false--12-31FY2019000142151700.0012000000001.001.000000P1YP5Y1280000000P5YP5Y000.00110000000000P3YP3YP1YP1YP1YP1YP7Y0.01990.01640.03010.02480.02570.01550.02154559355455935 0001421517 2019-01-01 2019-12-31 0001421517 2020-02-27 0001421517 2019-06-30 0001421517 2018-12-31 0001421517 2019-12-31 0001421517 2017-01-01 2017-12-31 0001421517 2018-01-01 2018-12-31 0001421517 us-gaap:LicenseAndServiceMember 2018-01-01 2018-12-31 0001421517 us-gaap:ProductMember 2017-01-01 2017-12-31 0001421517 us-gaap:ProductMember 2019-01-01 2019-12-31 0001421517 us-gaap:LicenseAndServiceMember 2019-01-01 2019-12-31 0001421517 us-gaap:ProductMember 2018-01-01 2018-12-31 0001421517 us-gaap:LicenseAndServiceMember 2017-01-01 2017-12-31 0001421517 2017-12-31 0001421517 2016-12-31 0001421517 us-gaap:RetainedEarningsMember 2016-12-31 0001421517 us-gaap:TreasuryStockMember 2017-12-31 0001421517 us-gaap:CommonStockMember 2017-01-01 2017-12-31 0001421517 us-gaap:TreasuryStockMember 2017-01-01 2017-12-31 0001421517 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001421517 us-gaap:TreasuryStockMember 2018-12-31 0001421517 us-gaap:CommonStockMember 2016-12-31 0001421517 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-12-31 0001421517 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001421517 us-gaap:AdditionalPaidInCapitalMember 2017-01-01 2017-12-31 0001421517 us-gaap:RetainedEarningsMember 2018-01-01 2018-12-31 0001421517 us-gaap:CommonStockMember 2017-12-31 0001421517 us-gaap:CommonStockMember 2019-01-01 2019-12-31 0001421517 us-gaap:CommonStockMember 2019-12-31 0001421517 us-gaap:TreasuryStockMember 2018-01-01 2018-12-31 0001421517 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-12-31 0001421517 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2016-12-31 0001421517 us-gaap:TreasuryStockMember 2019-12-31 0001421517 us-gaap:RetainedEarningsMember 2019-12-31 0001421517 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-01-01 2017-12-31 0001421517 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0001421517 us-gaap:RetainedEarningsMember 2019-01-01 2019-12-31 0001421517 us-gaap:CommonStockMember 2018-12-31 0001421517 us-gaap:TreasuryStockMember 2016-12-31 0001421517 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0001421517 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001421517 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-12-31 0001421517 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-12-31 0001421517 us-gaap:RetainedEarningsMember 2017-12-31 0001421517 us-gaap:RetainedEarningsMember 2017-01-01 2017-12-31 0001421517 us-gaap:CommonStockMember 2018-01-01 2018-12-31 0001421517 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0001421517 us-gaap:RetainedEarningsMember 2018-12-31 0001421517 us-gaap:AdditionalPaidInCapitalMember 2016-12-31 0001421517 us-gaap:TreasuryStockMember 2019-01-01 2019-12-31 0001421517 srt:MaximumMember us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2019-01-01 2019-12-31 0001421517 erii:EquipmentUsedInManufactureOfCeramicComponentsMember 2019-01-01 2019-12-31 0001421517 srt:MaximumMember 2019-01-01 2019-12-31 0001421517 srt:MinimumMember us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2019-01-01 2019-12-31 0001421517 srt:MinimumMember 2019-01-01 2019-12-31 0001421517 srt:MaximumMember erii:CustomerRelationshipsAndOtherNoncontractualIntangibleAssetsMember 2019-01-01 2019-12-31 0001421517 srt:MinimumMember erii:CustomerRelationshipsAndOtherNoncontractualIntangibleAssetsMember 2019-01-01 2019-12-31 0001421517 erii:VorTeqLicenseAgreementMember 2019-01-01 2019-12-31 0001421517 erii:MilestonePaymentWhenUncertaintyOfReceiptIsResolvedMember erii:VorTeqLicenseAgreementMember 2019-01-01 2019-12-31 0001421517 srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201618Member 2017-01-01 2017-12-31 0001421517 srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201409Member 2017-01-01 2017-12-31 0001421517 srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201618Member 2016-12-31 0001421517 srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201409Member 2017-12-31 0001421517 srt:ScenarioPreviouslyReportedMember 2017-01-01 2017-12-31 0001421517 srt:ScenarioPreviouslyReportedMember 2017-12-31 0001421517 srt:ScenarioPreviouslyReportedMember 2016-12-31 0001421517 srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201618Member 2017-12-31 0001421517 srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201409Member 2016-12-31 0001421517 us-gaap:LicenseAndServiceMember srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201409Member 2017-01-01 2017-12-31 0001421517 us-gaap:ProductMember srt:ScenarioPreviouslyReportedMember 2017-01-01 2017-12-31 0001421517 us-gaap:LicenseAndServiceMember srt:ScenarioPreviouslyReportedMember 2017-01-01 2017-12-31 0001421517 us-gaap:ProductMember srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201409Member 2017-01-01 2017-12-31 0001421517 srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201602Member 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember srt:ScenarioPreviouslyReportedMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember srt:ScenarioPreviouslyReportedMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember srt:ScenarioPreviouslyReportedMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201409Member us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201409Member us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember srt:RestatementAdjustmentMember us-gaap:AccountingStandardsUpdate201409Member us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 srt:AsiaMember 2018-01-01 2018-12-31 0001421517 erii:MiddleEastAndAfricaMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 erii:MiddleEastAndAfricaMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:LicenseAndServiceMember us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 erii:WaterMember 2018-01-01 2018-12-31 0001421517 us-gaap:LicenseAndServiceMember erii:WaterMember 2017-01-01 2017-12-31 0001421517 erii:MiddleEastAndAfricaMember us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 srt:EuropeMember 2019-01-01 2019-12-31 0001421517 srt:EuropeMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 srt:EuropeMember us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:LicenseAndServiceMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 erii:PXPumpsAndTurboDevicesMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 srt:AsiaMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 erii:MiddleEastAndAfricaMember erii:WaterMember 2017-01-01 2017-12-31 0001421517 erii:MiddleEastAndAfricaMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 erii:WaterMember 2019-01-01 2019-12-31 0001421517 srt:AsiaMember 2017-01-01 2017-12-31 0001421517 srt:AmericasMember us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 erii:MiddleEastAndAfricaMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 srt:AmericasMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 srt:EuropeMember 2017-01-01 2017-12-31 0001421517 srt:EuropeMember 2018-01-01 2018-12-31 0001421517 srt:EuropeMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 erii:MiddleEastAndAfricaMember 2019-01-01 2019-12-31 0001421517 erii:WaterMember 2017-01-01 2017-12-31 0001421517 erii:PXPumpsAndTurboDevicesMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 erii:PXPumpsAndTurboDevicesMember erii:WaterMember 2017-01-01 2017-12-31 0001421517 srt:AsiaMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 erii:MiddleEastAndAfricaMember 2017-01-01 2017-12-31 0001421517 us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 srt:AmericasMember 2017-01-01 2017-12-31 0001421517 us-gaap:LicenseAndServiceMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 us-gaap:LicenseAndServiceMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 srt:AmericasMember erii:WaterMember 2017-01-01 2017-12-31 0001421517 srt:AsiaMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 erii:MiddleEastAndAfricaMember 2018-01-01 2018-12-31 0001421517 srt:AsiaMember erii:WaterMember 2017-01-01 2017-12-31 0001421517 srt:EuropeMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 srt:AmericasMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 us-gaap:LicenseAndServiceMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 srt:EuropeMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 srt:EuropeMember erii:WaterMember 2017-01-01 2017-12-31 0001421517 erii:PXPumpsAndTurboDevicesMember 2017-01-01 2017-12-31 0001421517 srt:AsiaMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 srt:AsiaMember us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 erii:PXPumpsAndTurboDevicesMember us-gaap:OilAndGasMember 2017-01-01 2017-12-31 0001421517 srt:AmericasMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 srt:AmericasMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 erii:PXPumpsAndTurboDevicesMember us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 erii:PXPumpsAndTurboDevicesMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 srt:AmericasMember 2018-01-01 2018-12-31 0001421517 srt:AsiaMember 2019-01-01 2019-12-31 0001421517 srt:AmericasMember 2019-01-01 2019-12-31 0001421517 erii:PXPumpsAndTurboDevicesMember 2018-01-01 2018-12-31 0001421517 erii:PXPumpsAndTurboDevicesMember 2019-01-01 2019-12-31 0001421517 2020-12-31 2019-12-31 0001421517 2024-12-31 2019-12-31 0001421517 2023-12-31 2019-12-31 0001421517 2022-12-31 2019-12-31 0001421517 2021-12-31 2019-12-31 0001421517 2021-01-01 2019-12-31 0001421517 2024-01-01 2019-12-31 0001421517 2023-01-01 2019-12-31 0001421517 2020-01-01 2019-12-31 0001421517 2022-01-01 2019-12-31 0001421517 us-gaap:AllowanceForCreditLossMember 2017-12-31 0001421517 us-gaap:AllowanceForCreditLossMember 2018-01-01 2018-12-31 0001421517 us-gaap:AllowanceForCreditLossMember 2019-01-01 2019-12-31 0001421517 us-gaap:AllowanceForCreditLossMember 2018-12-31 0001421517 us-gaap:AllowanceForCreditLossMember 2017-01-01 2017-12-31 0001421517 us-gaap:AllowanceForCreditLossMember 2016-12-31 0001421517 us-gaap:AllowanceForCreditLossMember 2019-12-31 0001421517 us-gaap:AutomobilesMember 2019-12-31 0001421517 us-gaap:LeaseholdImprovementsMember 2019-12-31 0001421517 us-gaap:ConstructionInProgressMember 2018-12-31 0001421517 us-gaap:ConstructionInProgressMember 2019-12-31 0001421517 us-gaap:MachineryAndEquipmentMember 2018-12-31 0001421517 us-gaap:MachineryAndEquipmentMember 2019-12-31 0001421517 us-gaap:FurnitureAndFixturesMember 2019-12-31 0001421517 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2019-12-31 0001421517 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2018-12-31 0001421517 us-gaap:AutomobilesMember 2018-12-31 0001421517 us-gaap:LeaseholdImprovementsMember 2018-12-31 0001421517 us-gaap:FurnitureAndFixturesMember 2018-12-31 0001421517 us-gaap:AvailableforsaleSecuritiesMember 2019-12-31 0001421517 us-gaap:ShortTermInvestmentsMember 2018-12-31 0001421517 erii:LongtermInvestmentMember 2018-12-31 0001421517 us-gaap:ShortTermInvestmentsMember us-gaap:USTreasurySecuritiesMember 2018-12-31 0001421517 erii:LongtermInvestmentMember us-gaap:CorporateDebtSecuritiesMember 2018-12-31 0001421517 us-gaap:ShortTermInvestmentsMember us-gaap:CorporateDebtSecuritiesMember 2018-12-31 0001421517 us-gaap:ShortTermInvestmentsMember us-gaap:USTreasurySecuritiesMember 2019-12-31 0001421517 erii:LongtermInvestmentMember us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0001421517 erii:LongtermInvestmentMember 2019-12-31 0001421517 us-gaap:ShortTermInvestmentsMember us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0001421517 us-gaap:ShortTermInvestmentsMember 2019-12-31 0001421517 us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:MoneyMarketFundsMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0001421517 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0001421517 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USTreasurySecuritiesMember 2019-12-31 0001421517 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0001421517 us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0001421517 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USTreasurySecuritiesMember 2019-12-31 0001421517 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:FairValueMeasurementsRecurringMember us-gaap:USTreasurySecuritiesMember 2019-12-31 0001421517 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USTreasurySecuritiesMember 2019-12-31 0001421517 us-gaap:USTreasurySecuritiesMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001421517 us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001421517 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001421517 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001421517 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateDebtSecuritiesMember 2018-12-31 0001421517 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USTreasurySecuritiesMember 2018-12-31 0001421517 us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateDebtSecuritiesMember 2018-12-31 0001421517 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateDebtSecuritiesMember 2018-12-31 0001421517 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USTreasurySecuritiesMember 2018-12-31 0001421517 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001421517 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateDebtSecuritiesMember 2018-12-31 0001421517 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001421517 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001421517 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001421517 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USTreasurySecuritiesMember 2018-12-31 0001421517 us-gaap:MoneyMarketFundsMember us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001421517 us-gaap:FairValueMeasurementsRecurringMember us-gaap:USTreasurySecuritiesMember 2018-12-31 0001421517 us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0001421517 us-gaap:CorporateDebtSecuritiesMember 2018-12-31 0001421517 us-gaap:USTreasurySecuritiesMember 2018-12-31 0001421517 us-gaap:USTreasurySecuritiesMember 2019-12-31 0001421517 us-gaap:AvailableforsaleSecuritiesMember 2018-12-31 0001421517 us-gaap:DevelopedTechnologyRightsMember 2019-12-31 0001421517 us-gaap:PatentedTechnologyMember 2019-01-01 2019-12-31 0001421517 us-gaap:PatentedTechnologyMember 2018-12-31 0001421517 us-gaap:DevelopedTechnologyRightsMember 2019-01-01 2019-12-31 0001421517 us-gaap:DevelopedTechnologyRightsMember 2018-12-31 0001421517 us-gaap:PatentedTechnologyMember 2019-12-31 0001421517 us-gaap:StandbyLettersOfCreditMember erii:LoanAndPledgeAgreementMember us-gaap:LineOfCreditMember 2019-01-01 2019-12-31 0001421517 us-gaap:StandbyLettersOfCreditMember erii:LoanAndPledgeAgreementMember us-gaap:LineOfCreditMember 2017-01-27 2017-01-27 0001421517 us-gaap:StandbyLettersOfCreditMember 2018-12-31 0001421517 erii:LoanAndPledgeAgreementMember 2019-12-31 0001421517 us-gaap:StandbyLettersOfCreditMember erii:LoanAndPledgeAgreementMember 2019-01-01 2019-12-31 0001421517 erii:ForeignSubsidiaryMember erii:LoanAndPledgeAgreementMember us-gaap:LineOfCreditMember 2018-08-24 0001421517 erii:CommittedRevolvingCreditLineMember erii:LoanAndPledgeAgreementMember us-gaap:LineOfCreditMember 2017-01-27 0001421517 us-gaap:StandbyLettersOfCreditMember 2019-12-31 0001421517 erii:UncommittedRevolvingCreditLineMember erii:LoanAndPledgeAgreementMember us-gaap:LineOfCreditMember 2017-01-27 0001421517 erii:LoanAndPledgeAgreementMember erii:OtherFinancialInstitutionMember us-gaap:LineOfCreditMember 2019-12-31 0001421517 erii:LoanAndPledgeAgreementMember 2018-12-31 0001421517 erii:OfficeAndWarehouseKatyTXMember us-gaap:SubsequentEventMember 2020-01-20 2020-01-20 0001421517 erii:OfficeAndWarehouseSpaceTracyLeaseMember erii:TracyCaliforniaMember us-gaap:SubsequentEventMember 2020-03-01 2020-03-01 0001421517 erii:OfficeAndWarehouseKatyTXMember us-gaap:SubsequentEventMember 2020-01-20 0001421517 erii:OfficeAndWarehouseSpaceTracyLeaseMember erii:TracyCaliforniaMember us-gaap:SubsequentEventMember 2020-03-01 0001421517 us-gaap:IndemnificationGuaranteeMember 2019-12-31 0001421517 us-gaap:IndemnificationGuaranteeMember 2018-12-31 0001421517 us-gaap:RevenueCommissionersIrelandMember 2018-12-31 0001421517 us-gaap:CaliforniaFranchiseTaxBoardMember 2018-12-31 0001421517 us-gaap:CaliforniaFranchiseTaxBoardMember 2019-12-31 0001421517 us-gaap:RevenueCommissionersIrelandMember 2019-12-31 0001421517 us-gaap:InternalRevenueServiceIRSMember 2018-12-31 0001421517 us-gaap:InternalRevenueServiceIRSMember 2019-12-31 0001421517 us-gaap:DomesticCountryMember 2017-12-31 0001421517 us-gaap:DomesticCountryMember 2017-01-01 2017-12-31 0001421517 2017-10-01 2017-12-31 0001421517 erii:DomesticAndForeignTaxAuthorityMember 2017-01-01 2017-12-31 0001421517 us-gaap:RevenueCommissionersIrelandMember 2017-12-31 0001421517 erii:ResearchAndDevelopmentMinimumTaxandForeignTaxCreditCarryforwardMember 2019-12-31 0001421517 us-gaap:InternalRevenueServiceIRSMember erii:ResearchAndDevelopmentMinimumTaxandForeignTaxCreditCarryforwardMember 2019-12-31 0001421517 erii:ResearchAndDevelopmentMinimumTaxandForeignTaxCreditCarryforwardMember 2018-12-31 0001421517 us-gaap:CaliforniaFranchiseTaxBoardMember erii:ResearchAndDevelopmentMinimumTaxandForeignTaxCreditCarryforwardMember 2018-12-31 0001421517 us-gaap:CaliforniaFranchiseTaxBoardMember erii:ResearchAndDevelopmentMinimumTaxandForeignTaxCreditCarryforwardMember 2019-12-31 0001421517 us-gaap:InternalRevenueServiceIRSMember erii:ResearchAndDevelopmentMinimumTaxandForeignTaxCreditCarryforwardMember 2018-12-31 0001421517 erii:March2018AuthorizationMember 2018-03-07 2018-09-30 0001421517 erii:March2018AuthorizationMember 2018-01-01 2018-09-30 0001421517 erii:March2018AuthorizationMember 2018-03-07 0001421517 us-gaap:RestrictedStockUnitsRSUMember erii:VestingonTheFirstAnniversaryofGrantDateBefore2017Member 2016-01-01 2016-12-31 0001421517 us-gaap:RestrictedStockUnitsRSUMember erii:VestingAnnuallyAfter2016Member 2017-01-01 2017-12-31 0001421517 erii:The2016IncentivePlanMember 2019-12-31 0001421517 us-gaap:RestrictedStockMember 2019-12-31 0001421517 us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-12-31 0001421517 erii:EmployeeStockOptionsUnissuedUnderPriorPlanMember erii:The2016IncentivePlanMember 2019-12-31 0001421517 us-gaap:RestrictedStockUnitsRSUMember 2017-01-01 2017-12-31 0001421517 erii:The2016IncentivePlanMember 2018-12-31 0001421517 erii:EmployeeStockOptionsCreatedUnderNewPlanMember erii:The2016IncentivePlanMember 2019-12-31 0001421517 us-gaap:RestrictedStockUnitsRSUMember erii:VestingThereafterMonthlyDependentUponContinuedEmploymentBefore2017Member 2016-01-01 2016-12-31 0001421517 us-gaap:EmployeeStockOptionMember 2018-01-01 2018-12-31 0001421517 us-gaap:EmployeeStockOptionMember 2017-01-01 2017-12-31 0001421517 us-gaap:EmployeeStockOptionMember 2019-01-01 2019-12-31 0001421517 srt:MinimumMember us-gaap:EmployeeStockOptionMember 2017-01-01 2017-12-31 0001421517 srt:MaximumMember us-gaap:EmployeeStockOptionMember 2017-01-01 2017-12-31 0001421517 srt:MaximumMember us-gaap:EmployeeStockOptionMember 2019-01-01 2019-12-31 0001421517 srt:MaximumMember us-gaap:EmployeeStockOptionMember 2018-01-01 2018-12-31 0001421517 srt:MinimumMember us-gaap:EmployeeStockOptionMember 2018-01-01 2018-12-31 0001421517 srt:MinimumMember us-gaap:EmployeeStockOptionMember 2019-01-01 2019-12-31 0001421517 us-gaap:CostOfSalesMember 2019-01-01 2019-12-31 0001421517 us-gaap:CostOfSalesMember 2018-01-01 2018-12-31 0001421517 us-gaap:GeneralAndAdministrativeExpenseMember 2019-01-01 2019-12-31 0001421517 us-gaap:RestrictedStockUnitsRSUMember 2018-01-01 2018-12-31 0001421517 us-gaap:ResearchAndDevelopmentExpenseMember 2019-01-01 2019-12-31 0001421517 us-gaap:ResearchAndDevelopmentExpenseMember 2018-01-01 2018-12-31 0001421517 us-gaap:CostOfSalesMember 2017-01-01 2017-12-31 0001421517 us-gaap:SellingAndMarketingExpenseMember 2018-01-01 2018-12-31 0001421517 us-gaap:SellingAndMarketingExpenseMember 2019-01-01 2019-12-31 0001421517 us-gaap:SellingAndMarketingExpenseMember 2017-01-01 2017-12-31 0001421517 us-gaap:ResearchAndDevelopmentExpenseMember 2017-01-01 2017-12-31 0001421517 us-gaap:GeneralAndAdministrativeExpenseMember 2017-01-01 2017-12-31 0001421517 us-gaap:GeneralAndAdministrativeExpenseMember 2018-01-01 2018-12-31 0001421517 erii:A4YearEmployeeStockOptionsMember 2017-01-01 2017-12-31 0001421517 erii:A4YearEmployeeStockOptionsMember 2019-01-01 2019-12-31 0001421517 erii:A4YearEmployeeStockOptionsMember 2018-01-01 2018-12-31 0001421517 us-gaap:EmployeeStockOptionMember 2019-12-31 0001421517 us-gaap:RestrictedStockUnitsRSUMember 2019-12-31 0001421517 erii:FormerChairmanOfBoardOfDirectorsAndPresidentAndCEOMember 2019-01-01 2019-12-31 0001421517 erii:FormerPresidentAndChiefExecutiveOfficerMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember 2019-01-01 2019-12-31 0001421517 us-gaap:OperatingSegmentsMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember erii:WaterMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 us-gaap:CorporateNonSegmentMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember erii:WaterMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember erii:WaterMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember us-gaap:OilAndGasMember 2019-01-01 2019-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 us-gaap:CorporateNonSegmentMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:ProductMember 2019-01-01 2019-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember 2017-01-01 2017-12-31 0001421517 us-gaap:OperatingSegmentsMember us-gaap:LicenseAndServiceMember 2019-01-01 2019-12-31 0001421517 us-gaap:CorporateNonSegmentMember 2019-01-01 2019-12-31 0001421517 us-gaap:SalesRevenueNetMember 2018-01-01 2018-12-31 0001421517 country:EG us-gaap:SalesRevenueNetMember 2017-01-01 2017-12-31 0001421517 erii:OthersMember us-gaap:SalesRevenueNetMember 2017-01-01 2017-12-31 0001421517 us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0001421517 us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0001421517 us-gaap:AccountsPayableMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0001421517 country:EG us-gaap:SalesRevenueNetMember 2018-01-01 2018-12-31 0001421517 us-gaap:SalesRevenueNetMember 2019-01-01 2019-12-31 0001421517 erii:OthersMember us-gaap:SalesRevenueNetMember 2019-01-01 2019-12-31 0001421517 us-gaap:NonUsMember us-gaap:SalesRevenueNetMember 2018-01-01 2018-12-31 0001421517 erii:OthersMember us-gaap:SalesRevenueNetMember 2018-01-01 2018-12-31 0001421517 country:US us-gaap:SalesRevenueNetMember 2018-01-01 2018-12-31 0001421517 us-gaap:NonUsMember us-gaap:SalesRevenueNetMember 2019-01-01 2019-12-31 0001421517 country:AE us-gaap:SalesRevenueNetMember 2019-01-01 2019-12-31 0001421517 country:US us-gaap:SalesRevenueNetMember 2019-01-01 2019-12-31 0001421517 us-gaap:SalesRevenueNetMember 2017-01-01 2017-12-31 0001421517 country:US us-gaap:SalesRevenueNetMember 2017-01-01 2017-12-31 0001421517 country:SA us-gaap:SalesRevenueNetMember 2017-01-01 2017-12-31 0001421517 us-gaap:NonUsMember us-gaap:SalesRevenueNetMember 2017-01-01 2017-12-31 0001421517 country:SA us-gaap:SalesRevenueNetMember 2019-01-01 2019-12-31 0001421517 country:SA us-gaap:SalesRevenueNetMember 2018-01-01 2018-12-31 0001421517 erii:OneCustomerMember erii:LicenseAndDevelopmentRevenueMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0001421517 erii:CustomerCMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 erii:CustomerAMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 erii:CustomerBMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 erii:OneCustomerMember erii:LicenseAndDevelopmentRevenueMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2017-01-01 2017-12-31 0001421517 erii:OneCustomerMember erii:LicenseAndDevelopmentRevenueMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2018-01-01 2018-12-31 0001421517 erii:CustomerDMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember erii:WaterMember 2018-01-01 2018-12-31 0001421517 erii:CustomerAMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember erii:WaterMember 2019-01-01 2019-12-31 0001421517 erii:CustomerEMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 erii:CustomerFMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember us-gaap:OilAndGasMember 2018-01-01 2018-12-31 0001421517 erii:VendorBMember us-gaap:AccountsPayableMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0001421517 erii:VendorAMember us-gaap:AccountsPayableMember us-gaap:CustomerConcentrationRiskMember 2019-01-01 2019-12-31 0001421517 erii:VendorBMember us-gaap:AccountsPayableMember us-gaap:CustomerConcentrationRiskMember 2018-01-01 2018-12-31 0001421517 erii:VendorAMember us-gaap:AccountsPayableMember us-gaap:CustomerConcentrationRiskMember 2018-01-01 2018-12-31 0001421517 erii:VorTeqLicenseAgreementMember 2015-10-14 2015-10-14 0001421517 erii:MilestonePaymentOneUponSuccessfulYardTestMember erii:VorTeqLicenseAgreementMember 2015-10-14 2015-10-14 0001421517 erii:VorTeqLicenseAgreementMember 2015-10-14 0001421517 erii:LibertyOilFieldServicesMember srt:AffiliatedEntityMember erii:VorTeqLicenseAgreementMember 2014-01-01 2014-12-31 0001421517 erii:MilestonePaymentTwoUponSuccessfulFracingOfAliveWellMember erii:VorTeqLicenseAgreementMember 2019-01-01 2019-12-31 0001421517 erii:LibertyOilFieldServicesMember srt:AffiliatedEntityMember erii:VorTeqLicenseAgreementMember 2014-12-31 0001421517 2018-07-01 2018-09-30 0001421517 2018-04-01 2018-06-30 0001421517 us-gaap:LicenseAndServiceMember 2018-07-01 2018-09-30 0001421517 2018-01-01 2018-03-31 0001421517 us-gaap:ProductMember 2018-01-01 2018-03-31 0001421517 us-gaap:ProductMember 2018-04-01 2018-06-30 0001421517 2018-10-01 2018-12-31 0001421517 us-gaap:LicenseAndServiceMember 2018-10-01 2018-12-31 0001421517 us-gaap:LicenseAndServiceMember 2018-04-01 2018-06-30 0001421517 us-gaap:ProductMember 2018-10-01 2018-12-31 0001421517 us-gaap:ProductMember 2018-07-01 2018-09-30 0001421517 us-gaap:LicenseAndServiceMember 2018-01-01 2018-03-31 0001421517 2019-10-01 2019-12-31 0001421517 2019-01-01 2019-03-31 0001421517 2019-07-01 2019-09-30 0001421517 us-gaap:ProductMember 2019-04-01 2019-06-30 0001421517 us-gaap:ProductMember 2019-07-01 2019-09-30 0001421517 2019-04-01 2019-06-30 0001421517 us-gaap:LicenseAndServiceMember 2019-10-01 2019-12-31 0001421517 us-gaap:LicenseAndServiceMember 2019-01-01 2019-03-31 0001421517 us-gaap:ProductMember 2019-10-01 2019-12-31 0001421517 us-gaap:ProductMember 2019-01-01 2019-03-31 0001421517 us-gaap:LicenseAndServiceMember 2019-07-01 2019-09-30 0001421517 us-gaap:LicenseAndServiceMember 2019-04-01 2019-06-30 xbrli:pure xbrli:shares iso4217:USD iso4217:USD xbrli:shares erii:payment utreg:sqft erii:term utreg:acre erii:missile
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
 
 
Form 10-K
 
 
 
(Mark One)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission File Number: 001-34112
 
 
 
erilogoh4c.jpg
 
Energy Recovery, Inc.
 
 
(Exact Name of Registrant as Specified in its Charter)
 
 
Delaware
 
 
 
 
01-0616867
 
 
(State or Other Jurisdiction of Incorporation)
 
 
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
 
 
 
 
1717 Doolittle Drive
 
 
 
 
 
 
 
 
San Leandro
California
 
 
 
 
94577
 
 
(Address of Principal Executive Offices) 
 
 
 
 
(Zip Code)
 
(510) 483-7370
(Registrant’s telephone number, including area code)
 
 
 
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $0.001 par value per share
 
ERII
 
The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes  þ No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ Yes  þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  þ Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer      Accelerated filer  þ    Non-accelerated filer      Smaller reporting company      Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  þ No

The aggregate market value of the voting stock held by non-affiliates amounted to approximately $389 million on June 30, 2019.

The number of shares of the registrant’s common stock outstanding as of February 27, 2020 was 55,492,350 shares.

DOCUMENTS INCORPORATED BY REFERENCE

As noted herein, the information called for by Part III is incorporated by reference to specified portions of the registrant’s definitive proxy statement to be filed in conjunction with the registrant’s 2020 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2019.


 





TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 2



Table of Contents

Forward Looking Information

This Annual Report on Form 10-K for the year ended December 31, 2019 including “Part I, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” (the “MD&A”), and certain information incorporated by reference, contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this report include, but are not limited to, statements about our expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future.

Forward-looking statements represent our current expectations about future events, are based on assumptions, and involve risks and uncertainties. If the risks or uncertainties occur or the assumptions prove incorrect, then our results may differ materially from those set forth or implied by the forward-looking statements. Our forward-looking statements are not guarantees of future performance or events.

Words such as “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” variations of such words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified under “Item 1A – Risk Factors” and elsewhere in this report for factors that may cause actual results to be different from those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Forward-looking statements in this report include, without limitation, statements about the following:
our belief that levels of gross profit margin are sustainable to the extent that volume grows, we experience a favorable product mix, pricing remains stable and we continue to realize cost savings through production efficiencies and enhanced yields;
our plan to improve our existing energy recovery devices and to develop and manufacture new and enhanced versions of these devices;
our belief that our PX® energy recovery devices are the most cost-effective energy recovery devices over time and will result in low life-cycle costs;
our belief that our turbocharger devices have long operating lives;
our belief that our turbocharger is designed for maximum durability and reliability and deliver substantial savings and ease of integration into desalination systems;
our belief that our pumps are designed for maximum durability, reliability and efficiency and that our pumping systems offer users operational savings;
our expectation that there will be new desalination emerging markets that will provide us with further revenue growth opportunities;
our belief that OEM desalination projects are less susceptible to economic and regional shocks and provides us with a more stable source of revenue;
our belief that a technology conversion from thermal to reverse osmosis desalination is occurring and that such conversion will create demand for our products.
our belief that our solutions and products offer a competitive advantage or are competitive with our competitor’s solutions and products;
our objective of finding new applications for our technology and developing new products for use outside of desalination, including oil & gas applications;
our expectation that our expenses for research and development and sales and marketing may increase as a result of diversification into markets outside of desalination;
our expectation that we will continue to rely on sales of our energy recovery devices in the desalination market for a substantial portion of our revenue, and that new desalination markets, including the U.S., will provide revenue opportunities to us;
our ability to meet projected new product development dates, anticipated cost reduction targets or revenue growth objectives for new products;
our belief that we can commercialize the VorTeq hydraulic fracturing system;

 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 3



Table of Contents

our belief that the VorTeq hydraulic fracturing system reduces equipment failure and enables oilfield services (“OFS”) companies to migrate to more efficient pumping technology;
our belief that the VorTeq hydraulic fracturing system can help operators reduce repair and maintenance costs, reduce capital costs by extending frac-pump life expectancy and eliminate redundant capital equipment and thereby lower costs and reduce the emissions and energy intensity of oil & gas production;
our belief that we will be able to progress the MTeq solution through the R&D phase and ultimately commercialize the solution;
our belief that customers will accept and adopt our new products;
our belief that we will successfully complete our capacity expansion and such facilities will be adequate for the foreseeable future;
our expectation that sales outside of the U.S. will remain a significant portion of our revenue;
the timing of our receipt of payment for products or services from our customers;
our belief that our existing cash balances and cash generated from our operations will be sufficient to meet our anticipated liquidity needs for the foreseeable future, with the exception of a decision to enter into an acquisition and/or fund investments in our latest technology arising from rapid market adoption that could require us to seek additional equity or debt financing;
our expectation that, as we expand our international sales, a portion of our revenue could be denominated in foreign currencies and the impact of changes in exchange rates on our cash and cash equivalents and operating results;
our belief that new markets will grow in the water desalination market;
our expectation that we will be able to enforce our intellectual property rights;
our expectation that the adoption of new accounting standards will not have a material impact on our financial position or results of operations;
the outcome of proceedings, lawsuits, disputes and claims;
the impact of losses due to indemnification obligations;
the impact of changes in internal control over financial reporting; and
other factors disclosed under Item 1 - Business, Item 1A - Risk Factors, Item 2 - Properties, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation, Item 7A - Quantitative and Qualitative Disclosures about Market Risks and elsewhere in this Form 10-K.

You should not place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of the filing of this Annual Report on Form 10-K. All forward-looking statements included in this document are subject to additional risks and uncertainties further discussed under “Item 1A – Risk Factors” and are based on information available to us as of March 6, 2020. We assume no obligation to update any such forward-looking statements, certain risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements, as disclosed from time to time in our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q and Current Reports on Form 8‑K, as well as in our Annual Reports to Stockholders and in “Part I, Item 1A – Risk Factors” within this Annual Report on Form 10-K. It is important to note that our actual results could differ materially from the results set forth or implied by our forward-looking statements. The factors that could cause our actual results to differ from those included in such forward-looking statements are set forth under the heading “Item 1A – Risk Factors,” and our results disclosed from time to time in our reports on Forms 10-Q and 8-K and our Annual Reports to Stockholders.

We provide our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, Proxy Statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large shareholders, and any amendments to those documents filed or furnished pursuant to the Securities Exchange Act of 1934, free of charge on the Investor Relations section of our website, www.energyrecovery.com. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. From time to time, we may use our website as a channel of distribution of material company information.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 4



Table of Contents

We also make available in the Investor Relations section of our website our corporate governance documents including our code of business conduct and ethics and the charters of the audit, compensation and nominating and governance committees. These documents, as well as the information on the website, are not intended to be part of this Annual Report on Form 10-K. We use the Investor Relations section of our website as a means of complying with our disclosure obligations under Regulation FD. Accordingly, you should monitor the Investor Relations section of our website in addition to following our press releases, SEC filings and public conference calls and webcasts.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 5



Table of Contents

PART I

Item 1 — Business

Overview

Energy Recovery, Inc. (the “Company”, “Energy Recovery”, “we”, “our” and “us”) has, for more than 20 years, created technologies that solve complex challenges for industrial fluid flow markets worldwide. We design and manufacture solutions that reduce waste, improve operational efficiency, and lower the production costs of clean water and oil & gas. What began as a game-changing invention for water desalination has grown into a global business delivering solutions that enable more affordable access to these critical resources.

We were incorporated in Virginia in 1992 and reincorporated in Delaware in 2001. Our headquarters and principal research, development and manufacturing facility is located in San Leandro, California, and, as of January 2020, we opened our commercial development center for oil & gas field testing, manufacturing, and training, located in Katy, Texas and, as of February 10, 2020, we leased an additional office and warehouse space located in Tracy, California, which commenced on March 1, 2020, to supplement the existing manufacturing, warehouse and distribution of our energy recovery devices (“ERDs”).

Engineering, research and development have been, and remain, an essential part of the Company’s history, culture and corporate strategy. Since our formation, we have developed and become experts in our unique PX Pressure Exchanger technology, which provides benefits when applied to industrial fluid flow system with pressure differentials. Today, our PX Pressure Exchanger is the industry standard in the reverse osmosis desalination industry. In addition, we have been actively developing new applications of our pressure exchanger technology in the oil & gas industry. This focus on engineering, research and development will continue to be core component of our future strategy as we focus on developing new products outside of our water and oil & gas business units.

Our worldwide sales and technical service organization provides on-site support for our line of water solutions, and we maintain direct sales offices and technical support centers in Europe, the Middle East and Asia.

Water

The world’s need for clean water is intensifying, driven by population growth, industrialization, rapid urbanization, and climate change. According to the United Nations’ estimates, global demand for water will surge 30% by 2050, outstripping supply. Apart from seasonal variations, the supply of fresh water generally remains fixed and is falling in some geographic areas. These trends make desalinating sea, brackish and contaminated water, increasingly vital to quench global water demand. In many water starved parts of the world, desalination contributes significantly to the local freshwater supply. We deliver efficient, scalable solutions for recovering otherwise wasted energy in the reverse osmosis desalination process, lowering operating costs and reducing carbon emissions associated with the production of clean water. We also offer high-pressure multi- and single-stage centrifugal pumps designed to complement our ERDs for any size reverse osmosis plant.

Solutions

We are a market leader in the engineering, design, manufacturing and supply of ERDs to the global reverse osmosis desalination market. Our ERDs are categorized into two technology groups: positive displacement isobaric ERDs, namely our proprietary Pressure Exchanger (“PX® Pressure Exchanger®”), and centrifugal-type ERDs such as our hydraulic turbochargers (“Turbochargers”). We also manufacture high-performance and high-efficiency pumps that are utilized in the reverse osmosis desalination process.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 6



Table of Contents

Energy Recovery Devices

Prior to the introduction of ERDs, the reverse osmosis desalination process was often cost prohibitive when compared to more traditional water treatment processes due to the high energy needs required by the process. Generally speaking, energy intensive pumps are used to pressurize feed waters with varying concentrations of salts, minerals and contaminants, which is then forced through a membrane to achieve the desired water quantity and quality. The process results in fresh water, suitable for potable, agricultural and industrial use. In the case of seawater reverse osmosis (“SWRO”) desalination, for example, this process results in a concentrated and pressurized concentrate or brine stream. Prior to the adoption of ERDs, the concentrated residual pressure energy was dissipated through a throttle valve before the fluid was returned to the ocean. The pressurization of the feed water and subsequent dissipation of the pressure energy in the discharge water was inefficient and resulted in tremendous amounts of wasted pressure energy that made SWRO desalination substantially more expensive than alternative water production options.

When introduced, ERDs fundamentally altered this paradigm by capturing and reusing this wasted pressure energy. The Pelton wheel was one of the first energy recovery device, followed by the development of hydraulic turbochargers, both of which provide suboptimal efficiencies in the reuse of wasted pressure energy. In the late 1990s, our PX Pressure Exchanger was introduced, delivering efficiencies now peaking above 98%. Rather than dissipating or “wasting” the pressure energy from the discharge brine, our PX Pressure Exchanger, which is SWRO’s most widely used energy recovery solution, can transfer the pressure energy from the discharge water directly to a portion of the low-pressure filtered feed water, thereby reducing the amount of flow required by the main high-pressure processes’ pumps. This results in a much more efficient process as the size of the high-pressure pumps and the corresponding energy usage can be reduced by up to 60%. As a result, our PX Pressure Exchangers have helped make SWRO desalination an economically viable option in the production of potable water.

The brackish water reverse osmosis (“BWRO”) desalination process is identical to that of the SWRO desalination process. Brackish water typically has lower salt content than seawater, therefore, fewer solids need to be removed and less energy is expended on pressurizing the feed water. The amount of salts in the feed water will ultimately determine the system design and operating conditions which, in turn, will drive decisions related to the specification or type of ERD to be employed, if any. Due to the lower cost and available pressure energy involved, our Turbochargers generally have characteristics more applicable to BWRO, although this is not always the case. BWRO is typically focused on maximizing membrane recovery and thus reducing the amount of brine generated throughout the process. In doing so, multiple membrane stages and “interstage boost” designs are being widely used.

The PX Pressure Exchanger, high efficiency isobaric ERD. Our patented PX Pressure Exchanger technology consists of a ceramic rotor supported by a highly efficient hydrodynamic and hydrostatic bearing system. Our PX Pressure Exchangers compete largely in the SWRO industry, or in higher salinity BWRO desalination applications, and enable desalination plant operators to recover otherwise wasted hydraulic pressure energy from a high-pressure fluid flow and transfer the energy to a low-pressure fluid flow, reducing energy costs and carbon emissions associated with the reverse osmosis process.

Turbochargers, high efficiency centrifugal ERD. Our Turbochargers consist of a single-stage turbine impeller connected to a single-stage pump impeller via a common shaft. All hydraulics are housed within the casing, with no seals required. The turbine impeller absorbs the hydraulic energy of the concentrate stream and converts it into mechanical energy. This energy is then transferred to the pump impeller. The impeller converts the mechanical energy back to hydraulic energy, providing an additional pressure boost to the feed stream of the brackish or SWRO desalination systems. Our Turbochargers are used for both low-pressure brackish and high-pressure SWRO desalination systems, as well as various other water treatment applications. Our AT and LPT Turbocharger product lines provide high efficiency with state-of-the-art engineering utilizing a compact configuration. We believe our Turbochargers deliver substantial savings and ease of integration into desalination systems. With custom-designed hydraulics that allow for optimum performance over a wide range of operating conditions, our Turbocharger technology offers solutions to capital cost constrained single-stage SWRO applications, as well as inter-stage boost desalination applications typically found in BWRO systems.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 7



Table of Contents

Pumps

High efficiency pumps, high-pressure feed and high-pressure circulation pumps. In addition to ERDs, reverse osmosis desalination requires specialized high-pressure membrane feed and, in PX Pressure Exchanger applications, high-pressure circulation pumps. These devices, in combination with ERDs, must efficiently pressurize and circulate feed water to the membranes to purify water. Plant operators require specialized pumps with performance matched to the requirements of the membranes and ERDs. To minimize plant costs these pumps must provide high energy efficiency and reliability with low maintenance requirements.

We manufacture and/or supply specialized high-pressure feed and circulation pumps for only a portion of the markets served by our ERD solutions. Our high-pressure feed pumps are designed to pressurize the membrane feed flow and overcome the osmotic pressure requirements of the feed water resulting in the production of permeate water. Our high-pressure circulation pumps are designed to “circulate” and control the high‑pressure flow rates through the PX Pressure Exchanger and to compensate for small pressure losses across the membrane, PX Pressure Exchanger, and associated process piping.

Markets

Sea and brackish water reverse osmosis desalination have been our primary markets for revenue generation. The water market ranges from small desalination plants, such as those used in cruise ships and resorts, to mega-project scale desalination plants, defined as those which produce over 50,000 cubic meters of water per day. Because of the geographical location of many significant water desalination projects, geopolitical and economic events can influence the timing of expected projects. We anticipate that emerging markets traditionally not associated with desalination, including the United States (“U.S.”) will inevitably develop and provide further revenue growth opportunities.

Greenfield

The greenfield market represents newly constructed reverse osmosis desalination projects. These facilities vary in size, scope and geography. Large scale greenfield projects are typically public in nature and involve a formal tendering process. Smaller greenfield projects may be private in nature, but typically still involve a formal tendering process. We work directly with the project bidders, generally large engineering, procurement and construction (“EPC”) firms, end-users and industry consultants, to specify our products prior to the project being awarded, where possible. Once the project is awarded to an EPC, our normal sales process ensues. The greenfield market has been the key market for our water business. This market is highly competitive, and the tendering process pays close attention to the cost to desalinate water (i.e., dollars per cubic meter of water produced). Our PX Pressure Exchanger’s industry-leading efficiency for ERDs in the desalination industry has allowed us to remain a market leader in the global ERD market.

Retrofit (or Brownfield)

The retrofit market represents existing water facilities that are currently in operation utilizing legacy ERD technologies or no ERDs, at all. These facilities and their owners not only face high energy consumption and reduced plant availability due to these legacy technologies, but also encounter capital expenditure and “know-how” issues that may prevent them from retrofitting plants. Typical retrofits include improvements to existing operations, equipment upgrades and potential expansions of existing capacity. We leverage our best-in-class solutions and “know how” to unseat legacy technology in Brownfield plants by implementing water production efficiency measures to reduce overall power consumption, repair and maintenance costs and avoid costly capital upgrades, as well as increase throughput and/or plant uptime. These retrofit opportunities may or may not have a formal tendering process. We typically approach the plant operators, owners and/or end-users of these facilities to present our leading life-cycle cost value-proposition.

Technology Conversion

A technology conversion within the desalination industry, from thermal to reverse osmosis desalination, is occurring due to significant cost savings associated with reverse osmosis. Over 22 million cubic meters per day of potable or desalinated water capacity was installed from 1980 through 2018. As these plants age, the industry expects the majority of plants to replace their existing technology with reverse osmosis technologies. These conversions are driving new demand for reverse osmosis solutions to simply maintain existing water supplies in the world today, which in turn may create demand for our products.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 8



Table of Contents

Service & Aftermarket

Service & aftermarket is comprised of existing water facilities that have our solutions installed or in operation. We provide spare parts and repair services, field services and various commissioning activities to our global customer base. We leverage our industry expertise in supporting our existing installed base to ensure that our solutions are being operated effectively and efficiently. Readily available aftermarket products and services are required by our industry partners and customers in order to maximize plant availability and overall profitability of their operations.

Customers

We sell our ERDs, Turbochargers, high-pressure pumps, circulation “booster” pumps, and services to (1) major international EPC firms that can design, build, own and operate large-scale desalination plants (mega projects); (2) original equipment manufacturers (“OEM”) which are companies that supply equipment and packaged solutions for small- to medium-sized desalination plants, and national, state and local municipalities worldwide; and (3) plant owners and/or operators who can utilize our technology to upgrade or keep their plant running, or retrofit their existing plant equipment with various efficiency measures to optimize operations by reducing overall power consumed and reduce other operating costs in the desalination process.

Large Engineering, Procurement and Construction Firms – EPCs

A significant portion of our revenue has historically come from sales to large EPC firms worldwide which have the required desalination expertise to engineer, undertake procurement for, construct, and sometimes own and operate, large-scale desalination plants or mega-projects. Due to the enormous volume of water being processed by these mega-projects, ongoing operating costs rather than the initial capital expenditures is the key factor in their selection of an ERD solution. As such, EPCs most often select our PX Pressure Exchangers, which we believe offers market-leading efficiency and total lifecycle cost to the end client. We work with these EPC firms to specify our PX Pressure Exchanger solutions for their plant designs. The time between project tender and shipment can range from 16 months to 36 months, or more. Each mega-project represents revenue opportunities ranging from approximately $1 million to $18 million.

We estimate that the total capital investments in these mega-projects may fall between $50 million to $1 billion. Due to the large capital investments needed to fund these projects, which are typically provided by national or local governments, these projects are more susceptible to macroeconomic and regional risks, such as economic downturns, currency shocks, or political risks.

Original Equipment Manufacturers – OEMs

We sell a broad set of our products to OEMs, including our PX Pressure Exchangers, Turbochargers, high-pressure pumps, circulation “booster” pumps, and services. Our sale of solutions and services to OEM suppliers are for integration and use in small- to medium-sized desalination plants processing up to 50,000 cubic meters of water per day, such as desalination plants located in local municipalities, hotels and resorts, power plants, cruise ships, and farm operations. In addition, these OEMs purchase our solutions for mobile, decentralized “quick water” or emergency water solutions.

Unlike mega-projects, OEM projects are smaller in scope and, as such, the initial capital expenditure, rather than future ongoing operating costs, is often the key factor in selection of an ERD solution. Accordingly, we sell not only our PX Pressure Exchanger, but also our Turbochargers, which offer a lower cost alternative to our PX Pressure Exchanger. The typical time from project tender and shipment can range from 1 month to 12 months. OEM projects typically represent revenue opportunities up to $1 million.

Capital investments in OEM projects typically range between $10 million to $50 million. Due to a more diverse customer base and source of financing, typically privately financed or financed by local municipalities, OEM projects tend to be less susceptible to economic and regional shocks and provide a more stable source of revenue.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 9



Table of Contents

End-users and Service Providers

Our existing and expanding installed base of ERDs and pump products in water plants has created a growing customer base comprised of plant operators and service providers. These customers purchase spare parts, replacement parts, and service contracts, as well as utilize our field service expertise to perform maintenance and repairs. Owners and operators of older plants without effective ERDs, and newer plants with devices manufactured by our competitors, purchase our equipment to retrofit plants to realize operational expense reductions or expansions in plant capacity.

Competition

The market for ERDs, turbochargers, high-pressure pumps, and circulation “booster” pumps, is competitive. As the demand for fresh water increases and the market expands, we expect competition to persist and intensify.

We have three main competitors for our ERDs: Flowserve Corporation (“Flowserve”), Fluid Equipment Development Company (“FEDCO”), and Danfoss Group (“Danfoss”). We believe our solutions offer a competitive advantage compared to our competitors’ solutions because our ERDs provide the lowest life-cycle cost and are, therefore, the most cost-effective ERD solutions for the reverse osmosis desalination industry.

In the market for large mega-projects, our PX Pressure Exchanger competes primarily with Flowserve’s DWEER product. We believe our PX Pressure Exchangers have a competitive advantage, as compared to the DWEER product, because our devices are made with highly durable and corrosion-resistant alumina ceramic parts that are designed for a life of more than 25 years, are warrantied for high efficiencies, and cause minimal unplanned downtime, resulting in lower lifecycle costs. Additionally, our PX Pressure Exchanger offers optimum scalability with a quick startup, as well as no scheduled maintenance.

In the market for small- to-medium-sized desalination plants, our ERD solutions compete with FEDCO’s turbochargers and Danfoss’ iSave ERD. We believe that our PX Pressure Exchangers have a distinct competitive advantage over these solutions because our devices provide up to 98% efficiency, have lower lifecycle maintenance costs, and are made of highly durable and corrosion-resistant alumina ceramic parts. We also believe that our Turbochargers compete favorably with FEDCO’s turbochargers based on efficiency, price, and because our Turbochargers have design advantages that enhance efficiency, operational flexibility and serviceability.

In the applicable market and flow ranges that we serve for high-pressure pumps and circulation pumps, our solutions compete with pumps manufactured by FEDCO, Flowserve, KSB Aktiengesellschaft, Torishima Pump Mfg. Co., Ltd., Sulzer Pumps, Ltd., and other companies. We believe that our pump solutions are competitive with these solutions because our pumps are developed specifically for reverse osmosis desalination, are highly efficient, feature product-lubricated bearings, and are often purchased with our ERDs in small- to medium-sized plants.

Sales and Marketing

Our strategically located direct sales force offers our products through capital sale to our customers around the world. We have sales offices in the U.S., Madrid, Shanghai, and Dubai, and we maintain a sales and service footprint in strategic territories, allowing rapid response to our customers’ needs. Our team is composed of individuals with many years of desalination and water industry expertise. Aligning to the geographic breadth of our current and potential future customers, our product marketing approach includes a strategic presence at water industry events across various regions. In addition, we leverage our industry and market intelligence to develop new solutions and services that can be adopted by our growing customer base.

A significant portion of our revenue is from outside of the U.S. Additional segment and geographical information regarding our product revenue is included in Note 12, “Business Segment,” and Note 13, “Concentrations,” of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 10



Table of Contents

Operations

Our ERDs, such as our PX Pressure Exchangers, Turbochargers, high-pressure pumps, and circulation “booster” pumps, are designed, produced, assembled, and tested, at our facility located in San Leandro, California. Our San Leandro, California manufacturing facility of 100,000 square feet (“sq.ft.”) includes an advanced ceramics manufacturing facility and testing laboratory, five hydraulic performance testing loops, computer numerical control (“CNC”) machines, assembly stations and warehouse. Aluminum Oxide (“Alumina”) ceramic components for our PX Pressure Exchanger are manufactured in-house from high-grade, raw alumina to the final product. Components for our other products also undergo final precision finishing to protect the proprietary nature of our manufacturing methods and product designs and to maintain premium quality standards. The availability of multiple test loops allows us to test every water product we manufacture to its full rated operating conditions.

On February 10, 2020, we entered into a lease agreement, that commenced on March 1, 2020, for an additional office and warehouse space located in Tracy, California. This office and warehouse space is approximately 54,429 sq.ft. and will supplement the existing manufacturing, warehouse and distribution of our ERDs.

We obtain raw, processed and certain pre-machined materials from various suppliers to support our manufacturing operations. A limited number of these suppliers are near sole-source to maintain material consistency and support new product development. A qualified redundant material source exists in most cases, or whenever feasible.

Through our vertically integrated precision manufacturing process, we ensure that all components meet our high standards for quality, durability, and reliability. Our production facility operates under the principles of Lean Manufacturing and we continuously seek ways to improve product and process performance. Our manufacturing operations is certified to ISO9001:2015 standards.

Water field activities are conducted by our aftermarket and field service organization on-site at customer locations.

Seasonality

We often experience substantial fluctuations in product revenue from quarter-to-quarter and from year-to-year because a single order for our ERDs by a large EPC firm for a particular plant is based upon each firm’s project planning, which varies from year to year and firm to firm, may represent a significant portion of our revenue.

Oil & Gas

Across the oil & gas markets, highly pressurized fluid flows are required to extract and process hydrocarbons. These pressurized fluid flows are a necessity but come at a high cost to the oil & gas industry. In the upstream sector, high rates of flow, high pressure differentials and hostile (i.e., corrosive, erosive or abrasive) fluids lead to rapid degradation of expensive pressure pumping equipment. In the mid-stream and down-stream sectors, pressure energy becomes a waste product at various stages of the oil & gas processing thereby driving excessive energy usage and cost. Oil & gas operators seek ways to reduce these costs and improve overall productivity.

Markets

Upstream Sector

Hydraulic fracturing is a well-stimulation technique in which pressurized liquid containing a highly abrasive, proppant‑laden fluid is injected into a wellbore. Oilfield service (“OFS”) providers utilize high-pressure hydraulic fracturing pumps (commonly referred to as “frac-pumps”) to pressurize fracturing fluid (commonly referred to as “frac-fluid”) at treating pressures up to 15,000 pounds per square inch (“psi”). This frac-fluid is sent from the frac-pumps through traditional missile manifolds into the wellbore to create cracks in the deep-rock formations thereby permitting oil & gas extraction. These frac-pumps are routinely destroyed by the abrasive frac-fluids used during the hydraulic fracturing process causing significant OFS operator costs associated with excessive downtime, repairs, maintenance and capital equipment redundancy.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 11



Table of Contents

During mud pumping in the drilling process, a drilling fluid (commonly referred to as “drilling mud”) is circulated from a mud pit through the wellbore utilizing high-pressure mud pumps, which pressurize the drilling mud at treating pressures up to 7,500 psi, to control formation pressures, lubricate the drill bit, and to remove cuttings. Although the existing mud pumping process removes most of the solids from the drilling mud, debris and sand often remain. The pumps circulating the drilling mud is therefore subjected to extreme wear, resulting in burdensome repair and maintenance costs. Components of these mud pumps are routinely destroyed by the hostile drilling mud used during the mud pumping process causing OFS operators significant costs associated with excessive downtime, repairs, maintenance, capital equipment redundancy, safety, and rig mobilization.

OFS operators have long sought ways to ruggedize or extend the life of pumps thereby reducing costs in both the hydraulic fracturing and drilling processes. We believe the most efficient method of extending the life of these pumps is to isolate the high-pressure pumps from the abrasive fluids completely, thereby enabling OFS operators to realize immediate and long-term savings in the form of reduced downtime, repairs and maintenance costs and capital equipment redundancy.

Midstream and Downstream Sectors

Today, natural gas is typically processed by removing acid gases, such as carbon dioxide and hydrogen sulfide, before it is ready for distribution and use. A common acid gas removal process uses an amine solvent to absorb acid gases in a high-pressure contactor column. Having absorbed the carbon dioxide and hydrogen sulfide, the pressurized (rich) amine is then depressurized and processed into regenerated (lean) amine for reuse. An ERD, such as our Turbocharger, can recover the energy wasted during this reduction in pressure of the amine. This recovered energy can then be converted to electricity, or hydraulic energy, which eliminates the need for a high-pressure pump. Fewer high-pressure pumps reduce capital expenditures, and energy and maintenance costs, positively impacting plant availability.

Within pipeline applications, crude oil or final hydrocarbon products must be pressurized to travel from upstream gathering facilities or refineries, to terminals and tank farms. Fluid pressure builds within the pipeline during transport, and this pressure must be reduced before storing the liquid. This required pressure-drop, typically managed through a control valve that simply dissipates the energy into the atmosphere, represents an opportunity to generate electricity from otherwise wasted pressure energy.

Solutions

Our technology solutions seek to preserve or eliminate pumping technology in hostile processing environments or convert wasted pressure energy into a reusable asset. Our core oil & gas solutions, currently in research and development, are based upon our proven pressure exchanger technology, the VorTeq and MTeq, isolate high cost pumping equipment from hostile processing fluids. Our centrifugal line of solutions based upon our Turbocharger technology, the IsoBoost and IsoGen, recycle otherwise lost pressure energy.

Upstream Sector

VorTeq, a PX solution for hydraulic fracturing applications: The VorTeq reduces equipment failure common during well completion operations by re-routing the abrasive proppants that can cause pump failure away from frac-pumps, and ultimately enables a more efficient pumping model. The advanced pressure exchanger technology at the heart of the VorTeq works as a pump. Frac-fluid is pressurized in the VorTeq manifold before being sent downhole. This process ensures that high-pressure frac-pumps handle water, not abrasive proppants, protecting frac-pumps from erosion and reducing operational downtime. Using VorTeq, site operators can reduce repair and maintenance costs, reduce capital costs by extending frac-pump life expectancy, and eliminate redundant capital equipment. By minimizing pump redundancy and increasing equipment lifespan, the VorTeq can lower costs and reduce the emissions and energy intensity of oil & gas production. The VorTeq is currently in the advance stages of research and development (“R&D”). We completed a substantial re-design of the VorTeq during 2017 and have progressed the technology significantly in 2018 and 2019. Our focus remains on commercializing this technology.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 12



Table of Contents

MTeq, a PX solution for mud pumping applications: Our MTeq technology isolates and preserves costly mud pumps by re-routing hostile drilling mud from these critical pumps, and ultimately enables a more efficient pumping model. These mud pumps will process only clean fluid, which leads to reduced repairs and maintenance costs, and reduced capital costs by extending pump life expectancy and eliminating redundant capital equipment. Our MTeq technology is currently in the R&D stage. We designed the MTeq during late 2016 and early 2017 and completed building the first prototype in December 2017 and we began testing MTeq in 2018.

Midstream and Downstream Sectors

IsoBoost & IsoGen, Turbocharger solutions, for gas processing & pipeline applications: Within the gas processing and pipeline pressure down cycle, the IsoBoost and IsoGen technologies enable the recovery of pressure energy in the fluid flows either through the exchange of pressure within the application or by converting it to electricity. Our technology enables gas processing plant and pipeline owners and operators to achieve immediate and long-term energy savings with little or no operational disruption. Our IsoBoost is comprised of hydraulic turbochargers and related controls and automation systems. The IsoBoost solution enables oil & gas operators to capture and use wasted hydraulic pressure energy within the acid gas removal process, acting like a pump that is powered by hydraulic pressure that would otherwise be discarded through a control valve. Our IsoGen is comprised of hydraulic turbines, generators, and related controls and automation systems. The IsoGen enables oil & gas operators to generate electricity from the hydraulic energy in high-pressure fluid flows, either within the acid gas removal process in gas processing or at pipeline choke stations.

Customers

We license, lease or sell our oil & gas products to OFS companies, international oil companies (“IOC”), national oil companies (“NOC”), exploration and production companies (“E&P”), OEMs and EPC firms.

Oilfield Service Companies

OFS companies provide the infrastructure, equipment, intellectual property, and services needed by the oil & gas industry to explore for, extract, and transport, crude oil and natural gas. OFS hydraulic fracturing and mud pumping operators face significant pressure to reduce costs as oil & gas companies curtail capital expenditures and seek operational efficiencies in response to lower commodity prices.

In 2014, we entered into a strategic partnership with Liberty Oil Field Services (“Liberty”) to pilot and conduct field trials with the VorTeq. Through this agreement, Liberty has the rights to lease up to twenty VorTeq missiles for a period of up to five years following commercialization. In 2015, we entered into a 15-year license agreement with Schlumberger Technology Corporation (the “VorTeq Licensee”) for the exclusive, worldwide right to use the VorTeq for hydraulic fracturing onshore operations. The license agreement provides a carve out for Liberty’s contractual rights to utilize the VorTeq. We are currently working with the VorTeq Licensee and Liberty to commercialize the VorTeq technology.

As the MTeq technology matures, the Company intends to evaluate the best potential distribution method for the technology, which may include leasing or licensing partnerships with OFS companies that specialize in drilling wells or OEMs that supply or lease equipment to market participants.

Gas Processing & Pipeline Operators

We have contracted and delivered oil & gas solutions to customers in North America, Asia, and the Middle East for use in gas processing applications. Our target market consists of gas processing plants, pipeline substations and ammonia plants worldwide. Our IsoBoost solution has been installed in a major gas processing plant in the Middle East.

In 2016, we received our first major purchase order for multiple units of our IsoBoost solution for integration into a major gas processing plant under construction in the Middle East. We completed and shipped the initial units to the Middle East in fourth quarter of 2018. In April 2017, we entered into a 10-year licensing agreement with Alderley FZE for our IsoBoost and IsoGen technologies in gas processing and pipeline applications within the countries of the Gulf Cooperation Council (“GCC”), as well as Iraq and Iran to the extent international sanctions and laws permit.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 13



Table of Contents

Competition

The landscape for our technology within the oil & gas market is competitive as the industry is continuously seeking ways to reduce costs and extend the life of assets used in the production, transportation or processing of hydrocarbons.

We believe our VorTeq technology represents a competitive advantage over existing missile manifold technology because our solution re-routes abrasive proppant away from high-pressure pumps and will provide OFS operators the option to transition to more robust, longer lived, centrifugal pumps thereby further decreasing operating and capital costs. While our VorTeq replaces a traditional manifold, the competitors to our VorTeq are the high-pressure frac-pump manufacturers. There are a multitude of these pump manufacturers, including Gardner Denver, Inc., FMC Technologies, the Weir Group, Stewart & Stevenson and Forum Energy Technologies.

Similar to the VorTeq, we believe MTeq enhances the useful life of mud pumps and consumable pump components used in land drilling by re-routing the hostile drilling mud away from the high-pressure pumps, and OFS operators have the option to transition to more robust, longer life, centrifugal pumps thereby further decreasing operating and capital costs. The competition to the MTeq is a more robust mud pump or more durable mud pump components. The primary manufacturers of mud pumps are National Oilwell Varco, Inc., Gardner Denver, Inc. and Cameron International Corporation.

Several companies manufacture competitive technology to the IsoGen, which primarily consists of reverse running pumps (also called “hydraulic power recovery turbines” or “HPRTs”) and perform a basic form of energy recovery. Manufacturers of reverse running pumps include, but are not limited to, Flowserve, Sulzer Pumps, Ltd., and Shin Nippon Machinery. Several companies manufacture hydraulic turbochargers, which could eventually develop into competitive technology to our IsoBoost. However, none of these companies that manufacture turbochargers have significant experience within gas processing. In order to utilize a turbocharger in gas processing, expertise is required to validate the system level design and integration within a gas processing application.

Sales and Marketing

In the oil & gas market, we target OFSs, IOCs, NOCs, E&Ps, OEMs or EPCs on behalf of oil producers and chemical producers who have applications for our solutions and services. We endeavor to limit capital sales into the oil & gas market, thereby minimizing installation and distribution costs, as well as associated sales and marketing expenses. As a result, our primary go-to-market strategy in the oil & gas market is through technology leasing or licensing as outlined in the Customer section of this overview.

A significant portion of our revenue is from outside of the U.S. Additional segment and geographical information regarding our product revenue is included in Note 13, “Concentrationsof the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.

Operations

Our oil & gas product manufacturing, assembly and testing, as well as overseeing the commercialization of the VorTeq, has been historically managed through our operations in Ireland. In October 2018, these functions were transitioned to the U.S. branch of our Ireland operating company, which is a tax resident in Malta. To produce our oil & gas products, we utilize multiple supply chain partners, in addition to our San Leandro, California manufacturing facility. We complete critical machining, assembly and testing operations, in-house to protect the proprietary nature of our manufacturing methods and product designs and to maintain premium quality standards.

Oil & gas field activities are conducted by our field operations organization located in Texas, which also provides support to R&D activities leading to VorTeq and MTeq commercialization.

In January 2020, we opened our commercial development center for oil & gas field testing, manufacturing, and training, located in Katy, Texas. This facility consolidates our Texas oil & gas operations and allow us to test the VorTeq and MTeq technologies at scale and in real world conditions on a regular, uninterrupted basis. The facility contains a test yard with equipment that simulates the pressures, flows, and operating conditions of commercial frac sites for scalable, continuous product testing. In addition, the facility houses equipment to complete critical machining, assembly and testing operations in support of R&D and eventual commercialization.

 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 14



Table of Contents


Seasonality

In our Oil & Gas segment, we do not currently have enough history to determine seasonal revenue patterns.

Research, Development and Technology

Our focus on R&D is a key driver of our future evolution. When developing products, we seek three distinct process criteria: (1) high rates of fluid flow; (2) large pressure differentials; and (3) high degrees of capital intensity, specifically in the form of pumping and/or compression assets. Using these criteria, our product development strategy is to identify fluid flow applications where equipment is being destroyed or adversely affected and/or where pressure energy is being wasted. We maintain a product development road map, which guides R&D resource allocation across all business units. Our R&D team guides products through defined development stages with structured toll-gate reviews throughout the process.

We have invested in R&D to support our product development strategy and have grown our R&D organization significantly since 2013. We maintain advanced testing capabilities to test our PX Pressure Exchanger, Turbocharger, and pump solutions at our headquarters located in San Leandro, California and, as of January 2020, our new commercial development center for oil & gas field testing, manufacturing, and training, located in Katy, Texas, allows us to test our oil & gas products at full scale (full flow and pressure). In 2018, we made a sizable investment in high pressure frac-equipment, such as frac-pumps, blenders, and other equipment, to bolster our testing capabilities to advance our oil & gas solutions.

Our engineers specialize in a range of technical fields spanning our core engineering competencies of fluid mechanics and aerodynamics, solid mechanics with expertise in computational fluid dynamics and finite element analysis, bearings design (roller-element, hydrostatic, and hydrodynamic), multi-phase flow, dynamics and controls, acoustics and vibrations, tribology, material science and coatings, pumps and turbines, turbo-machinery, and rotating equipment.

We have invested in advanced numerical modeling and analytical tools that allow for 3-dimensional (“3D”), multi-phase, multi-physics, and multi-scale computational fluid dynamics and fluid structure interactions. Leading-edge modeling and analytical techniques coupled with extensive experimental capabilities allow us to further refine our existing water and oil & gas technologies, as well as developing new derivatives of our pressure exchanger technology for complex systems and applications.

Today our R&D investments are focused on (1) commercialization of the VorTeq and MTeq solutions; (2) advances to our existing PX Pressure Exchanger, Turbocharger, and pump solutions to better service our water end markets; (3) development of new pump technologies in support of our water business; and (4) fundamental research into new applications of our pressure exchanger technology in existing and new verticals.

Intellectual Property

We seek patent protection for new technologies, inventions, and improvements that are likely to be incorporated into our solutions. We rely on patents, trade secret laws, and contractual safeguards to protect the proprietary tooling, processing techniques, and other know-how used in the production of our solutions. We have a robust intellectual property (“IP”) portfolio consisting of U.S. and international issued patents as well as pending patent applications.

We have registered the following trademarks with the United States Patent and Trademark office: “ERI,” “PX,” “PX Pressure Exchanger,” “Pressure Exchanger,” the Energy Recovery logo, “Making Desalination Affordable,” “IsoBoost,” and “IsoGen.” Applications are pending for “VorTeq” and “MTeq.” We have also applied for and received registrations in international trademark offices.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 15



Table of Contents

Employees

As of December 31, 2019, we had 188 employees: 66 in manufacturing; 49 in engineering, research and development; 42 in corporate services and management; and 31 in sales, service, and marketing. Fourteen of these employees were located outside of the U.S. We also engage a relatively small number of independent contractors, primarily as sales agents worldwide. We have not experienced any work stoppages, and our employees are not unionized. We consider our relations with our employees to be good.

Additional Information

The Energy Recovery website is www.energyrecovery.com. In addition, we maintain an Investor Relations website as a routine channel for distribution of important information, including news releases, presentations, and financial statements (https://ir.energyrecovery.com). We intend to use the Investor Relations website as a means of complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our Investor Relations website in addition to press releases, Securities and Exchange Commission (“SEC”) filings, and public conference calls and webcasts. Our Annual Report on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K, all amendments to those reports, and the Proxy Statement for our Annual Meeting of Stockholders are made available, free of charge, in the Investor Relations section of our website, as soon as reasonably practicable after the reports have been filed with or furnished to the SEC. The information contained on our website or any other website is not part of this report nor is it considered to be incorporated by reference herein or with any other filing we make with the SEC. Our headquarters and primary manufacturing center is located at 1717 Doolittle Drive, San Leandro, California 94577, and our main telephone number is (510) 483-7370. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC and the address of that site (http://www.sec.gov).


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 16



Table of Contents

Item 1A — Risk Factors

The following discussion sets forth what management currently believes could be the most significant risks and uncertainties that could impact our businesses, results of operations, and financial condition. Other risks and uncertainties, including those not currently known to us or our management, could also negatively impact our businesses, results of operations, and financial conditions. Accordingly, the following should not be considered a complete discussion of all of the risks and uncertainties we may face. We may amend or supplement these risk factors from time to time in other reports we file with the SEC.

Risk Related to our Water Segment

Our Water segment depends on the construction of new desalination plants, and the retrofit of existing plants, for revenue, and as a result, our operating results have experienced, and may continue to experience, significant variability due to volatility in capital spending, availability of project financing, and other factors affecting the water desalination industry.

We currently derive the majority of our revenue from sales of products and services used in desalination plants for municipalities, hotels, mobile containerized desalination solutions, resorts, and agricultural operations in dry or drought-ridden regions of the world. The demand for our Water segment products may decrease if the construction of desalination plants or the retrofit of existing plants, declines for political, economic, or other factors, especially in these dry or drought-ridden regions. In addition, the desalination industry is witnessing the start of a technology shift from thermal desalination plants to SWRO production. If this technology shift does not occur or we are unable to capture a portion of the market created by this shift, our Water segment sales and revenue can be negatively impacted. Other factors that could affect the number and capacity of desalination plants built or the timing of their completion, include the availability of required engineering and design resources; a weak global economy; shortage in the supply of credit and other forms of financing; changes in government regulation, permitting requirements, or priorities; and reduced capital spending for desalination. Each of these factors could result in reduced or uneven demand for our Water segment products. Pronounced variability or delays in the construction of desalination plants or reductions in spending for desalination, could negatively impact our Water segment sales and revenue, which in turn could have an adverse effect on our entire business, financial condition, or results of operations and make it difficult for us to accurately forecast our future sales and revenue.

Our Water segment faces competition from a number of companies that offer competing energy recovery and pump solutions. If any one of these companies produces superior technology or offers more cost-effective products, our competitive position in the market could be harmed and our profits may decline.

The market for ERD and pumps for desalination plants is competitive and evolving. We expect competition, especially competition on price, to persist and intensify as the desalination market grows and new competitors enter the market. Some of our current and potential competitors may have significantly greater financial, technical, marketing, and other resources; longer operating histories; or greater name recognition. They may also have more extensive products and product lines that would enable them to offer multi-product or packaged solutions as well as competing products at lower prices or with other more favorable terms and conditions. As a result, our ability to sustain our market share may be adversely impacted, which would affect our business, operating results, and financial condition. In addition, if one of our competitors were to merge or partner with another company, the change in the competitive landscape could adversely affect our continuing ability to compete effectively.

If we are unable to collect unbilled receivables, which are caused in part by holdback provisions, our operating results could be adversely affected.

Our contracts with large engineering, procurement, and construction firms generally contain holdback provisions that typically delay final installment payments for our products by up to 24 months, after the product has been shipped and revenue has been recognized. Generally, 10% or less of the revenue we recognize pursuant to our customer contracts is subject to such holdback provisions and is accounted for as contract assets. Such holdbacks may result in relatively high unbilled receivables. If we are unable to collect these performance holdbacks, our results of operations would be adversely affected.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 17



Table of Contents

We depend on a limited number of suppliers for some of our components. If our suppliers are not able to meet our demand and/or requirements, our business could be harmed.

We rely on a limited number of suppliers for vessel housings, stainless steel ports, alumina powder, and tungsten carbide for our portfolio of PX ERDs and stainless steel castings and components for our Turbochargers and pumps. Our reliance on a limited number of manufacturers for these supplies involves several risks, including reduced control over delivery schedules, quality assurance, manufacturing yields, production costs, and lack of guaranteed production capacity or product supply. We do not have long-term supply agreements with these suppliers but secure these supplies on a purchase order basis. Our suppliers have no obligation to supply products to us for any specific period, in any specific quantity, or at any specific price, except as set forth in a particular purchase order. Our requirements may represent a small portion of the total production capacities of these suppliers, and our suppliers may reallocate capacity to other customers, even during periods of high demand for our products. We have in the past experienced, and may in the future experience, product quality issues and delivery delays with our suppliers due to factors such as high industry demand or the inability of our vendors to consistently meet our quality or delivery requirements. If our suppliers were to cancel or materially change their commitments to us or fail to meet quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, be unable to develop or sell our products cost-effectively or on a timely basis, if at all, and have significantly decreased revenue, which could harm our business, operating results, and financial condition. We may qualify additional suppliers in the future, which would require time and resources. If we do not qualify additional suppliers, we may be exposed to increased risk of capacity shortages due to our dependence on current suppliers.

Risk Related to our Oil & Gas Segment

We may not be able to successfully commercialize the VorTeq.

In October 2015, we entered into the VorTeq License Agreement with the VorTeq Licensee, which provides the VorTeq Licensee with exclusive worldwide rights to our VorTeq technology for hydraulic fracturing onshore applications. Once the VorTeq is commercialized, the VorTeq Licensee will begin paying ongoing recurring royalty fees to us for the VorTeq technology. In order to commercialize the VorTeq, the VorTeq License Agreement provides, among other things, that we successfully meet certain specified milestones against key performance indicators set forth in the license agreement. The VorTeq is a relatively new technology and the hydraulic fracturing process is extremely complex, which presents a wide range of technological challenges for us. If we are unable to successfully solve these challenges and, as a result, fail to meet the milestones, we may not be able to successfully commercialize the VorTeq. In that circumstance, we will not receive any royalty payments from the VorTeq Licensee, which could have an adverse effect on our entire business, financial condition, or results of operation.

If the VorTeq Licensee fails to adopt the VorTeq, for any reason, we may not receive royalty payments or be able to successfully commercialize the VorTeq.

The successful commercialization of the VorTeq depends heavily on the VorTeq Licensee’s support and ultimate adoption of the technology. If the VorTeq Licensee fails to adopt the VorTeq, for any reason, or exits the business altogether, we may not be able to successfully commercialize the VorTeq with the VorTeq Licensee and consequently, we may not receive any royalties under the VorTeq License Agreement. In addition, the VorTeq Licensee recently announced a change in their North American Land business strategy that might result in a prolonged reduction of their presence within the North American market. This reduction could have a material impact on the total royalties we may receive under the VorTeq License Agreement. If any of the foregoing were to occur, we may not be able to find a suitable replacement for the VorTeq Licensee or be able to negotiate royalties similar to those contained in the VorTeq License Agreement or to commercialize the VorTeq, at all. Failure to commercialize the VorTeq could have an adverse effect on our entire business, financial condition, or results of operation.

We may not meet the key performance indicators necessary to meet the two milestones in the VorTeq License Agreement.

The VorTeq License Agreement calls for certain milestone key performance indicators that if met will result in payments to us of $25 million for each of two milestones. Achievement of these milestones is uncertain, and while we believe we can meet the milestones, if we are unable to do so, the milestone payments will be delayed until such time as the milestones are met or may not be earned and received at all. Failure to meet said milestones may also jeopardize commercialization and the rate of adoption of our VorTeq.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 18



Table of Contents

We may not be able to successfully commercialize the MTeq.

We introduced the MTeq in 2017 and the technology is currently in the R&D stage. While we are actively working towards progressing this technology, there is no guarantee we will produce a viable commercialized solution given the complex and extreme conditions found in mud pumping, which present a wide range of technological challenges for us. If we are unable to solve any of the technological challenges we encounter or find partners to adopt the technology, we may not be able to successfully commercialize the MTeq, which could have an adverse effect on our entire business, financial condition, or results of operation.

Our Oil & Gas segment may be impacted by prolonged deflation in global oil prices which may cause delays or cancellations of projects by Oil & Gas segment customers, negatively affecting the rate of our market penetration and consequently our revenue and profitability.

A deflationary oil environment may delay and even stall adoption and deployment of our products within our Oil & Gas segment including but not limited to the VorTeq as licensed for onshore applications by the VorTeq Licensee. Emerging market economies, those dependent on commodity exports, and especially those for whom oil exports make up a significant percent of total exports, may be unable to retrofit or expand their oil exploration, production, and gas processing infrastructure thus negatively impacting our addressable market and future revenue. Additionally, oil price deflation may continue to lead to widespread liquidity and insolvency issues for exploration, production, and processing customers, which may negatively affect our addressable markets and therefore our financial performance.

Risk Related to our Entire Business

Our diversification into new fluid flow markets, such as oil & gas, may not be successful.

We have made a substantial investment in research, development, and sales to execute on our diversification strategy into fluid flow markets such as oil & gas and chemical processing. While we see diversification as core to our growth strategy, there is no guarantee that we will be successful in our efforts. Our model for growth is based in part on our ability to initiate and embrace disruptive technology trends, to enter new markets, both in terms of geographies and product areas, and to drive broad adoption of the products and services that we develop and market. Any inability to execute this model for growth could damage our reputation, limit our growth, and negatively affect our operation results. For example, while we believe that our products will enable gas processing plant operators to operate at a high level of energy efficiency with minimal downtime, we may be subject to warranty claims if customers of these offerings experience significant downtimes or failures for which our warranty reserves may be inadequate given the lack of historical failure rates associated with new product introductions. We also could be subject to damage claims based on our products, which we may not be able to properly insure. In addition, profitability, if any, in new industrial verticals may be lower than in our Water segment, and we may not be sufficiently successful in our diversification efforts to recoup investments.

Our operating results may fluctuate significantly, making our future operating results difficult to predict and causing our operating results to fall below expectations.

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control.

We have experienced significant fluctuations in revenue from quarter-to-quarter and year-to-year, and we expect such fluctuations to continue. In addition, in the past, customer buying patterns led to a significant portion of our sales occurring in the fourth quarter. This presents the risk that delays, cancellations, or other adverse events in the fourth quarter could have a substantial negative impact on annual results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Since it is difficult for us to anticipate our future results, in the event our revenue or operating results fall below the expectations of investors or securities analysts, our stock price may decline.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 19



Table of Contents

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate.

Our sales efforts involve substantial education of our current and prospective customers about the use and benefits of our energy recovery products. This education process can be time-consuming and typically involves a significant product evaluation process which is particularly pronounced when dealing with product introduction into new fluid flow industrial verticals. In our Water segment, the sales cycle for our OEM customers, which are involved with smaller desalination plants, averages one to 12 months. The Water segment sales cycle for our international engineering, procurement, and construction firm customers, which are involved with larger desalination plants, ranges from 16 to 36 months. These long sales cycles make quarter-by-quarter revenue predictions difficult and results in our expending significant resources well in advance of orders for our products.

Our business entails significant costs that are fixed or difficult to reduce in the short term while demand for our products is variable and subject to fluctuation, which may adversely affect our operating results.

Our business requires investments in facilities, equipment, research and development, and training that are either fixed or difficult to reduce or scale in the short term. At the same time, the market for our products is variable and has experienced downturns due to factors such as economic recessions, increased precipitation, uncertain global financial markets, and political changes, many of which are outside of our control. During periods of reduced product demand, we may experience higher relative costs and excess manufacturing capacity, resulting in high overhead and lower gross profit margins while causing cash flow and profitability to decline. Similarly, although we believe that our existing manufacturing facilities are capable of meeting current demand and demand for the foreseeable future, the continued success of our business depends on our ability to expand our manufacturing, research and development, and testing facilities to meet market needs. If we are unable to respond timely to an increase in demand, our revenue, gross profit margin, net income, and cash flow may be adversely affected.

Parts of our inventory may become excess or obsolete, which would increase our cost of revenues.

Inventory of raw materials, parts, components, work in-process, or finished products may accumulate, and we may encounter losses due to a variety of factors, including technological change in the water desalination and oil & gas industries that result in product changes; long delays in shipment of our products or order cancellations; our need to order raw materials that have long lead times and our inability to estimate exact amounts and types of items needed, especially with regard to the configuration of our high-efficiency pumps and IsoBoost and IsoGen systems; and cost reduction initiatives resulting in component changes within the products.

In addition, we may from time to time purchase more inventory than is immediately required in order to shorten our delivery time in case of an anticipated increase in demand for our products. If we are unable to forecast demand for our products with a reasonable degree of certainty and our actual orders from our customers are lower than these forecasts, we may accumulate excess inventory that we may be required to write off, and our business, financial condition, and results of operations could be adversely affected.

We may not generate positive returns on our research and development strategy.

Developing our products is expensive and the investment in product development may involve a long payback cycle. For the years ended December 31, 2019, 2018 and 2017, our R&D expenses were $23.4 million, or approximately 27% of our total revenue, $17.0 million, or approximately 23% of our total revenue, and $13.4 million, or approximately 19% of our total revenue, respectively. We believe one of our greatest strengths lies in our innovation and our product development efforts. By investing in R&D, we believe we are well positioned to continue to execute on our product strategy, take into consideration our customers’ cost and efficiency sensitivities and take advantage of other market opportunities. We expect that our results of operations may be impacted by the timing and size of these investments. In addition, these investments may take several years to generate positive returns, if ever.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 20



Table of Contents

We are subject to risks related to product defects, which could lead to warranty claims in excess of our warranty provision or result in a significant or a large number of warranty or other claims in any given year.

We provide a warranty for certain products for a period of 18 to 30 months and provide up to a five-year warranty for the ceramic components of our PX-branded products. We test our products in our manufacturing facilities through a variety of means; however, there can be no assurance that our testing will reveal latent defects in our products, which may not become apparent until after the products have been sold into the market. The testing may not replicate the harsh, corrosive, and varied conditions of the desalination and other plants in which they are installed. It is also possible that components purchased from our suppliers could break down under those conditions. Certain components of our Turbochargers and pumps are custom-made and may not scale or perform as required in production environments. Accordingly, there is a risk that we may have significant warranty claims or breach supply agreements due to product defects. We may incur additional cost of revenue if our warranty provisions are not sufficient to cover the actual cost of resolving issues related to defects in our products. If these additional expenses are significant, they could adversely affect our business, financial condition, and results of operations.

Business interruptions may damage our facilities or those of our suppliers.

Our operations and those of our suppliers may be vulnerable to interruption by fire, earthquake, flood, and other natural disasters, as well as power loss, telecommunications failure, and other events beyond our control. Our facilities in California are located near major earthquake faults and have experienced earthquakes in the past. If a natural disaster occurs, our ability to conduct our operations could be seriously impaired, which could harm our business, financial condition, results of operations, and cash flows. We cannot be sure that the insurance we maintain against general business interruptions will be adequate to cover all of our losses.

If we are unable to protect our technology or enforce our intellectual property rights, our competitive position could be harmed, and we could be required to incur significant expenses to enforce our rights.

Our competitive position depends on our ability to establish and maintain proprietary rights in our technology and to protect our technology from copying by others. We rely on trade secret, patent, copyright, and trademark laws, as well as confidentiality agreements with employees and third parties, all of which may offer only limited protection. We hold a number of U.S. and counterpart international patents, and when their terms expire, we could become more vulnerable to increased competition. The protection of our intellectual property in some countries may be limited. While we have expanded our portfolio of patent applications, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims, and even if patents are issued, they may be contested, circumvented, or invalidated. Moreover, while we believe our issued patents and patent pending applications are essential to the protection of our technology, the rights granted under any of our issued patents or patents that may be issued in the future may not provide us with proprietary protection or competitive advantages, and as with any technology, competitors may be able to develop similar or superior technologies now or in the future. In addition, our granted patents may not prevent misappropriation of our technology, particularly in foreign countries where intellectual property laws may not protect our proprietary rights as fully as those in the U.S. This may render our patents impaired or useless and ultimately expose us to currently unanticipated competition. Protecting against the unauthorized use of our products, trademarks, and other proprietary rights is expensive, difficult, and in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Intellectual property litigation could result in substantial costs and diversion of management resources, either of which could harm our business.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 21



Table of Contents

Claims by others that we infringe their proprietary rights could harm our business.

Third parties could claim that our technology infringes their intellectual property rights. In addition, we or our customers may be contacted by third parties suggesting that we obtain a license to certain of their intellectual property rights that they may believe we are infringing. We expect that infringement claims against us may increase as the number of products and competitors in our market increases and overlaps occur. In addition, to the extent that we gain greater visibility, we believe that we will face a higher risk of being the subject of intellectual property infringement claims. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract management from our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment against us could also include an injunction or other court order that could prevent us from offering our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms, or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any of these events could seriously harm our business. Third parties may also assert infringement claims against our customers. Because we generally indemnify our customers if our products infringe the proprietary rights of third parties, any such claims would require us to initiate or defend protracted and costly litigation on their behalf in one or more jurisdictions, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers.

We are currently involved in legal proceedings, and may be subject to additional future legal proceedings, that may result in material adverse outcomes.

In addition to the intellectual property litigation risks discussed above, we are presently involved, and may become involved in the future, in various commercial and other disputes as well as related claims and legal proceedings that arise from time to time in the course of our business. See Note 8, Commitments and ContingenciesLitigation,” of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for information about certain legal proceedings in which we are involved. Our current legal proceedings and any future lawsuits to which we may become a party are and will likely be expensive and time consuming to investigate, defend and resolve, and will divert our management’s attention. Any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal or in payments of substantial monetary damages or fines, or we may decide to settle lawsuits on similarly unfavorable terms, which could have an adverse effect on our business, financial condition, or results of operations.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 22



Table of Contents

Our global operations expose us to risks and challenges associated with conducting business internationally, and our results of operations may be adversely affected by our efforts to comply with the laws of other countries, as well as U.S. laws which apply to international operations, such as the Foreign Corrupt Practices Act (FCPA) and U.S. export control laws.

We operate on a global basis with offices or activities in Europe, Africa, Asia, South America, and North America. We face risks inherent in conducting business internationally, including compliance with international and U.S. laws and regulations that apply to our international operations. These laws and regulations include tax laws, anti-competition regulations, import and trade restrictions, export control laws, and laws which prohibit corrupt payments to governmental officials or certain payments or remunerations to customers, including the U.S. Foreign Corrupt Practices Act (“FCPA”) or other anti-corruption laws that have recently been the subject of a substantial increase in global enforcement. Many of our products are subject to U.S. export law restrictions that limit the destinations and types of customers to which our products may be sold, or require an export license in connection with sales outside the U.S. Given the high level of complexity of these laws, there is a risk that some provisions may be inadvertently or intentionally breached, for example through fraudulent or negligent behavior of individual employees, our failure to comply with certain formal documentation requirements, or otherwise. Also, we may be held liable for actions taken by our local dealers and partners. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions or conditions on the conduct of our business. Any such violations could include prohibitions or conditions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our business, and our operating results. In addition, we operate in many parts of the world that have experienced significant governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We may be subject to competitive disadvantages to the extent that our competitors are able to secure business, licenses, or other preferential treatment by making payments to government officials and others in positions of influence or through other methods that relevant law and regulations prohibit us from using. Our success depends, in part, on our ability to anticipate these risks and manage these difficulties. These factors or any combination of these factors may adversely affect our revenue or our overall financial performance.

Uncertainty in the global geopolitical landscape may impact our operations outside the United States.

There is uncertainty as to the position the United States will take with respect to world affairs. This uncertainty may include such issues as U.S. support for existing treaty and trade relationships with other countries, including, notably, China. This uncertainty, together with other recent key global events, such as recently enacted currency control regulations and tariff regimes in or against China, ongoing terrorist activity, and potential hostilities in the Middle East, may adversely impact (i) the ability or willingness of non-U.S. companies to transact business in the United States, including with us, (ii) our ability to transact business in other countries, including the Middle East, where many of the water mega-projects are planned, (iii) regulation and trade agreements affecting U.S. companies, (iv) global stock markets (including The Nasdaq Global Market on which our common shares are traded), and (v) general global economic conditions. All of these factors are outside of our control, but may nonetheless cause us to adjust our strategy in order to compete effectively in global markets.

The decision by British voters to exit the European Union may negatively impact our operations.

The United Kingdom’s (U.K.) exit from the European Union on January 31, 2020, commonly referred to as Brexit, has caused, and may continue to cause, uncertainty in the global markets. Political and regulatory responses to the withdrawal are still developing, and we are in the process of assessing the impact that the withdrawal may have on our business as more information becomes available. Any impact from Brexit on our business and operations over the long term will depend, in part, on the outcome of tariff, tax treaties, trade, regulatory, and other negotiations the U.K. conducts.

Acts of War or Terrorism.

Threats or acts of war or terrorism can adversely affect our business. Terrorist attacks in the United States, Europe and in other countries and continuing hostilities in the Middle East and elsewhere have created significant instability and uncertainty in the world. These and future events may have a material adverse effect on world financial markets as well as the water industry, as many large existing and planned water desalination plants are located in the Middle East. In addition, threats or acts of war or terrorism can cause our customers to curtail their purchase of our products. These factors or any combination of these factors may adversely affect our revenue or our overall financial performance.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 23



Table of Contents

We have global operations and face risks related to health epidemics that could impact our results of operations.

Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases and other adverse public health developments could have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel or to distribute our products, as well as temporary closures of our facilities or the facilities of our suppliers or customers. Any disruption of our suppliers or customers would likely impact our sales and operating results. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could impact our operating results.

Changes in the method of determining the London Interbank Offered Rate, or LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect our financial condition and results of operations.

Certain of our financial obligations and instruments, including our Loan and Pledge Agreement with Citibank N.A., dated January 27, 2017, are or may be made at variable interest rates that use LIBOR (or metrics derived from or related to LIBOR) as a benchmark for establishing the interest rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to perform differently than in the past or to disappear entirely. These reforms may also result in new methods of calculating LIBOR to be established, or alternative reference rates to be established. For example, the Federal Reserve Bank of New York has begun publishing a Secured Overnight Funding Rate, or SOFR, which is intended to replace U.S. dollar LIBOR, and central banks in several other jurisdictions have also announced plans for alternative reference rates for other currencies. The potential consequences of these actions cannot be fully predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us. Changes in market interest rates may influence our financing costs, and the returns on financial investments and could reduce our earnings and cash flows. In addition, any transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR, reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. This could materially and adversely affect our results of operations, cash flows, and liquidity.

The U.S. Congress and Trump Administration may make substantial changes to fiscal, political, regulation and other federal policies that may adversely affect our business, financial condition, operating results and cash flows.

Changes in general economic or political conditions in the United States or other regions could adversely affect our business. There have been and may be significant changes in, and uncertainty with respect to, legislation, regulation and government policy. While it is not possible to predict whether and when any such changes will occur, changes at the local, state or federal level could impact our business. Specific legislative and regulatory proposals that could have a material impact on us include, but are not limited to, modifications to international trade policy; public company reporting requirements; and environmental regulation.

Beginning in 2018, the U.S. imposed additional duties, ranging from 10% to 25%, on a variety of goods imported from China. Effective in September 2018, the Office of the U.S. Trade Representative (“USTR”) imposed tariffs of 10% on approximately $200 billion worth of goods imported from China (“List 3 products”), including categories of products we import from China and increased these tariffs to 25% effective in May 2019. In August 2019, the U.S. administration directed the USTR to increase tariffs on List 3 products from 25% to 30%, effective October 2019, which increases were subsequently delayed indefinitely. China responded to the multiple U.S. tariff lists by announcing several lists of products from the U.S. that are subject to additional tariffs upon import to China. The first round of Chinese retaliatory tariffs went into effect on July 6, 2018, and a second set was implemented on August 23, 2018. Our products are not impacted by these tariffs. A third group of items subject to 5% to 10% tariff went into effect on September 24, 2018, which includes our PX Pressure Exchanger, Turbocharger, and pump products.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 24



Table of Contents

We cannot predict what actions may ultimately be taken with respect to tariffs or trade relations between the U.S. and other countries, what products may be subject to such actions, or what actions may be taken by the other countries in retaliation. Accordingly, it is difficult to predict how such actions may impact our business, or the business of our customers. Our business operations, as well as the businesses of our customers on which we are substantially dependent, are located in various countries at risk for escalating trade disputes, including the U.S. and China. Any resulting trade wars could have a significant adverse effect on world trade and could adversely impact our revenues, gross margins and business operations.

Regulations related to conflict minerals could adversely impact our business.

The SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals mined from the Democratic Republic of Congo (also referred to as the “DRC”) and adjoining countries in their products. Based on our purchasing policy and supplier selection, it is considered unlikely that any conflict minerals are used in the manufacturing of our products. Nevertheless, we are continuing reasonable country of origin inquiry and have implemented a program of due diligence on the source and chain of custody for conflict minerals. There are costs associated with complying with these disclosure requirements, including loss of customers and potential changes to products, processes, or sources of supply. The implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” minerals, we cannot be sure that we will be able to obtain necessary materials from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we have implemented.

We may have risks associated with security of our information technology systems.

We make significant efforts to maintain the security and integrity of our information technology systems and data. Despite significant efforts to create security barriers to such systems, it is virtually impossible for us to entirely mitigate this risk. There is a risk of industrial espionage, cyber-attacks, misuse or theft of information or assets, or damage to assets by people who may gain unauthorized access to our facilities, systems, or information. Such cybersecurity breaches, misuse, or other disruptions could lead to the disclosure of confidential information, improper usage and distribution of our intellectual property, theft, manipulation and destruction of private and proprietary data, and production downtimes. Although we actively employ measures to prevent unauthorized access to our information systems, preventing unauthorized use or infringement of our rights is inherently difficult. These events could adversely affect our financial results and any legal action in connection with any such cybersecurity breach could be costly and time-consuming and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, we must frequently expand our internal information system to meet increasing demand in storage, computing and communication, which may result in increased costs. Our internal information system is expensive to expand and must be highly secure due to the sensitive nature of our customers’ information that we transmit. Building and managing the support necessary for our growth places significant demands on our management and resources. These demands may divert these resources from the continued growth of our business and implementation of our business strategy.

Our actual or perceived failure to adequately protect personal data could adversely affect our business, financial condition and results of operations.

A wide variety of provincial, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data. These privacy- and data protection-related laws and regulations are evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. Further, our legal and regulatory obligations in foreign jurisdictions are subject to unexpected changes, including the potential for regulatory or other governmental entities to enact new or additional laws or regulations, to issues rulings that invalidate prior laws or regulations, or to increase penalties significantly. Compliance with these laws and regulations can be costly and can delay or impede the development and offering of new products and services.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 25



Table of Contents

For example, the General Data Protection Regulation, which became effective in May 2018, imposes more stringent data protection requirements, and provides for significantly greater penalties for noncompliance, than the European Union laws that previously applied. Additionally, California recently enacted legislation, the California Consumer Privacy Act, which became effective January 1, 2020. We may also be subject to additional obligations relating to personal data by contract that industry standards apply to our practices. Our actual or perceived failure to comply with applicable laws and regulations or other obligations to which we may be subject relating to personal data, or to protect personal data from unauthorized access, use, or other processing, could result in enforcement actions and regulatory investigations against us, claims for damages by customers and other affected individuals, fines, damage to our reputation, and loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business. Further, evolving and changing definitions of personal data and personal information, including the classification of IP addresses, machine identification information, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting business relationships and partnerships that may involve the sharing or uses of data, and may require significant costs, resources, and efforts in order to comply.

We may have risks associated with our international tax optimization structure.

In 2015, we implemented an international tax optimization structure. While we continue to conclude that uncertain tax positions are unlikely, it is possible that the international tax structure could be examined by the Internal Revenue Service in the U.S. and/or the Tax Authorities in Ireland, and it is possible that such an examination could result in an unfavorable impact on us.

The enactment of legislation implementing changes in taxation of international business activities, the adoption of other corporate tax reform policies, or changes in tax legislation or policies could materially impact our financial position and results of operations.

Our future effective tax rates could be subject to volatility or adversely affected by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, the U.S. Tax Cuts and Jobs Act (“Tax Act”) made significant changes to the taxation of U.S. business entities that may have a meaningful impact to our provision for income taxes. These changes included a reduction to the federal corporate income tax rate, the current taxation of certain foreign earnings, the imposition of base-erosion prevention measures which may limit the deduction of certain transfer pricing payments, and possible limitations on the deductibility of net interest expense or corporate debt obligations. Accounting for the income tax effects of the Tax Act required significant judgments and estimates that are based on current interpretations of the Tax Act. The U.S. Department of the Treasury continues to issue regulations that affect various components of the Act. Our future effective tax rate may be impacted by changes in interpretation of the regulations, as well as additional legislation and guidance regarding the Act.

In addition, many countries are beginning to implement legislation and other guidance to align their international tax rules with the Organisation for Economic Co-operation’s Base Erosion and Profit Shifting recommendations and action plan that aim to standardize and modernize global corporate tax policy, including changes to cross-border tax, transfer-pricing documentation rules, and nexus-based tax incentive practices. As a result of the heightened scrutiny of corporate taxation policies, prior decisions by tax authorities regarding treatments and positions of corporate income taxes could be subject to enforcement activities, and legislative investigation and inquiry, which could also result in changes in tax policies or prior tax rulings. Any such changes in policies or rulings may also result in the taxes we previously paid being subject to change.

Due to the scale of our international business activities any substantial changes in international corporate tax policies, enforcement activities or legislative initiatives may materially and adversely affect our business, the amount of taxes we are required to pay and our financial condition and results of operations generally.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 26



Table of Contents

If we need additional capital to fund future growth, it may not be available on favorable terms, or at all.

Our primary source of cash historically has been customer payments for our products and services and proceeds from the issuance of common stock. This has funded our operations and capital expenditures. We may require additional capital from equity or debt financing in the future to fund our operations or respond to competitive pressures or strategic opportunities, such as a potential acquisition or the expansion of operations. We may not be able to secure such additional financing on favorable terms or at all. The terms of additional financing may place limits on our financial and operational flexibility. If we raise additional funds through further issuances of equity, convertible debt securities, or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities that we issue could have rights, preferences, or privileges senior to those of existing or future holders of our common stock. If we are unable to obtain necessary financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges or opportunities could be significantly limited.

We may seek to expand through acquisitions of and investments in other businesses, technologies, and assets. These acquisition activities may be unsuccessful or divert management’s attention.

We may consider strategic and complementary acquisitions of and investments in other businesses, technologies, and assets, and such acquisitions or investments are subject to risks that could affect our business, including risks related to:

the necessity of coordinating geographically disparate organizations;
implementing common systems and controls;
integrating personnel with diverse business and cultural backgrounds;
integrating acquired research and manufacturing facilities, technology and products;
combining different corporate cultures and legal systems;
unanticipated expenses related to integration, including technical and operational integration;
increased costs and unanticipated liabilities, including with respect to registration, environmental, health and safety matters, that may affect sales and operating results;
retaining key employees;
obtaining required government and third-party approvals;
legal limitations in new jurisdictions;
installing effective internal controls and audit procedures;
issuing common stock that could dilute the interests of our existing stockholders;
spending cash and incurring debt;
assuming contingent liabilities; and
creating additional expenses.

We may not be able to identify opportunities or complete transactions on commercially reasonable terms, or at all, or actually realize any anticipated benefits from such acquisitions or investments. Similarly, we may not be able to obtain financing for acquisitions or investments on attractive terms. If we do complete acquisitions, we cannot ensure that they will ultimately strengthen our competitive or financial position or that they will not be viewed negatively by customers, financial markets, investors, or the media. In addition, the success of any acquisitions or investments also will depend, in part, on our ability to integrate the acquisition or investment with our existing operations.

The integration of businesses that we may acquire is likely to be a complex, time-consuming, and expensive process and we may not realize the anticipated revenues or other benefits associated with our acquisitions if we fail to successfully manage and operate the acquired business. If we fail in any acquisition integration efforts and are unable to efficiently operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls, and human resources practices, our business, financial condition, and results of operations may be adversely affected.

In connection with certain acquisitions, we may agree to issue common stock or assume equity awards that dilute the ownership of our current stockholders, use a substantial portion of our cash resources, assume liabilities, record goodwill and amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our financial condition and results of operations.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 27



Table of Contents

Our actual operating results may differ significantly from our guidance.

We release guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which includes forward-looking statements, will be based on projections prepared by our management. These projections will not be prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections. Accordingly, no such person will express any opinion or any other form of assurance with respect to the projections.

Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We will continue to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such third parties.

Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.

Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this Annual Report on Form 10-K could result in the actual operating results being different from our guidance and the differences may be adverse and material.

Insiders and principal stockholders will likely have significant influence over matters requiring stockholder approval.

Our directors, executive officers, and other principal stockholders beneficially own, in the aggregate, a substantial amount of our outstanding common stock. These stockholders could likely have significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions such as a merger or other sale of our company or its assets.

The market price of our common stock may continue to be volatile.

The market price of our common stock has been, and is likely to continue to be, volatile and subject to fluctuations. Changes in the stock market generally, as it concerns our industry, as well as geopolitical, economic, and business factors unrelated to us, may also affect our stock price. Significant declines in the market price of our common stock or failure of the market price to increase could harm our ability to recruit and retain key employees, reduce our access to debt or equity capital, and otherwise harm our business or financial condition. In addition, we may not be able to use our common stock effectively as consideration in connection with any future acquisitions.

Anti-takeover provisions in our charter documents and under Delaware law could discourage, delay, or prevent a change in control of our company and may affect the trading price of our common stock.

Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

authorize our Board of Directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock;
require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
specify that special meetings of our stockholders can be called only by our Board of Directors, the chairman of the board, the chief executive officer, or the president;

 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 28



Table of Contents

establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our Board of Directors;
establish that our Board of Directors is divided into three classes, Class I, Class II, and Class III, with each class serving staggered terms;
provide that our directors may be removed only for cause;
provide that vacancies on our Board of Directors may be filled only by a majority vote of directors then in office, even though less than a quorum;
specify that no stockholder is permitted to cumulate votes at any election of directors; and
require a super-majority of votes to amend certain of the above-mentioned provisions.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. Section 203 generally prohibits us from engaging in a business combination with an interested stockholder subject to certain exceptions.

Changes in United States Generally Accepted Accounting Principles (“GAAP”) could adversely affect our financial results and may require significant changes to our internal accounting systems and processes.

We prepare our consolidated financial statements in conformity with GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various bodies formed to interpret and create appropriate accounting principles and guidance. The FASB periodically issues new accounting standards on a variety of topics. For information regarding new accounting standards, please refer to Note 1, “Description of Business and Significant Accounting PoliciesRecent Accounting Pronouncements,” of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. These and other such standards generally result in different accounting principles, which may significantly impact our reported results or could result in variability of our financial results.

We are required to evaluate the effectiveness of our internal control over financial reporting and publicly disclose material weaknesses in our controls. Any adverse results from such evaluation may adversely affect investor perception, and our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to assess the effectiveness of our internal control over financial reporting and to disclose in our filing if such controls were unable to provide assurance that a material error would be prevented or detected in a timely manner. We have an ongoing program to review the design of our internal controls framework in keeping with changes in business needs, implement necessary changes to our controls design and test the system and process controls necessary to comply with these requirements. If in the future, our internal controls over financial reporting are determined to be not effective resulting in a material weakness or significant deficiency, investor perceptions regarding the reliability of our financial statements may be adversely affected which could cause a decline in the market price of our stock and otherwise negatively affect our liquidity and financial condition.

In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.

We make assumptions, judgments and estimates for a number of items, including the fair value of financial instruments, goodwill, long-lived assets and other intangible assets, the realizability of deferred tax assets, the recognition of revenue and the fair value of stock awards. We also make assumptions, judgments and estimates in determining the accruals for employee-related liabilities, including commissions and variable compensation, and in determining the accruals for uncertain tax positions, valuation allowances on deferred tax assets, allowances for doubtful accounts, and legal contingencies. These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the consolidated financial statements. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 29



Table of Contents

Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.

In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists frequently propose to involve themselves in the governance, strategic direction and operations of the Company. Such proposals may disrupt our business and divert the attention of our Board of Directors, management and employees, and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of potential business opportunities, interfere with our ability to execute our strategic plan, be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all of which could adversely affect our business. A proxy contest for the election of directors at our annual meeting could also require us to incur significant legal fees and proxy solicitation expenses. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

Our shareholders may experience future dilution as a result of future equity offerings.

In the future, we may offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock in order to raise additional capital. We cannot assure our shareholders that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater than the price per share our shareholders paid for our shares. Investors purchasing shares or other securities in the future could have rights, preferences or privileges senior to those of our shareholders and our shareholders may experience dilution. Our shareholders may incur additional dilution upon the exercise of any outstanding stock options or warrants, the issuance of shares of restricted stock, the vesting of restricted stock units, or the issuance, vesting or exercise of other equity awards.

We do not intend to pay cash dividends in the foreseeable future and, consequently, our shareholders’ ability to achieve a return on their investment will depend on the appreciation in the price of our common stock.

We have never declared or paid cash dividends on our common stock and we do not intend to pay any cash dividends on our common stock in the foreseeable future. We currently expect to retain all available funds and any future earnings for use in the operation and expansion of our business. In addition, the terms of our revolving credit facility restrict our ability to pay dividends and any future credit facilities, loan agreements, debt instruments or other agreements may further restrict our ability to pay dividends. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, results of operations and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be our shareholders’ sole source of potential gain for the foreseeable future.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 30



Table of Contents

Item 1B — Unresolved Staff Comments

None

Item 2 — Properties

We lease approximately 171,000 sq.ft. of space located in San Leandro, California for product manufacturing, research and development, and executive headquarters under a lease that expires on December 31, 2028.

On January 10, 2019, we entered into an industrial lease agreement for property located in Katy, Texas, which commenced on January 1, 2020 and expires in 2029. This new lease includes an additional 25,200 sq.ft. of office and warehouse space and approximately 4.5 acres of land, to test our VorTeq and MTeq technologies at scale and in real world conditions on a regular, uninterrupted basis.

On February 10, 2020, we entered into a lease agreement for an additional office and warehouse space located in Tracy, California. This new lease commenced on March 1, 2020 and expires in 2030. This office and warehouse space is approximately 54,429 sq.ft. and will supplement the existing manufacturing, warehouse and distribution of our ERDs.

Additionally, we lease offices located in Dubai, United Arab Emirates; Shanghai, Peoples Republic of China; Houston, Texas. We believe that these facilities will be adequate for our purposes for the foreseeable future.

Item 3 — Legal Proceedings

See Note 8, “Commitments and ContingenciesLitigationof the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K, which is incorporated by reference into this Item 3, for a description of the lawsuits pending against us.

Item 4 — Mine Safety Disclosures

Not applicable.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 31



Table of Contents

PART II

Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is listed on The Nasdaq Global Select Market under the symbol “ERII.”

Stockholders

As of December 31, 2019, there were approximately 28 stockholders of record of our common stock as reported by our transfer agent, one of which is Cede & Co., a nominee for Depository Trust Company (“DTC”). All of the shares of common stock held by brokerage firms, banks, and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and are therefore considered to be held of record by Cede & Co., as one stockholder.

Dividend Policy

We have never declared or paid any dividends on our common stock, and we do not currently intend to pay any dividends on our common stock for the foreseeable future. Any future determination to pay dividends on our common stock will be, subject to applicable law, at the discretion of our Board of Directors, and will depend upon, among other factors, our results of operations, financial condition, capital requirements, and contractual restrictions in loan or other agreements.

Sales of Unregistered Securities

None


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 32



Table of Contents

Stock Performance Graph

The following graph shows the cumulative total stockholder return of an investment of $100 on December 31, 2014 in (i) our common stock, (ii) the NASDAQ Composite Index, and (iii) common stock of a selected group of peer issuers (“Peer Group”). Cumulative total return assumes the reinvestment of dividends, although dividends have never been declared on our stock, and is based on the returns of the component companies weighted according to their capitalizations as of the end of each quarterly period. For each reported year, the reported dates are the last trading dates of our annual year.

The NASDAQ Composite Index tracks the aggregate price performance of equity securities traded on the NASDAQ. The Peer Group tracks the weighted average price performance of equity securities of seven companies in our industry: Consolidated Water Co. Ltd.; Flowserve Corp.; Hyflux Ltd., Kurita Water Industries Ltd.; Pentair PLC; Tetra Tech, Inc.; and The Gorman-Rupp Company. The return of each component issuer of the Peer Group is weighted according to the respective issuer’s stock market capitalization at the end of each period for which a return is indicated. Our stock price performance shown in the graph below is not indicative of future stock price performance.

The following graph and its related information is not “soliciting material,” is not deemed “filed” with the Securities and Exchange Commission, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.


COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
Among Energy Recovery Inc., The NASDAQ Composite Index,
And A Peer Group
performancegraph2019.jpg
 
December 31,
2014
 
December 31,
2015
 
December 31,
2016
 
December 31,
2017
 
December 31,
2018
 
December 31,
2019
Energy Recovery, Inc.
$
100.00

 
$
134.16

 
$
196.39

 
$
166.03

 
$
127.70

 
$
185.77

NASDAQ Composite Index
100.00

 
106.96

 
116.45

 
150.96

 
146.67

 
200.49

Peer Group
100.00

 
78.87

 
93.32

 
108.93

 
93.94

 
125.37



 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 33



Table of Contents

Item 6 — Selected Financial Data

The following selected financial data should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 8, “Financial Statements and Supplementary Data,” included in this Annual Report on Form 10-K.
 
Years Ended December 31,
 
2019
 
2018
 
2017(1)
 
2016(1)
 
2015(2)
 
(In thousands, except per share amounts)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Product revenue
$
72,834

 
$
61,025

 
$
58,023

 
$
49,715

 
$
43,671

Product cost of revenue
20,335

 
17,873

 
19,061

 
17,849

 
19,111

Product gross profit
52,499

 
43,152

 
38,962

 
31,866

 
24,560

 
 
 
 
 
 
 
 
 
 
License and development revenue
14,108

 
13,490

 
11,106

 
8,069

 
1,042

 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
General and administrative
22,832

 
21,476

 
17,354

 
16,626

 
19,773

Sales and marketing
9,434

 
7,546

 
9,391

 
9,116

 
9,326

Research and development
23,402

 
17,012

 
13,443

 
10,136

 
7,659

Amortization of intangible assets
575

 
630

 
631

 
631

 
635

Total operating expenses
56,243

 
46,664

 
40,819

 
36,509

 
37,393

Income (loss) from operations
10,364

 
9,978

 
9,249

 
3,426

 
(11,791
)
Other income (expense), net
1,892

 
1,462

 
680

 
287

 
(181
)
Income (loss) before income taxes
12,256

 
11,440

 
9,929

 
3,713

 
(11,972
)
Provision for (benefit from) income taxes
1,343

 
(10,653
)
 
(8,425
)
 
(6
)
 
(334
)
Net income (loss)
$
10,913

 
$
22,093

 
$
18,354

 
$
3,719

 
$
(11,638
)
 
 
 
 
 
 
 
 
 
 
Income (loss) per share
 
 
 
 
 
 
 
 
 
Basic
$
0.20

 
$
0.41

 
$
0.34

 
$
0.07

 
$
(0.22
)
Diluted
$
0.19

 
$
0.40

 
$
0.33

 
$
0.07

 
$
(0.22
)
Number of shares used in per share calculation:
 
 
 
 
 
 
 
 
 
Basic
54,740

 
53,764

 
53,701

 
52,341

 
52,151

Diluted
56,067

 
55,338

 
55,612

 
55,451

 
52,151

 
 
(1) 
Due to the full retrospective adoption of Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606), referred to as Accounting Standards Codification (“ASC”) 606 (“ASC 606”) the financial data for the years ended 2017 and 2016 are recast.
(2) 
The 2015 financial data has not been recast for ASC 606 adoption. The impact of ASC 606 for periods prior to 2016 was included as a one-time adjustment to 2016 beginning balance retained earnings.

 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 34



Table of Contents

 
As of December 31,
 
2019
 
2018
 
2017(1)
 
2016(2)
 
2015(3)
 
(In thousands)
Consolidated Balance Sheets Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
26,387

 
$
21,955

 
$
27,780

 
$
61,364

 
$
99,931

Short-term investments
58,736

 
73,338

 
70,020

 
39,073

 
257

Long-term investments
15,419

 
1,269

 

 

 

Total assets
188,774

 
179,841

 
164,485

 
148,679

 
151,799

Long-term liabilities
24,931

 
39,331

 
42,231

 
57,307

 
72,116

Total liabilities
52,761

 
66,463

 
72,591

 
80,571

 
88,140

Total stockholders’ equity
136,013

 
113,378

 
91,894

 
68,108

 
63,659

 
 
(1) 
Due to the full retrospective adoption of ASC 606, Revenues, and the modified retrospective adoption of ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), the financial data for the year ended 2017 is recast.
(2) 
Due to the full retrospective adoption of ASC 606 the financial data for the year ended 2016 is recast. The impact of ASC 606 for periods prior to 2016 was included as a one-time adjustment to 2016 beginning balance retained earnings.
(3) 
The 2015 financial data has not been recast for the adoption of ASC 606.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 35



Table of Contents

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our results of operations and financial condition. It should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part II, Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K.

Overview

We have, for more than 20 years, created technologies that solve complex challenges for industrial fluid flow markets worldwide. We design and manufacture solutions that reduce waste, improve operational efficiency, and lower the production costs of clean water and oil & gas. What began as a game-changing invention for water desalination has grown into a global business delivering solutions that enable more affordable access to these critical resources.

We were incorporated in Virginia in 1992 and reincorporated in Delaware in 2001. Our headquarters and principal research, development and manufacturing facility is located in San Leandro, California, and, as of January 2020, we opened our commercial development center for oil & gas field testing, manufacturing, and training, located in Katy, Texas. On February 10, 2020, we leased an additional office and warehouse space located in Tracy, California, that commenced on March 1, 2020, to supplement the existing manufacturing, warehouse and distribution of our ERDs. Our worldwide sales and technical service organization provides on-site support for our line of water solutions, and we maintain direct sales offices and technical support centers in Europe, the Middle East and Asia.

Engineering, research and development have been, and remain, an essential part of the Company’s history, culture and corporate strategy. Since our formation, we have developed and become experts in our unique PX Pressure Exchanger technology, which provides benefits when applied to industrial fluid flow system with pressure differentials. Today, our PX Pressure Exchanger is the industry standard in the reverse osmosis desalination industry. In addition, we have been actively developing new applications of our pressure exchanger technology in the oil & gas industry. This focus on engineering, research and development will continue to be core component of our future strategy as we focus on developing new products outside of our water and oil & gas business units.

Our reportable operating segments consist of the Water segment and the Oil & Gas segment. These segments are based on the industries in which the technology solutions are sold, the type of ERD or other technology sold and the related solution and service.

Water Segment

Our Water segment consists of revenues and expenses associated with solutions sold for use in sea, brackish and contaminated water reverse osmosis desalination. Our Water segment revenue is principally derived from the sale of ERDs and high-pressure and circulation pumps to our MPD, OEM and AM channels. MPD sales are typically made to global EPC firms to build very large desalination plants worldwide. Our typical MPD sale consists of our PX Pressure Exchangers, and each MPD sale represents revenue opportunities generally ranging from $1 million to $18 million. Our packaged solutions to OEMs include our PX Pressure Exchangers, Turbochargers, high-pressure pumps and circulation “booster” pumps for integration and use in small- to medium-sized desalination plants. OEM projects typically represent revenue opportunities of up to $1 million. Our existing and expanding installed base of ERD and pump products in water plants has created a growing customer base comprised of plant operators and service providers who purchase spare parts, replacement parts and service contracts through our AM channel.

Oil & Gas Segment

Our Oil & Gas segment consists primarily of license and development revenue and expenses associated with solutions for use in hydraulic fracturing, gas processing and chemical processing. In the past several years, we have invested significantly into research and development, sales, and marketing to expand our business into pressurized fluid flow industries within the oil & gas industry.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 36



Table of Contents

2019 Highlights

Water Segment

Water growth product sales increased year over year, due primarily to:
Water shortage in the Middle East, driving new and larger MPDs.
Thermal seawater desalination process retrofits to seawater reverse osmosis (“SWRO”) desalination process at existing plants continues to drive growth.
Since our first installation in 1997, more than 20,000 PX Pressure Exchangers have been deployed worldwide.
Completed phase 1 of our capacity expansion and initiated phase 2, which will be completed at our new facility located in Tracy, California.

Oil & Gas Segment

We completed construction on a new commercial development center for oil & gas field testing, manufacturing, and training, located in Katy, Texas. This facility will further enhance our capacity to commercialize our VorTeq technology.

Results of Operations

A discussion regarding our financial condition and results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017 can be found under Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 7, 2019, as amended on March 12, 2019, which is available free of charge on the SEC’s website at http://www.sec.gov and at our investor relations website (https://ir.energyrecovery.com).

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Total Revenue
 
Years Ended December 31,
 
 
 
 
 
2019
 
2018
 
Change
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
(In thousands, except percentages)
Water
$
72,730

 
84
%
 
$
60,512

 
81
%
 
$
12,218

 
20
%
Oil & Gas
104

 
%
 
513

 
1
%
 
(409
)
 
(80
%)
Product revenue
72,834

 
84
%
 
61,025

 
82
%
 
11,809

 
19
%
License and development revenue
14,108

 
16
%
 
13,490

 
18
%
 
618

 
5
%
Total revenue
$
86,942

 
100
%
 
$
74,515

 
100
%
 
$
12,427

 
17
%

A limited number of our customers account for a substantial portion of our product revenue, although the number of customers, and which specific customers, change from year to year. Revenue from customers representing 10% or more of product revenue varies from period to period. For the year ended December 31, 2019, one customer represented 19% of product revenue. For the year ended December 31, 2018, two customers represented 15% and 11% of product revenue. See Note 13, “Concentrations,” of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for further details on customer concentration.

Water segment product revenue of $72.7 million for the year ended December 31, 2019, compared to $60.5 million for the year ended December 31, 2018, increased $12.2 million, or 20%, due primarily to an increase of shipments across all channels, including MPD, OEM and AM channels.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 37



Table of Contents

Oil & Gas segment product revenues of $0.1 million for the year ended December 31, 2019, compared to $0.5 million for the year ended December 31, 2018, decreased $0.4 million, or (80%), due primarily to lower unit sales. Our total Oil & Gas segment license and development revenue, of $14.1 million, compared to $13.5 million for the year ended December 31, 2018, increased by $0.6 million, or 5%, due primarily to increased salary, wages and travel costs, partially offset by a change in total planned project costs. See Note 14, “VorTeq Partnership and License Agreement,” of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for additional discussion on the VorTeq License agreement.

Product revenue attributable to domestic and international sales as a percentage of total product revenue is presented in the following table.
 
Years Ended December 31,
 
2019
 
2018
Domestic revenue
2
%
 
3
%
International revenue
98
%
 
97
%
Total product revenue
100
%
 
100
%

Product Gross Profit and Product Gross Margin
 
Years Ended December 31,
 
 
 
 
 
2019
 
2018
 
Change
 
Gross Profit (Deficit)
 
Gross Margin
 
Gross Profit (Deficit)
 
Gross Margin
 
$
 
%
 
(In thousands, except percentages)
Water
$
52,582

 
72.3
%
 
$
43,301

 
71.6
%
 
$
9,281

 
21
%
Oil & Gas
(83
)
 
(79.8
%)
 
(149
)
 
(29.0
%)
 
66

 
(44
%)
Product gross profit and product gross margin
$
52,499

 
72.1
%
 
$
43,152

 
70.7
%
 
$
9,347

 
22
%

Product gross profit represents our product revenue less our product cost of revenue. Our product cost of revenue consists primarily of raw materials, personnel costs (including stock-based compensation), manufacturing overhead, warranty costs, depreciation expense, and manufactured components.

Product gross profit of $52.5 million for the year ended December 31, 2019, compared to $43.2 million for the year ended December 31, 2018, increased $9.3 million, or 22%, due primarily to a $9.3 million increase in Water segment product gross profit related to higher volumes of products sold, specifically, the increased sales of our PX Pressure Exchangers, and favorable price and product mix.

Product gross margin of 72.1% for the year ended December 31, 2019, compared to 70.7% for the year ended December 31, 2018, increased by 140 basis points. This increase was largely driven by favorable price and product mix, continued improvements in manufacturing efficiencies and higher production levels in the Water segment to support increased demand.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 38



Table of Contents

Total Operating Expenses
 
Years Ended December 31,
 
 
 
 
 
2019
 
2018
 
Change
 
$
 
% of Total Revenue
 
$
 
% of Total Revenue
 
$
 
%
 
(In thousands, except percentages)
Total revenue
$
86,942

 
100
%
 
$
74,515

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative
$
22,832

 
26
%
 
$
21,476

 
29
%
 
$
1,356

 
6
%
Sales and marketing
9,434

 
11
%
 
7,546

 
10
%
 
1,888

 
25
%
Research and development
23,402

 
27
%
 
17,012

 
23
%
 
6,390

 
38
%
Amortization of intangible assets
575

 
1
%
 
630

 
1
%
 
(55
)
 
(9
%)
Total operating expenses
$
56,243

 
65
%
 
$
46,664

 
63
%
 
$
9,579

 
21
%

General and administrative (“G&A”) expenses of $22.8 million for the year ended December 31, 2019, compared to $21.5 million for the year ended December 31, 2018, increased $1.4 million, or 6%, due primarily to an increase in employee-related costs of $1.3 million related to higher headcount, and higher professional services and other costs of $0.1 million.

Sales and marketing (“S&M”) expenses of $9.4 million for the year ended December 31, 2019, compared to $7.5 million for the year ended December 31, 2018, increased $1.9 million, or 25%, due primarily to an increase in employee-related costs of $1.3 million related to increased headcount, an increase in marketing costs of $0.4 million and an increase in outside commission costs of $0.3 million, partially offset by lower other costs of $0.1 million.

Research and development (“R&D”) expenses of $23.4 million for the year ended December 31, 2019, compared to $17.0 million for the year ended December 31, 2018, increased $6.4 million, or 38%, due primarily to higher testing supplies expenditures of $3.3 million, an increase in employee-related costs of $2.1 million related to increased headcount and stock-based compensation cost, higher depreciation expense of certain test equipment of $0.9 million, and an increase in other costs of $0.1 million.

Amortization of intangible assets is related to finite-lived intangible assets acquired as a result of our purchase of Pump Engineering, LLC in December 2009. Amortization expense in the year ended December 31, 2019, compared to the year ended December 31, 2018, did not materially change.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 39



Table of Contents

Segment Operating Expenses
 
Years Ended December 31, 2019
 
Years Ended December 31, 2018
 
Water
 
Oil & Gas
 
Total
 
Water
 
Oil & Gas
 
Total
 
(In thousands)
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
General and administrative
$
1,501

 
$
1,576

 
$
3,077

 
$
2,078

 
$
1,771

 
$
3,849

Sales and marketing
7,072

 
741

 
7,813

 
5,783

 
1,264

 
7,047

Research and development
3,825

 
19,085

 
22,910

 
1,711

 
15,276

 
16,987

Amortization of intangibles
575

 

 
575

 
629

 

 
629

Total operating expenses
$
12,973

 
$
21,402

 
34,375

 
$
10,201

 
$
18,311

 
28,512

Corporate operating expenses
 
 
 
 
21,868

 
 
 
 
 
18,152

Total operating expenses
 
 
 
 
$
56,243

 
 
 
 
 
$
46,664


Water segment operating expenses of $13.0 million for the year ended December 31, 2019, compared to $10.2 million for the year ended December 31, 2018, increased $2.8 million, or 27%, due primarily to a $2.1 million increase in R&D expense and a $1.3 million increase in S&M expense, partially offset by a $0.6 million decrease in G&A expense. The higher R&D expense is due primarily to increased employee headcount to support both the expansion of our current product offering as well as to the improvement of existing technologies. The higher S&M expenses are due primarily to higher employee headcount and employee-related costs and commission costs due to higher unit sales. The decrease in G&A expenses is due primarily to lower employee-related costs and bad debt expense.

Oil & Gas segment operating expenses of $21.4 million for the year ended December 31, 2019, compared to $18.3 million for the year ended December 31, 2018, increased $3.1 million, or 17%, due primarily to an increase in R&D expense of $3.8 million, partially offset by decreases of $0.5 million in S&M expenses and $0.2 million in G&A expenses. The increase in R&D expenditures is due primarily to the commercialization of new technologies and increased costs related to the operation of our Katy, Texas testing facility.

Corporate operating expenses of $21.9 million for the year ended December 31, 2019, compared to $18.2 million for the year ended December 31, 2018, increased $3.7 million, or 20%, due primarily to higher employee headcount and employee-related expenses, investor relations costs and professional services costs, partially offset by lower equipment depreciation expenses.

Other Income, Net
 
Years Ended December 31,
 
 
 
 
 
2019
 
2018
 
Change
 
(In thousands, except percentages)
Other income:
 
 
 
 
 
 
 
Interest income
$
2,010

 
$
1,543

 
$
467

 
30
%
Interest expense

 
(1
)
 
1

 
100
%
Other non-operating expense, net
(118
)
 
(80
)
 
(38
)
 
48
%
Total other income, net
$
1,892

 
$
1,462

 
$
430

 
29
%

Total other income, net of $1.9 million for the year ended December 31, 2019, compared to $1.5 million for the year ended December 31, 2018, increased $0.4 million, or 29%, due primarily to higher interest income related to our investments in corporate notes and bonds, and U.S. treasury notes.


 
 
 
Energy Recovery, Inc. | 2019 Form 10-K | 40



Table of Contents

Income Taxes
 
Years Ended December 31,
 
 
 
 
 
2019
 
2018
 
Change
 
(In thousands, except percentages)
Provision for (benefit from) income taxes
$