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Mr. Mao continued, “We continue to make material progress in diversification efforts of our pressure exchanger technology. We have been awarded projects in the chemical manufacturing, landfill leachate and lithium-ion battery manufacturing facilities in China for our new Ultra PX™ energy recovery device, a testament to our efforts to educate the industrial wastewater treatment market on the Ultra PX’s energy-saving benefits. Furthermore, our confidence in our PX G1300™ energy recovery device for CO2 refrigeration has grown stronger through successful tests that underscore the significant financial and sustainability benefits we can bring end customers such as supermarkets. We are already seeking our first commercial deployment and believe our technology can make the transition from climate-damaging hydrofluorocarbons to sustainable natural refrigeration alternatives attractive for retailers. We are excited by these new opportunities and believe our strategy of pressure exchanger diversification will continue to drive long-term value creation for Energy Recovery shareholders.”


	Three Months Ended June 30,								Six Months Ended June 30,
	2021			2020			Variance		2021			2020			Variance
	(In millions, except net income per share, percentages and basis points)
Product revenue	$	20.6		$	19.3		7%		$	49.5		$	38.3		30%
License and development revenue (1)	—			24.4			(100%)		—			26.9			(100%)
Total revenue	$	20.6		$	43.6		(53%)		$	49.5		$	65.2		(24%)

Product gross profit	$	13.4		$	12.7		6%		$	33.4		$	26.0		28%
Product gross margin	65.1		%	66.0		%	(90) bps		67.4		%	68.0		%	(60) bps

Operating expense	$	13.1		$	15.8		(17%)		$	27.0		$	31.5		(14%)
Operating income	$	0.3		$	21.3		(99%)		$	6.4		$	21.4		(70%)

Net income	$	1.1		$	16.9		(94%)		$	7.9		$	17.5		(55%)
Diluted net income per share	$	0.02		$	0.30		$	(0.28)	$	0.13		$	0.31		$	(0.18)

Operating cash flow	$	11.5		$	5.6		$	5.9	$	11.5		$	(0.3)		$	11.8
Cash and investments	$	120.7		$	96.9		25%		$	120.7		$	96.9		25%

(1)In June 2020, the Company terminated the VorTeq License Agreement with Schlumberger Technology Corporation. As there were no future performance obligations to be recognized under the VorTeq License Agreement after the effective date, the Company recognized in full the remaining deferred revenue balance of $24.4 million in the second quarter of fiscal year 2020. In addition, no future license and development revenue was recognized under the VorTeq License Agreement after the second quarter of fiscal year 2020.

“We experienced another solid financial quarter at Energy Recovery,” said Joshua Ballard, Chief Financial Officer of Energy Recovery. “Growth remains steady and stable across all sales channels despite a slight temporary decline in aftermarket sales this quarter. Importantly, our year-to-date operating expenditures, excluding impairment charges, remain 8% below 2020 as we continue to manage this growth prudently. The notable year-to-date 44% increase in sales and marketing spend reflects investments in support of this growth, offset entirely by reduced R&D spend largely due to VorTeq™. Finally, despite nearly $12 million in share buybacks and increased investments in inventory, our cash and security balances remain at historic highs following record sales in the first quarter.”

•Steady product revenue growth in the second quarter was driven by megaproject (“MPD”) and original equipment manufacturer (“OEM”) channels, with year-to-date sales representing growth of 30% across all channels, compared to the same period in 2020. The MPD channel continues to drive stable growth from large scale SWRO projects, while the OEM channel is beginning to rebound. This upward trend within the OEM channel is being driven primarily by large greenfield plant installations and brownfield retrofits, which include upgrades to existing operations leveraging our pressure exchanger technology and ancillary equipment.

On a quarterly basis, we reported a net income of $1.1 million, or $0.02 per diluted share, for the second quarter ended June 30, 2021, compared to a net income of $16.9 million, or $0.30 per diluted share, for the second quarter ended June 30, 2020, which included $17.2 million, net of tax, related to the termination of the VorTeq License Agreement and the impairment of related long-lived assets.

Certain matters discussed in this press release and on the conference call are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the Company’s belief that the company is embarking on a path of sustainable, disciplined and diversified growth; our ability to develop pressure exchanged-based solutions for new industries; our belief that our carbon dioxide commercial refrigeration solution excels in warmer climates as compared to the market-leading technology; our belief that the Company’s future is bright; our belief that the Company can work towards a more diversified revenue stream for the future; and our belief that the Company is making significant progress in our emerging technology projects. These forward-looking statements are based on information currently available to us and on management’s beliefs, assumptions, estimates, or projections and are not guarantees of future events or results. Potential risks and uncertainties include any other factors that may have been discussed herein regarding the risks and uncertainties of the Company’s business, and the risks discussed under “Risk Factors” in the Company’s Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) for the year ended December 31, 2020, as well as other reports filed by the Company with the SEC from time to time. Because such forward-looking statements involve risks and uncertainties, the Company’s actual results may differ materially from the predictions in these forward-looking statements. All forward-looking statements are made as of today, and the Company assumes no obligation to update such statements.

Energy Recovery creates technologies that solve complex challenges for industrial fluid-flow markets worldwide. Building on our pressure exchanger technology platform, we design and manufacture solutions that make industrial processes more efficient and sustainable. What began as a game-changing invention for desalination has grown into a global business accelerating the environmental sustainability of customers’ operations in multiple industries. Headquartered in the San Francisco Bay Area, Energy Recovery has manufacturing, research and development facilities across California and Texas with sales and on-site technical support available globally. For more information, please visit www.energyrecovery.com.


	June 30, 2021		December 31, 2020
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	103,302	$	94,255
Short-term investments	17,394		20,446
Accounts receivable, net	7,599		11,792
Inventories, net	15,289		11,748

Prepaid expenses and other assets, current	4,265		4,950
Total current assets	147,849		143,191

Deferred tax assets, net	12,471		11,030
Property and equipment, net	20,443		20,176
Operating lease, right of use asset	15,383		16,090
Goodwill and other intangible assets	12,833		12,839

Other assets, non-current	365		988
Total assets	$	209,344	$	204,314
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,278	$	1,118
Accrued expenses and other liabilities, current	8,397		11,816
Lease liabilities, current	1,473		1,243
Contract liabilities, current	1,117		1,552
Total current liabilities	13,265		15,729
Lease liabilities, non-current	15,682		16,443



Other liabilities, non-current	571		518
Total liabilities	29,518		32,690

Stockholders’ equity:

Common stock	63		62
Additional paid-in capital	191,087		179,161
Accumulated other comprehensive (loss) income	(53)		53
Treasury stock	(42,040)		(30,486)
Retained earnings	30,769		22,834
Total stockholders’ equity	179,826		171,624
Total liabilities and stockholders’ equity	$	209,344	$	204,314


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands, except per share data)
Product revenue	$	20,607	$	19,256	$	49,547	$	38,257
Product cost of revenue	7,181		6,549		16,162		12,233
Product gross profit	13,426		12,707		33,385		26,024

License and development revenue	—		24,352		—		26,895

Operating expenses:
General and administrative	6,175		5,599		12,781		12,480
Sales and marketing	2,537		1,497		5,240		3,635
Research and development	4,424		6,352		8,926		13,061
Amortization of intangible assets	3		4		7		8

Impairment of long-lived assets	—		2,332		—		2,332


Total operating expenses	13,139		15,784		26,954		31,516
Income from operations	287		21,275		6,431		21,403

Other income (expense):
Interest income	51		255		143		675

Other non-operating expense, net	(12)		(18)		(22)		(30)
Total other income, net	39		237		121		645
Income before income taxes	326		21,512		6,552		22,048
(Benefit from) provision for income taxes	(743)		4,586		(1,383)		4,501
Net income	$	1,069	$	16,926	$	7,935	$	17,547

Net income per share:
Basic	$	0.02	$	0.30	$	0.14	$	0.32
Diluted	$	0.02	$	0.30	$	0.13	$	0.31

Number of shares used in per share calculations:
Basic	57,253		55,614		57,066		55,513
Diluted	58,999		56,371		58,822		56,438


	Six Months Ended June 30,
		2021		2020
		(In thousands)
Cash flows from operating activities:
Net income		$	7,935	$	17,547
Adjustments to reconcile net income to cash provided by (used in) operating activities
Stock-based compensation		3,341		2,595
Depreciation and amortization		2,733		2,751
Amortization of premiums and discounts on investments		139		215
Deferred income taxes		(1,441)		4,666
Impairment of long-lived assets		—		2,332











Other non-cash adjustments		149		228
Changes in operating assets and liabilities:
Accounts receivable, net		4,193		101

Contract assets		1,356		(198)
Inventories, net		(3,621)		260
Prepaid and other assets		(47)		(278)
Accounts payable		1,237		1,285

Accrued expenses and other liabilities		(3,999)		(4,009)

Contract liabilities		(434)		(27,789)
Net cash provided by (used in) operating activities		11,541		(294)
Cash flows from investing activities:
Sales of marketable securities		—		9,767
Maturities of marketable securities		14,861		43,286
Purchases of marketable securities		(12,034)		(12,855)
Capital expenditures		(2,449)		(4,410)
Other		5		—
Net cash provided by investing activities		383		35,788
Cash flows from financing activities:
Net proceeds from issuance of common stock		8,697		1,128
Tax payment for employee shares withheld		—		(23)



Repurchase of common stock		(11,554)		—
Net cash (used in) provided by financing activities		(2,857)		1,105
Effect of exchange rate differences on cash and cash equivalents		(20)		(15)
Net change in cash, cash equivalents and restricted cash		9,047		36,584
Cash, cash equivalents and restricted cash, beginning of year		94,358		26,488
Cash, cash equivalents and restricted cash, end of period		$	103,405	$	63,072


	Three Months Ended June 30, 2021								Three Months Ended June 30, 2020 (Recast)
	Water		Emerging Technologies		Corporate		Total		Water		Emerging Technologies		Corporate		Total
	(In thousands)
Product revenue	$	20,568	$	39	$	—	$	20,607	$	19,256	$	—	$	—	$	19,256
Product cost of revenue	7,181		—		—		7,181		6,549		—		—		6,549
Product gross profit	13,387		39		—		13,426		12,707		—		—		12,707

License and development revenue	—		—		—		—		—		24,352		—		24,352

Operating expenses
General and administrative	1,776		1,315		3,084		6,175		1,967		1,150		2,482		5,599
Sales and marketing	2,121		229		187		2,537		1,124		262		111		1,497
Research and development	595		3,829		—		4,424		960		5,392		—		6,352
Amortization of intangible assets	3		—		—		3		4		—		—		4
Impairment of long-lived assets	—		—		—		—		—		2,332		—		2,332
Total operating expenses	4,495		5,373		3,271		13,139		4,055		9,136		2,593		15,784
Operating income (loss)	$	8,892	$	(5,334)	$	(3,271)	287		$	8,652	$	15,216	$	(2,593)	21,275
Other income, net							39								237
Income before income taxes							$	326							$	21,512


	Six Months Ended June 30, 2021								Six Months Ended June 30, 2020 (Recast)
	Water		Emerging Technologies		Corporate		Total		Water		Emerging Technologies		Corporate		Total
	(In thousands)
Product revenue	$	49,508	$	39	$	—	$	49,547	$	38,257	$	—	$	—	$	38,257
Product cost of revenue	16,162		—		—		16,162		12,233		—		—		12,233
Product gross profit	33,346		39		—		33,385		26,024		—		—		26,024

License and development revenue	—		—		—		—		—		26,895		—		26,895

Operating expenses
General and administrative	3,333		2,481		6,967		12,781		4,046		2,642		5,792		12,480
Sales and marketing	4,285		408		547		5,240		2,800		574		261		3,635
Research and development	1,096		7,830		—		8,926		1,862		11,199		—		13,061
Amortization of intangible assets	7		—		—		7		8		—		—		8
Impairment of long-lived assets	—		—		—		—		—		2,332		—		2,332
Total operating expenses	8,721		10,719		7,514		26,954		8,716		16,747		6,053		31,516
Operating income (loss)	$	24,625	$	(10,680)	$	(7,514)	6,431		$	17,308	$	10,148	$	(6,053)	21,403
Other income, net							121								645
Income before income taxes							$	6,552							$	22,048


	Three Months Ended June 30,						Six Months Ended June 30,
	2021		2020			Variance		2021	2020			Variance
	(In millions, except percentages)

Megaproject	$	13.3		$	12.0		11%			$	37.0		$	26.4	40%
Original equipment manufacturer	4.3			4.1			6%			7.1			7.6		(7%)
Aftermarket	3.0			3.2			(6%)			5.4			4.3		29%

Total product revenue	$	20.6		$	19.3		7%			$	49.5		$	38.3	30%