erii-20210630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ 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

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 Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value

ERII

The Nasdaq Stock Market LLC

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. Yes þ 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 and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth 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 ☐ 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 Exchange Act Rule 12b-2). Yes ☐ No ☑

As of July 30, 2021, there were 57,152,300 shares of the registrant’s common stock outstanding.

Table of Contents

ENERGY RECOVERY, INC.

TABLE OF CONTENTS


		Page No.
PART I
FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets — June 30, 2021 and December 31, 2020	1
	Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2021 and 2020	2
	Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 30, 2021 and 2020	3
	Condensed Consolidated Statements of Stockholders’ Equity — Three and Six Months Ended June 30, 2021 and 2020	4
	Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2021 and 2020	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4	Controls and Procedures	38

PART II
OTHER INFORMATION
Item 1	Legal Proceedings	39
Item 1A	Risk Factors	39
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3	Defaults Upon Senior Securities	39
Item 4	Mine Safety Disclosures	39
Item 5	Other Information	39
Item 6	Exhibits	40

Signatures		41

Energy Recovery, Inc. | Q2'2021 Form 10-Q

Table of Contents

Forward-Looking Information

This Quarterly Report on Form 10-Q for the three and six months ended June 30, 2021, including Part I, Item 2, “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, “continue,” “could,” “may,” “potential,” “should, “will,” “would,” 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 Part II, 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 the pressure exchanger is the industry standard for energy recovery in the seawater reverse osmosis (“SWRO”) industry;

•our belief that pressure exchanger technology can provide benefits to our customers, including the reduction of capital expenditures and energy use;

•our belief that the integration of Environmental, Social and Governance (“ESG”) principles into our corporate and risk management strategies can strengthen our existing business as well as our efforts to develop new applications of pressure exchanger technology for high-pressure fluid-flow environments;

•our belief that our enhanced safety measures will allow us to help contain the spread of coronavirus (“COVID-19”);

•the development of major public health concerns, including the COVID-19 outbreak or other pandemics arising globally, and the future impact of such major public health concerns, and specifically in the short-term the COVID-19 pandemic, on our business and operations;

•our belief that our pressure exchanger technology can address inefficiencies and waste within industrial systems and processes that involve high-pressure and low-pressure fluid flows;

•our belief that our PX® Pressure Exchanger® (“PX”) has helped make SWRO desalination an economically viable and more sustainable option in the production of potable water;

•our belief that markets not traditionally associated with desalination, including the United States of America (“U.S.”) will inevitably develop and provide further revenue growth opportunities;

•our belief that, as the existing thermal technology is replaced with reverse osmosis (“RO”) technology, demand for our products will be created;

•our belief that ongoing operating costs rather than capital expenditures is the key factor in the selection of an energy recovery device (“ERD”) solution for megaproject (“MPD”) customers;

•our belief that our PX offers market-leading efficiency and reduction of total lifecycle cost to the end client;

•our estimate that MPD customer projects represent revenue opportunities from approximately $1 million to $18 million;

•our belief that initial capital expenditure rather than future ongoing operating costs is the key factor in selection of an ERD solution for original equipment manufacturer (“OEM”) projects;

•our belief that our PX has a competitive advantage, as compared to the Flowserve Corporation’s DWEER product, because our devices are made with highly durable and corrosion-resistant aluminum oxide (“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;

Energy Recovery, Inc. | Q2'2021 Form 10-Q | FLS 1

Table of Contents

•our belief that our PX has a distinct competitive advantage over Fluid Equipment Development Company’s (“FEDCO”) turbochargers and Danfoss Group’s iSave ERDs 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;

•our belief 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;

•our belief that our existing cash and cash equivalents, our short-term investments, and the ongoing 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 we will be able to enforce our intellectual property (“IP”) rights;

•our expectation that the adoption of new accounting standards will not have a material impact on our financial position or results of operations; and

•other factors disclosed under the MD&A and Item 3, “Quantitative and Qualitative Disclosures about Market Risk,” and elsewhere in this Form 10-Q.

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 Quarterly Report on Form 10-Q. All forward-looking statements included in this document are subject to additional risks and uncertainties further discussed under Part II, Item 1A, “Risk Factors,” and are based on information available to us as of August 6, 2021. 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 filed with or furnished to the Securities and Exchange Commission (the “SEC”), as well as in Part II, Item 1A, “Risk Factors,” within this Quarterly Report on Form 10-Q. 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,” in our Quarterly Reports on Form 10-Q, and in our Annual Reports on Form 10-K, and from time-to-time, in our results disclosed on our Current Reports on Form 8-K.

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.

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 Quarterly Report on Form 10-Q. 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. | Q2'2021 Form 10-Q | FLS 2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements (unaudited)

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



	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
Commitments and contingencies (Note 7)
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

See Accompanying Notes to Condensed Consolidated Financial Statements

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 1

Table of Contents

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	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

See Accompanying Notes to Condensed Consolidated Financial Statements

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 2

Table of Contents

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Net income	$	1,069	$	16,926	$	7,935	$	17,547
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustments	5		10		(20)		(15)
Unrealized (loss) gain on investments	(38)		441		(86)		171
Total other comprehensive (loss) income, net of tax	(33)		451		(106)		156
Comprehensive income	$	1,036	$	17,377	$	7,829	$	17,703

See Accompanying Notes to Condensed Consolidated Financial Statements

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 3

Table of Contents

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands, except shares)
Common stock
Beginning balance	$	63	$	61	$	62	$	61
Issuance of common stock, net	—		—		1		—
Ending balance	63		61		63		61

Additional paid-in capital
Beginning balance	187,083		171,954		179,161		170,028
Issuance of common stock, net	2,638		687		8,696		1,105
Stock-based compensation	1,366		1,088		3,230		2,596
Ending balance	191,087		173,729		191,087		173,729

Accumulated other comprehensive (loss) income
Beginning balance	(20)		(332)		53		(37)
Other comprehensive (loss) income
Foreign currency translation adjustments	5		10		(20)		(15)
Unrealized (loss) gain on investments	(38)		441		(86)		171
Total other comprehensive (loss) income, net	(33)		451		(106)		156
Ending balance	(53)		119		(53)		119

Treasury stock
Beginning balance	(30,486)		(30,486)		(30,486)		(30,486)
Common stock repurchased	(11,554)		—		(11,554)		—

Ending balance	(42,040)		(30,486)		(42,040)		(30,486)

Retained earnings
Beginning balance	29,700		(2,932)		22,834		(3,553)
Net income	1,069		16,926		7,935		17,547
Ending balance	30,769		13,994		30,769		13,994

Total stockholders’ equity	$	179,826	$	157,417	$	179,826	$	157,417

Common stock issued (shares)
Beginning balance	62,877,567		60,999,233		61,798,004		60,717,702
Issuance of common stock, net	389,726		134,084		1,469,289		415,615
Ending balance	63,267,293		61,133,317		63,267,293		61,133,317

Treasury stock (shares)
Beginning balance	5,455,935		5,455,935		5,455,935		5,455,935
Common stock repurchased	656,938		—		656,938		—

Ending balance	6,112,873		5,455,935		6,112,873		5,455,935

Total common stock outstanding (shares)	57,154,420		55,677,382		57,154,420		55,677,382

See Accompanying Notes to Condensed Consolidated Financial Statements

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 4

Table of Contents

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	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

See Accompanying Notes to Condensed Consolidated Financial Statements

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 5

Table of Contents

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Description of Business and Significant Accounting Policies

Energy Recovery, Inc. and its wholly-owned subsidiaries (the “Company” or “Energy Recovery”) create technologies that solve complex challenges for industrial fluid-flow markets worldwide. Building on the Company’s pressure exchanger technology platform, the Company designs and manufactures solutions that improve operational efficiency by reducing waste, energy consumption and costs across a range of industrial processes. What began as a game-changing invention for desalination has grown into a global business advancing the environmental sustainability of the Company’s customers’ operations in multiple industries. The Company’s solutions are marketed, sold in, or developed for, the fluid-flow and gas markets, such as water, industrial waste, oil & gas, chemical processing and refrigeration, under the trademarks ERI®, Ultra PX™, PX®, Pressure Exchanger®, PX Pressure Exchanger® (“PX”), PX PowerTrain™, VorTeq™, IsoBoost®, AT™, AquaBold™, and PX G1300™. The Company owns, manufactures and/or develops its solutions, in whole or in part, in the United States of America (“U.S.”).

Basis of Presentation

The Condensed Consolidated Financial Statements include the accounts of Energy Recovery, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2020 Condensed Consolidated Balance Sheet was derived from audited financial statements and may not include all disclosures required by GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading.

The June 30, 2021 unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the fiscal year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021 (the “2020 Annual Report”).

All adjustments consisting of normal recurring adjustments that are necessary to present fairly the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Reclassifications

Certain prior period amounts have been reclassified in the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Cash Flows, and certain notes to the Condensed Consolidated Financial Statements, to conform to the current period presentation.

Use of Estimates

The preparation of Condensed Consolidated Financial Statements, in conformity with GAAP, requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes.

The accounting policies that reflect the Company’s more significant estimates and judgments and that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results are revenue recognition; valuation of stock options; valuation and impairment of goodwill; inventory; deferred taxes and valuation allowances on deferred tax assets; and evaluation and measurement of contingencies. Those estimates could change, and as a result, actual results could differ materially from those estimates.

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 6

Table of Contents

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Due to the novel coronavirus (“COVID-19”) pandemic, and the impact on the Company’s customers, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of August 6, 2021, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. The Company undertakes no obligation to update publicly these estimates for any reason after the date of this Quarterly Report on Form 10-Q, except as required by law.

Significant Accounting Policies

Except for adopting new accounting pronouncements, as noted under “Recently Adopted Accounting Pronouncements,” there have been no material changes to the Company’s significant accounting policies in Note 1, “Description of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” in the 2020 Annual Report.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard is effective for interim and annual periods beginning after December 15, 2020. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial condition, results of operations, and cash flows.

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), which provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The FASB later issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, to clarify the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848 (“ASU 2021-01”). Entities may apply the provisions of the new standards as of the beginning of the reporting period when the election is made (i.e., as early as the first quarter of 2020). Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to have been completed. An entity may elect to apply amendments prospectively through December 31, 2022. The optional expedients were available to be used upon issuance of this guidance but the Company has not yet applied the guidance because the Company has not yet modified its existing contract for reference rate reform. The Company does not expect the provisions of ASU 2020-04 or ASU 2021-01 to have a material impact on its financial condition, results of operation, and cash flows.

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 7

Table of Contents

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 — Revenue

Disaggregation of Revenue

The following tables present the disaggregated revenues by product and service line, product revenue by geography based on the “shipped to” addresses of the Company’s customers, product revenue by channel, and product revenue by segment (Water and Emerging Technologies segment). Sales and usage-based taxes are excluded from revenues. See Note 10, “Segment Reporting,” for further discussion related to the Company’s segments.


	Three Months Ended June 30, 2021						Six Months Ended June 30, 2021
	Water		Emerging Technologies		Total			Water		Emerging Technologies		Total
	(In thousands)
Revenue by product and service line
PXs, pumps and turbo devices, and other	$	20,568	$	39	$	20,607		$	49,508	$	39	$	49,547






Revenue by primary geographical markets
Middle East and Africa	$	16,401	$	39	$	16,440		$	37,361	$	39	$	37,400
Asia	2,325		—		2,325			9,503		—		9,503
Americas	945		—		945			1,368		—		1,368
Europe	897		—		897			1,276		—		1,276

Total revenue	$	20,568	$	39	$	20,607		$	49,508	$	39	$	49,547

Product revenue by channel
Megaproject	$	13,236	$	39	$	13,275		$	36,993	$	39	$	37,032
Original equipment manufacturer	4,274		—		4,274			7,065		—		7,065
Aftermarket	3,058		—		3,058			5,450		—		5,450

Total product revenue	$	20,568	$	39	$	20,607		$	49,508	$	39	$	49,547

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 8

Table of Contents

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Three Months Ended June 30, 2020						Six Months Ended June 30, 2020
	Water		Emerging Technologies		Total		Water		Emerging Technologies		Total
	(In thousands)
Revenue by product and service line
PXs, pumps and turbo devices, and other	$	19,256	$	—	$	19,256	$	38,257	$	—	$	38,257

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


Total revenue	$	19,256	$	24,352	$	43,608	$	38,257	$	26,895	$	65,152

Revenue by primary geographical markets
Middle East and Africa	$	16,504	$	—	$	16,504	$	32,735	$	—	$	32,735
Asia	617		—		617		1,392		—		1,392
Americas	1,161		24,352		25,513		2,362		26,895		29,257
Europe	974		—		974		1,768		—		1,768

Total product revenue	$	19,256	$	24,352	$	43,608	$	38,257	$	26,895	$	65,152

Product revenue by channel
Megaproject	$	11,965	$	—	$	11,965	$	26,422	$	—	$	26,422
Original equipment manufacturer	4,050		—		4,050		7,606		—		7,606
Aftermarket	3,241		—		3,241		4,229		—		4,229

Total product revenue	$	19,256	$	—	$	19,256	$	38,257	$	—	$	38,257

In June 2020, the Company and Schlumberger Technology Corporation (“Schlumberger”) entered into an agreement to terminate the 2015 license agreement between the Company and Schlumberger (the “VorTeq License Agreement”) to provide Schlumberger with the exclusive worldwide rights to the VorTeq technology. The termination of the VorTeq License Agreement was effective June 1, 2020. 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.

Contract Balances

The following table presents contract balances by category.



	June 30, 2021		December 31, 2020
	(In thousands)
Accounts receivable, net	$	7,599	$	11,792
Contract assets:
Contract assets, current (included in prepaid expenses and other assets, current)	$	536	$	1,309
Contract assets, non-current (included in other assets, non-current)	—		583
Total contract assets	$	536	$	1,892

Contract liabilities:








Contract liabilities, current	$	1,117	$	1,552







Contract liabilities, non-current (included in other liabilities, non-current)	89		88
Total contract liabilities	$	1,206	$	1,640

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 9

Table of Contents

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company records contract liabilities when cash payments are received in advance of the Company’s performance. The following table presents significant changes in contract liabilities during the period.



	June 30, 2021		December 31, 2020
	(In thousands)
Contract liabilities balance, beginning of year	$	1,640	$	28,866
Revenue recognized	(1,232)		(28,414)
Cash received, excluding amounts recognized as revenue during the period	798		1,188
Contract liabilities balance, end of period	$	1,206	$	1,640

Transaction Price Allocated to the Remaining Performance Obligations

The following table presents the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied.


	June 30, 2021
	(In thousands)
Future performance obligations by year
2021 (remaining six months)	$	4,036
2022	12,191



Total future performance obligations	$	16,227

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 10

Table of Contents

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 — Net Income Per Share

Net income for the reported period is divided by the weighted average number of common shares outstanding during the reported period to calculate basic net income per common share. Basic net income per share excludes any dilutive effect of stock options and restricted stock units ("RSU").

Diluted net income per common share reflects the potential dilution that would occur if outstanding stock options to purchase common stock were exercised for shares of common stock, using the treasury stock method, and the shares of common stock underlying each outstanding RSU were issued (outstanding stock options to purchase common stock and RSUs collectively referred to as, “stock awards”).

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands, except per share amounts)
Numerator
Net income	$	1,069	$	16,926	$	7,935	$	17,547

Denominator (weighted average shares)
Basic common shares outstanding	57,253		55,614		57,066		55,513
Dilutive stock awards	1,746		757		1,756		925
Diluted common shares outstanding	58,999		56,371		58,822		56,438

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

Certain shares of common stock issuable under stock awards have been omitted from the diluted net income per share calculations because their inclusion is considered anti-dilutive. The following table presents the weighted potential common shares issuable under stock awards that were excluded from the computation of diluted net income per share.


	Three Months Ended June 30,		Six Months Ended June 30,
	2021	2020	2021	2020
	(In thousands)


Anti-dilutive stock awards	6	2,893	457	1,989

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 11

Table of Contents

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4 — Other Financial Information

Cash, Cash Equivalents and Restricted Cash

The Condensed Consolidated Statements of Cash Flows explain the changes in the total of cash, cash equivalents and restricted cash. The following table presents a reconciliation of cash, cash equivalents and restricted cash(1) reported within the Condensed Consolidated Balance Sheets that sum to the total of such amounts presented.



	June 30, 2021		December 31, 2020		June 30, 2020
	(In thousands)
Cash and cash equivalents	$	103,302	$	94,255	$	62,970

Restricted cash, non-current (included in other assets, non-current)	103		103		102
Total cash, cash equivalents and restricted cash	$	103,405	$	94,358	$	63,072

(1) The Company pledged and deposited cash amounts into restricted cash accounts in connection with the Company’s credit cards.

Accounts Receivable, net

The following table presents the components of accounts receivable, net.



	June 30, 2021		December 31, 2020
	(In thousands)
Accounts receivable, gross	$	7,716	$	12,189
Allowance for doubtful accounts (1)	(117)		(397)
Accounts receivable, net	$	7,599	$	11,792

(1) The Company wrote-off $0.3 million of uncollectible receivables, which had been previously reserved as of December 31, 2020, during the second quarter of 2021.

Inventories

Inventories are stated at the lower of cost or net realizable value, using the first-in, first-out method. The following table presents inventory by category.



	June 30, 2021		December 31, 2020
	(In thousands)
Raw materials	$	5,161	$	4,260
Work in process	2,740		2,360
Finished goods	7,388		5,128
Inventories, net	$	15,289	$	11,748

Valuation adjustments for excess and obsolete inventory reflected as a reduction of inventory was $0.6 million and $0.5 million at June 30, 2021 and December 31, 2020, respectively.

Prepaid and Other Current Assets



	June 30, 2021		December 31, 2020
	(In thousands)
Contract assets, current	$	536	$	1,309
Cloud computing arrangement implementation costs	1,095		1,087







Other prepaid expenses and current assets	2,634		2,554
Total prepaid and other current assets	$	4,265	$	4,950

Energy Recovery, Inc. | Q2'2021 Form 10-Q | 12

Table of Contents

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Goodwill and Other Intangible Assets



	June 30, 2021		December 31, 2020
	(In thousands)
Goodwill	$	12,790	$	12,790



Other intangible assets	43		49
Total goodwill and other intangible assets	$	12,833	$	12,839

Accrued Expenses and Other Current Liabilities



	June 30, 2021		December 31, 2020
	(In thousands)
Payroll, incentives and commissions payable	$	5,614	$	8,400