erii-20230331

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 March 31, 2023

☐ 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 April 27, 2023, there were 56,347,563 shares of the registrant’s common stock outstanding.

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ENERGY RECOVERY, INC.

TABLE OF CONTENTS


		Page No.
PART I
FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets — March 31, 2023 and December 31, 2022	1
	Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2023 and 2022	2
	Condensed Consolidated Statements of Comprehensive (Loss) Income — Three Months Ended March 31, 2023 and 2022	3
	Condensed Consolidated Statements of Stockholders’ Equity — Three Months Ended March 31, 2023 and 2022	4
	Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2023 and 2022	5
	Notes to Condensed Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4	Controls and Procedures	27

PART II
OTHER INFORMATION
Item 1	Legal Proceedings	28
Item 1A	Risk Factors	28
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3	Defaults Upon Senior Securities	29
Item 4	Mine Safety Disclosures	29
Item 5	Other Information	29
Item 6	Exhibits	29


Signatures		30

Energy Recovery, Inc. | Q1'2023 Form 10-Q

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Forward-Looking Information

This Quarterly Report on Form 10-Q for the three months ended March 31, 2023, including Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (the “MD&A”), contains 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 we have sufficient raw material and finished goods to mitigate supply chain issues;
			•our belief that the scalability and versatility of our platform can help us achieve success in emerging markets similar to SWRO;




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

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




			•our belief that the PX Q400 will be the highest-performing and highest capacity PX available for SWRO desalination and industrial wastewater facilities;

			•our belief that our PX offers market-leading value with the highest technological and economic benefit;











			•our belief that leveraging our pressure exchanger technology will unlock new commercial opportunities in the future;
			•our belief that sales of carbon dioxide (“CO2”) refrigeration systems will increase in response to regulations and supermarkets’ search for safe natural refrigerants;
			•our belief that our pressure exchanger technology can significantly aid in the reduction of the operating costs of CO2 refrigeration systems by recycling the pressure energy of CO2 gas thereby significantly reducing the energy needed to operate these systems;
			•our belief that the PX G1300™ could eventually alter the standard refrigeration system architecture by reducing costs for retail end users such as grocery stores;




			•our objective of finding new applications for our technology and developing new products for use outside of desalination;
			•our belief that our current facilities will be adequate for the foreseeable future;
			•our belief that by investing in research and development, we will be well positioned to continue to execute on our product strategy;
			•our expectation that sales outside of the U.S. will remain a significant portion of our revenue;



			•our belief that our existing cash and cash equivalents, our short and/or long-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 belief that we will be in compliance with the terms of the existing credit agreement, as amended, in the future;
			•our expectation that we will continue to receive a tax benefit related to U.S. federal foreign-derived intangible income;





			•the impact of changes in internal control over financial reporting; and
			•other factors disclosed under the MD&A and Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk,” and elsewhere in this Form 10-Q.

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You should not place undue reliance on these forward-looking statements. These forward-looking statements 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 May 3, 2023. We assume no obligation to update any such forward-looking statements. Certain risks and uncertainties could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are 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. In addition, when preparing the MD&A below, we presume the readers have access to and have read the MD&A in our Annual Report on Form 10-K, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K.

We provide our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, Proxy Statements on Form DEF 14A, 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.

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PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements (unaudited)

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



	March 31, 2023		December 31, 2022
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	66,332	$	56,354
Short-term investments	32,338		33,479
Accounts receivable, net	11,584		34,062
Inventories, net	33,119		28,366



Prepaid expenses and other assets	4,569		5,606
Total current assets	147,942		157,867
Long-term investments	3,019		3,058
Deferred tax assets, net	11,415		10,263
Property and equipment, net	19,703		19,580
Operating lease, right of use asset	12,713		13,115
Goodwill	12,790		12,790
Other assets, non-current	385		366
Total assets	$	207,967	$	217,039
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,959	$	814
Accrued expenses and other liabilities	8,185		14,693
Lease liabilities	1,645		1,600
Contract liabilities	1,451		1,195
Total current liabilities	13,240		18,302
Lease liabilities, non-current	12,970		13,278



Other liabilities, non-current	254		121
Total liabilities	26,464		31,701
Commitments and contingencies (Note 7)
Stockholders’ equity:

Common stock	64		64

Additional paid-in capital	207,340		204,957
Accumulated other comprehensive loss	(271)		(349)
Treasury stock	(80,486)		(80,486)

Retained earnings	54,856		61,152
Total stockholders’ equity	181,503		185,338
Total liabilities and stockholders’ equity	$	207,967	$	217,039

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended March 31,
		2023		2022
		(In thousands, except per share data)
Revenue		$	13,401	$	32,546
Cost of revenue		5,246		9,498
Gross profit		8,155		23,048



Operating expenses:
General and administrative		7,066		6,551
Sales and marketing		4,894		3,364

Research and development		4,306		4,911





Total operating expenses		16,266		14,826
(Loss) income from operations		(8,111)		8,222

Other income:
Interest income		621		61

Other non-operating income, net		35		56
Total other income, net		656		117
(Loss) income before income taxes		(7,455)		8,339
(Benefit from) provision for income taxes		(1,159)		445
Net (loss) income		$	(6,296)	$	7,894

Net (loss) income per share:
Basic		$	(0.11)	$	0.14
Diluted		$	(0.11)	$	0.14

Number of shares used in per share calculations:
Basic		56,228		56,783
Diluted		56,228		58,181

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


	Three Months Ended March 31,
		2023		2022
		(In thousands)
Net (loss) income		$	(6,296)	$	7,894
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		(17)		(11)
Unrealized gain (loss) on investments		95		(258)
Total other comprehensive income (loss), net of tax		78		(269)
Comprehensive (loss) income		$	(6,218)	$	7,625

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Three Months Ended March 31,
		2023		2022
		(In thousands, except shares)
Common stock


Beginning and ending balance		$	64	$	64

Additional paid-in capital
Beginning balance		204,957		195,593
Issuance of common stock, net		165		763
Stock-based compensation		2,218		1,855
Ending balance		207,340		198,211

Accumulated other comprehensive loss
Beginning balance		(349)		(149)
Other comprehensive income (loss)
Foreign currency translation adjustments		(17)		(11)
Unrealized gain (loss) on investments		95		(258)
Total other comprehensive income (loss), net		78		(269)
Ending balance		(271)		(418)

Treasury stock
Beginning balance		(80,486)		(53,832)
Common stock repurchased		—		(8,056)

Ending balance		(80,486)		(61,888)

Retained earnings
Beginning balance		61,152		37,103
Net (loss) income		(6,296)		7,894
Ending balance		54,856		44,997

Total stockholders’ equity		$	181,503	$	180,966

Common stock issued (shares)
Beginning balance		64,225,391		63,544,419
Issuance of common stock, net		265,993		294,148
Ending balance		64,491,384		63,838,567

Treasury stock (shares)
Beginning balance		8,148,512		6,721,153
Common stock repurchased		—		415,441

Ending balance		8,148,512		7,136,594

Total common stock outstanding (shares)		56,342,872		56,701,973

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended March 31,
		2023		2022
		(In thousands)
Cash flows from operating activities:
Net (loss) income		$	(6,296)	$	7,894
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities
Stock-based compensation		2,302		1,880
Depreciation and amortization		983		1,014
Right of use asset depreciation		402		374
(Accretion) amortization of premiums and discounts on investments		(89)		288
Deferred income taxes		(1,152)		351













Other non-cash adjustments		93		57

Changes in operating assets and liabilities:
Accounts receivable, net		22,509		(6,042)

Contract assets		593		(299)
Inventories, net		(4,855)		(3,123)
Prepaid and other assets		187		(721)
Accounts payable		920		4,618

Accrued expenses and other liabilities		(7,156)		(6,611)
Contract liabilities		216		(1,282)

Net cash provided by (used in) operating activities		8,657		(1,602)
Cash flows from investing activities:

Maturities of marketable securities		15,250		10,421
Purchases of marketable securities		(13,886)		(29,377)


Capital expenditures and proceeds from sales of fixed assets		(197)		(1,976)

Net cash provided by (used in) investing activities		1,167		(20,932)
Cash flows from financing activities:
Net proceeds from issuance of common stock		165		763




Repurchase of common stock		—		(8,056)
Net cash provided by (used in) financing activities		165		(7,293)
Effect of exchange rate differences on cash and cash equivalents		8		(11)
Net change in cash, cash equivalents and restricted cash		9,997		(29,838)
Cash, cash equivalents and restricted cash, beginning of year		56,458		74,461
Cash, cash equivalents and restricted cash, end of period		$	66,455	$	44,623

See Accompanying Notes to Condensed Consolidated Financial Statements

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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”) designs and manufactures solutions that make industrial processes more efficient and sustainable. Leveraging the Company’s pressure exchanger technology, which generates little to no emissions when operating, the Company’s solutions lower costs, save energy, reduce waste and minimize emissions for companies across a variety of industrial processes. As the world coalesces around the urgent need to address climate change and its impacts, the Company is helping companies reduce their energy consumption in their industrial processes, which in turn, reduces their carbon footprint. The Company believes that its customers do not have to sacrifice quality and cost savings for sustainability and is committed to developing solutions that drive long-term value – both financial and environmental. The Company’s solutions are marketed, sold in, or developed for, the fluid-flow and gas markets, such as seawater and industrial wastewater desalination, natural gas, chemical processing and refrigeration systems, under the trademarks ERI®, PX®, Pressure Exchanger®, PX® Pressure Exchanger® (“PX”), Ultra PX™, PX G™, PX G1300™, PX PowerTrain™, AT™, and Aquabold™. The Company owns, manufactures and/or develops its solutions, in whole or in part, in the United States of America (the “U.S.”).

Basis of Presentation

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

The accompanying Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2022 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 March 31, 2023 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, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2023 (the “2022 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 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; useful life and valuation of equipment; valuation and impairment of goodwill; inventory; deferred taxes and valuation allowances on deferred tax assets; evaluation and measurement of contingencies, and warranty obligations. Those estimates could change, and as a result, actual results could differ materially from those estimates.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Although there has been uncertainty and disruption in the global economy, supply chain 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 May 3, 2023, 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

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 2022 Annual Report.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 — Revenue

Disaggregation of Revenue

The following table presents the disaggregated revenues by segment, and within each segment, by geographical market based on the customer “shipped to” address, and by channel customers. Sales and usage-based taxes are excluded from revenues. See Note 9, “Segment Reporting,” for further discussion related to the Company’s segments.




	Three Months Ended March 31, 2023			Three Months Ended March 31, 2022
		Water		Emerging Technologies		Total		Water		Emerging Technologies		Total
		(In thousands)








Geographical market
Asia		$	6,114	$	—	$	6,114	$	6,746	$	—	$	6,746
Americas		3,208		30		3,238		2,301		30		2,331
Middle East and Africa		2,739		—		2,739		22,128		—		22,128
Europe		1,235		75		1,310		1,341		—		1,341

Total revenue		$	13,296	$	105	$	13,401	$	32,516	$	30	$	32,546

Channel
Original equipment manufacturer		$	6,731	$	105	$	6,836	$	4,671	$	—	$	4,671
Aftermarket		3,322		—		3,322		4,005		30		4,035
Megaproject		3,243		—		3,243		23,840		—		23,840

Total revenue		$	13,296	$	105	$	13,401	$	32,516	$	30	$	32,546

Contract Balances

The following table presents contract balances by category.



	March 31, 2023		December 31, 2022
	(In thousands)
Accounts receivable, net	$	11,584	$	34,062

Contract assets, current (included in prepaid expenses and other assets)	1,127		1,720



Contract liabilities:








Contract liabilities, current	$	1,451	$	1,195







Contract liabilities, non-current (included in other liabilities, non-current)	81		121
Total contract liabilities	$	1,532	$	1,316

Contract Liabilities

The Company records contract liabilities, which consist of customer deposits and deferred revenue, when cash payments are received in advance of the Company’s performance. The following table presents significant changes in contract liabilities during the period.



	March 31, 2023		December 31, 2022
	(In thousands)
Contract liabilities, beginning of year	$	1,316	$	3,406
Revenue recognized	(978)		(3,123)
Cash received, excluding amounts recognized as revenue during the period	1,194		1,033
Contract liabilities, end of period	$	1,532	$	1,316

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Future Performance Obligations

As of March 31, 2023, the following table presents the future estimated revenue by year expected to be recognized related to performance obligations that are unsatisfied or partially unsatisfied.


Year	Future Performance Obligations
	(In thousands)
2023 (remaining nine months)	$	4,580
2024	7,493



Total	$	12,073

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 — Net (Loss) Income Per Share

Net (loss) income for the reported period is divided by the weighted average number of common shares outstanding during the reported period to calculate basic net (loss) income per common share.

•Basic net (loss) income per common share excludes any dilutive effect of stock options and restricted stock units ("RSUs").

•Diluted net (loss) 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 if the shares of common stock underlying each unvested RSU were issued.

Outstanding stock options to purchase common stock and unvested RSUs are collectively referred to as “stock awards.”

The following table presents the computation of basic and diluted net (loss) income per common share.


	Three Months Ended March 31,
		2023		2022
		(In thousands, except per share amounts)
Numerator
Net (loss) income		$	(6,296)	$	7,894

Denominator (weighted average shares)
Basic common shares outstanding		56,228		56,783
Dilutive stock awards		—		1,398
Diluted common shares outstanding		56,228		58,181

Net (loss) income per share
Basic		$	(0.11)	$	0.14
Diluted		$	(0.11)	$	0.14

Certain shares of common stock issuable under stock awards have been omitted from the diluted net (loss) income per common 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 (loss) income per common share.


	Three Months Ended March 31,
		2023	2022
		(In thousands)


Anti-dilutive stock award shares		2,652	298

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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, such as cash amounts deposited in restricted cash accounts in connection with the Company’s credit cards, reported within the Condensed Consolidated Balance Sheets that sum to the total of such amounts presented.



	March 31, 2023		December 31, 2022		March 31, 2022
	(In thousands)
Cash and cash equivalents	$	66,332	$	56,354	$	44,520

Restricted cash, non-current (included in other assets, non-current)	123		104		103
Total cash, cash equivalents and restricted cash	$	66,455	$	56,458	$	44,623

Accounts Receivable, net



	March 31, 2023		December 31, 2022
	(In thousands)
Accounts receivable, gross	$	11,693	$	34,210
Allowance for doubtful accounts	(109)		(148)
Accounts receivable, net	$	11,584	$	34,062

Inventories, net



	March 31, 2023		December 31, 2022
	(In thousands)
Raw materials	$	9,777	$	11,178
Work in process	3,985		2,628
Finished goods	19,930		15,062
Inventories, gross	33,692		28,868
Valuation adjustments for excess and obsolete inventory	(573)		(502)
Inventories, net	$	33,119	$	28,366

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

Accrued Expenses and Other Liabilities



	March 31, 2023		December 31, 2022
	(In thousands)
Current
Payroll, incentives and commissions payable	$	4,907	$	10,479
Warranty reserve	907		968
















Other accrued expenses and other liabilities	2,371		3,246
Total accrued expenses and other liabilities	8,185		14,693













Other liabilities, non-current	254		121
Total accrued expenses, and current and non-current other liabilities	$	8,439	$	14,814

Energy Recovery, Inc. | Q1'2023 Form 10-Q | 11

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 — Investments and Fair Value Measurements

Available-for-Sale Investments

The Company’s investments in investment-grade short-term and long-term marketable debt instruments, such as U.S. treasury securities, corporate notes and bonds, and municipal and agency notes and bonds, are classified as available-for-sale. Available-for-sale investments are classified on the Condensed Consolidated Balance Sheets as either short-term and/or long-term investments.

The classification of available-for-sale investments on the Condensed Consolidated Balance Sheets and definition of each of these classifications are provided in Note 1, “Description of Business and Significant Accounting Policies - Significant Accounting Policies,” subsections “Cash and Cash Equivalents” and “Short-term and Long-term Investments,” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” in the 2022 Annual Report.

Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. The Company generally holds available-for-sale investments until maturity; however, from time-to-time, the Company may elect to sell certain available-for-sale investments prior to contractual maturity.

Fair Value of Financial Instruments

All of the Company’s financial assets and liabilities are remeasured and reported at fair value at each reporting period, and are classified and disclosed in one of the following three pricing category levels:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and

Level 3 — Unobservable inputs in which little or no market activity exists, thereby requiring an entity to develop its own assumptions that market participants would use in pricing.

Energy Recovery, Inc. | Q1'2023 Form 10-Q | 12

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the Company’s financial assets measured on a recurring basis by contractual maturity, including pricing category, amortized cost, gross unrealized gains and losses, and fair value. As of the dates reported in the table, the Company had no financial liabilities and no Level 3 financial assets.


						March 31, 2023																December 31, 2022
			Pricing Category			Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses		Fair Value
						(In thousands)
Cash equivalents
Money market securities			Level 1			$	35,131			$	—			$	—			$	35,131			$	33,268			$	—			$	—	$	33,268






Short-term investments
U.S. treasury securities			Level 2			8,614				2				—				8,616				3,629				1				—		3,630

Corporate notes and bonds			Level 2			16,920				2				(185)				16,737				26,060				—				(208)		25,852
Municipal and agency notes and bonds			Level 2			6,994				—				(9)				6,985				3,992				5				—		3,997
Total short-term investments	32,528			4				(194)				32,338				33,681				6				(208)				33,479

Long-term investments


Corporate notes and bonds			Level 2			1,991				—				(7)				1,984				3,178				—				(120)		3,058
Municipal and agency notes and bonds			Level 2			1,038				—				(3)				1,035				—				—				—		—
Total long-term investments	3,029			—				(10)				3,019				3,178				—				(120)				3,058
Total short and long-term investments	35,557			4				(204)				35,357				36,859				6				(328)				36,537
Total	$	70,688		$	4			$	(204)			$	70,488			$	70,127			$	6			$	(328)			$	69,805

The following table presents a summary of the fair value and gross unrealized losses on the available-for-sale securities that have been in a continuous unrealized loss position, aggregated by type of investment instrument. The available-for-sale securities that were in an unrealized gain position have been excluded from the table.


	March 31, 2023				December 31, 2022
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In thousands)


Corporate notes and bonds	$	17,734	$	(192)	$	28,911	$	(328)
Municipal and agency notes and bonds	8,020		(12)		—		—
Total available-for-sale investments with unrealized loss positions	$	25,754	$	(204)	$	28,911	$	(328)

Energy Recovery, Inc. | Q1'2023 Form 10-Q | 13

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 — Lines of Credit

Credit Agreement

The Company entered into a credit agreement with JPMorgan Chase Bank, N.A. (“JPMC”) on December 22, 2021 (the “Credit Agreement”). The Credit Agreement, which will expire on December 21, 2026, provides a committed revolving credit line of $50.0 million and includes both a revolving loan and a letters of credit (“LCs”) component.

Under the Credit Agreement, as of March 31, 2023, there were no revolving loans outstanding. In addition, under the LCs component, the Company utilized $19.0 million of the maximum allowable credit line of $25.0 million, which includes newly issued LCs, and previously issued and unexpired stand-by letters of credits (“SBLCs”) and certain non-expired commitments under the Company’s previous Loan and Pledge Agreement with Citibank, N.A. which are guaranteed under the Credit Agreement.

Letters of Credit

The following table presents the total outstanding LCs and SBLCs issued by the Company to our customers related to product warranty and performance guarantees.



	March 31, 2023		December 31, 2022
	(In thousands)
Outstanding letters of credit	$	17,159	$	15,487

Energy Recovery, Inc. | Q1'2023 Form 10-Q | 14

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 — Commitments and Contingencies

Litigation

From time-to-time, the Company has been named in and subject to various proceedings and claims in connection with its business. The Company may in the future become involved in litigation in the ordinary course of business, including litigation that could be material to its business. The Company considers all claims, if any, on a quarterly basis and, based on known facts, assesses whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, the Company then evaluates disclosure requirements and whether to accrue for such claims in its consolidated financial statements. The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and are adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. As of March 31, 2023, the Company was not involved in any lawsuits, therefore there were no material losses which were probable or reasonably possible.

Energy Recovery, Inc. | Q1'2023 Form 10-Q | 15

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 — Income Taxes


	Three Months Ended March 31,
		2023			2022
		(In thousands, except percentages)
(Benefit from) provision for income taxes		$	(1,159)		$	445
Discrete items		488			599
(Benefit from) provision for income taxes, excluding discrete items		$	(671)		$	1,044
Effective tax rate		15.5		%	5.3		%
Effective tax rate, excluding discrete items		9.0		%	12.5		%

The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period. The Company’s quarterly tax provision and estimate of its annual effective tax rate are subject to variation due to several factors, including variability in accurately predicting its pre-tax income or loss and the mix of jurisdictions to which they relate, intercompany transactions, the applicability of special tax regimes, and changes in how the Company does business.

For the three months ended March 31, 2023, the recognized benefit from income tax resulted from the Company’s loss for the quarter and included benefits related to the U.S. federal foreign-derived intangible income (“FDII”) and federal research and development (“R&D”) tax credit, along with a discrete tax benefit due primarily to stock-based compensation windfalls. For the three months ended March 31, 2022, the recognized income tax expense included a benefit primarily related to the U.S. FDII and federal R&D tax credit, along with a discrete tax benefit due primarily to stock-based compensation windfalls.

The effective tax rate excluding discrete items for the three months ended March 31, 2023, as compared to the corresponding period of the prior year, differed primarily due to the Company reporting a pretax book loss for the three months ended March 31, 2023, as compared to pretax book income for the three months ended March 31, 2022, along with higher projected FDII benefit in the current year versus the prior year.

Energy Recovery, Inc. | Q1'2023 Form 10-Q | 16

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 — Segment Reporting

The Company’s chief operating decision-maker (“CODM”) is its chief executive officer. The Company continues to monitor and review its segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact its reportable segments.

The following table presents a summary of the Company’s financial information by segment and corporate operating expenses.


	Three Months Ended March 31, 2023			Three Months Ended March 31, 2022
		Water		Emerging Technologies		Total		Water		Emerging Technologies		Total
		(In thousands)
Revenue		$	13,296	$	105	$	13,401	$	32,516	$	30	$	32,546
Cost of revenue		5,101		145		5,246		9,480		18		9,498
Gross profit (loss)		8,195		(40)		8,155		23,036		12		23,048



Operating expenses
General and administrative		1,938		968		2,906		1,464		908		2,372
Sales and marketing		3,175		1,170		4,345		2,301		527		2,828

Research and development		1,180		3,126		4,306		800		4,111		4,911



Total operating expenses		6,293		5,264		11,557		4,565		5,546		10,111

Operating (loss) income		$	1,902	$	(5,304)	(3,402)		$	18,471	$	(5,534)	12,937

Less: Corporate operating expenses						4,709						4,715
(Loss) income from operations						$	(8,111)					$	8,222

Energy Recovery, Inc. | Q1'2023 Form 10-Q | 17

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 — Concentrations

Customer Revenue Concentration

The following table presents the customers that account for 10% or more of the Company’s revenue and their related segment. Although certain customers might account for greater than 10% of the Company’s revenue at any one point in time, the concentration of revenue between a limited number of customers shifts regularly, depending on when revenue is recognized. The percentages by customer reflect specific relationships or contracts that would concentrate revenue for the periods presented and do not indicate a trend specific to any one customer.

Three Months Ended March 31,

Segment

2023

2022

Customer A

Water

35%

Customer B

Water

27%