erii-20230930

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 September 30, 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 October 26, 2023, there were 56,517,933 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 — September 30, 2023 and December 31, 2022	1
	Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2023 and 2022	2
	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2023 and 2022	3
	Condensed Consolidated Statements of Stockholders’ Equity — Three and Nine Months Ended September 30, 2023 and 2022	4
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 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	30
Item 4	Controls and Procedures	30

PART II
OTHER INFORMATION
Item 1	Legal Proceedings	31
Item 1A	Risk Factors	31
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3	Defaults Upon Senior Securities	31
Item 4	Mine Safety Disclosures	31
Item 5	Other Information	32
Item 6	Exhibits	32


Signatures		33

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Forward-Looking Information

This Quarterly Report on Form 10-Q for the three and nine months ended September 30, 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 our energy recovery device used in the seawater reverse osmosis (“SWRO”) process;




			•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 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 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 our cash deposit risk at uninsured or under insured financial institutions will not materially affect our current liquidity;
			•our expectation that the lender under our current credit agreement, as amended, will continue to honor its commitments to us;


			•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;

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			•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.

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 November 1, 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.

Energy Recovery, Inc. | Q3'2023 Form 10-Q | FLS 2

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PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements (unaudited)

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



	September 30, 2023		December 31, 2022
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	51,440	$	56,354
Short-term investments	33,095		33,479
Accounts receivable, net	23,337		34,062
Inventories, net	33,888		28,366



Prepaid expenses and other assets	4,508		5,606
Total current assets	146,268		157,867
Long-term investments	21,394		3,058
Deferred tax assets, net	11,183		10,263
Property and equipment, net	18,747		19,580
Operating lease, right of use asset	11,892		13,115
Goodwill	12,790		12,790
Other assets, non-current	387		366
Total assets	$	222,661	$	217,039
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,809	$	814
Accrued expenses and other liabilities	11,402		14,693
Lease liabilities	1,740		1,600
Contract liabilities	1,467		1,195
Total current liabilities	16,418		18,302
Lease liabilities, non-current	11,992		13,278



Other liabilities, non-current	222		121
Total liabilities	28,632		31,701
Commitments and contingencies (Note 7)
Stockholders’ equity:

Common stock	65		64

Additional paid-in capital	211,782		204,957
Accumulated other comprehensive loss	(183)		(349)
Treasury stock	(80,486)		(80,486)

Retained earnings	62,851		61,152
Total stockholders’ equity	194,029		185,338
Total liabilities and stockholders’ equity	$	222,661	$	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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands, except per share data)
Revenue	$	37,036	$	30,462	$	71,160	$	83,300
Cost of revenue	11,154		9,417		23,580		25,835
Gross profit	25,882		21,045		47,580		57,465



Operating expenses:
General and administrative	7,369		7,608		21,704		21,155
Sales and marketing	5,411		4,703		15,397		11,916

Research and development	3,969		3,828		12,043		14,170





Total operating expenses	16,749		16,139		49,144		47,241
Income (loss) from operations	9,133		4,906		(1,564)		10,224

Other income (expense):
Interest income	1,083		259		2,486		486

Other non-operating expense, net	(38)		(5)		(129)		(9)
Total other income, net	1,045		254		2,357		477
Income before income taxes	10,178		5,160		793		10,701
Provision for (benefit from) income taxes	518		371		(906)		377
Net income	$	9,660	$	4,789	$	1,699	$	10,324

Net income per share:
Basic	$	0.17	$	0.09	$	0.03	$	0.18
Diluted	$	0.17	$	0.08	$	0.03	$	0.18

Number of shares used in per share calculations:
Basic	56,443		55,881		56,346		56,291
Diluted	57,969		57,372		57,761		57,708

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Net income	$	9,660	$	4,789	$	1,699	$	10,324
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments	(2)		34		95		38
Unrealized gain (loss) on investments	(54)		(28)		71		(398)
Total other comprehensive income (loss), net of tax	(56)		6		166		(360)
Comprehensive income	$	9,604	$	4,795	$	1,865	$	9,964

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands, except shares)
Common stock
Beginning balance	$	65	$	64	$	64	$	64
Issuance of common stock, net	—		—		1		—
Ending balance	65		64		65		64

Additional paid-in capital
Beginning balance	209,139		200,129		204,957		195,593
Issuance of common stock, net	805		1,259		1,183		2,244
Stock-based compensation	1,838		1,419		5,642		4,970
Ending balance	211,782		202,807		211,782		202,807

Accumulated other comprehensive loss
Beginning balance	(127)		(515)		(349)		(149)
Other comprehensive income (loss)
Foreign currency translation adjustments	(2)		34		95		38
Unrealized gain (loss) on investments	(54)		(28)		71		(398)
Total other comprehensive income (loss), net	(56)		6		166		(360)
Ending balance	(183)		(509)		(183)		(509)

Treasury stock
Beginning balance	(80,486)		(80,455)		(80,486)		(53,832)
Common stock repurchased	—		(31)		—		(26,654)

Ending balance	(80,486)		(80,486)		(80,486)		(80,486)

Retained earnings
Beginning balance	53,191		42,638		61,152		37,103
Net income	9,660		4,789		1,699		10,324
Ending balance	62,851		47,427		62,851		47,427

Total stockholders’ equity	$	194,029	$	169,303	$	194,029	$	169,303

Common stock issued (shares)
Beginning balance	64,553,969		63,935,378		64,225,391		63,544,419
Issuance of common stock, net	99,091		196,110		427,669		587,069
Ending balance	64,653,060		64,131,488		64,653,060		64,131,488

Treasury stock (shares)
Beginning balance	8,148,512		8,146,859		8,148,512		6,721,153
Common stock repurchased	—		1,653		—		1,427,359

Ending balance	8,148,512		8,148,512		8,148,512		8,148,512

Total common stock outstanding (shares)	56,504,548		55,982,976		56,504,548		55,982,976

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,
		2023		2022
		(In thousands)
Cash flows from operating activities:
Net income		$	1,699	$	10,324
Adjustments to reconcile net income to cash provided by (used in) operating activities
Stock-based compensation		5,811		5,101
Depreciation and amortization		3,075		3,803
Right of use asset depreciation		1,223		1,143
(Accretion) amortization of premiums and discounts on investments		(613)		647
Deferred income taxes		(920)		207













Other non-cash adjustments		241		235

Changes in operating assets and liabilities:
Accounts receivable, net		10,756		2,208

Contract assets		1,720		(398)
Inventories, net		(5,745)		(11,848)
Prepaid and other assets		(1,292)		(461)
Accounts payable		1,043		1,121

Accrued expenses and other liabilities		(4,966)		(4,617)
Contract liabilities		240		(1,197)

Net cash provided by operating activities		12,272		6,268
Cash flows from investing activities:
Sales of marketable securities		2,966		—
Maturities of marketable securities		58,705		34,107
Purchases of marketable securities		(78,949)		(35,964)
Capital expenditures		(1,179)		(2,999)
Proceeds from sales of fixed assets		82		734


Net cash used in investing activities		(18,375)		(4,122)
Cash flows from financing activities:
Net proceeds from issuance of common stock		1,184		2,244




Repurchase of common stock		—		(26,654)
Net cash provided by (used in) financing activities		1,184		(24,410)
Effect of exchange rate differences on cash and cash equivalents		27		38
Net change in cash, cash equivalents and restricted cash		(4,892)		(22,226)
Cash, cash equivalents and restricted cash, beginning of year		56,458		74,461
Cash, cash equivalents and restricted cash, end of period		$	51,566	$	52,235

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 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 September 30, 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 Statements of Cash Flows and certain notes to the Condensed Consolidated Financial Statements to conform to the current period presentation.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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; 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.

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 November 1, 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 tables present 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 September 30, 2023						Nine Months Ended September 30, 2023
	Water		Emerging Technologies		Total		Water		Emerging Technologies		Total
	(In thousands)








Geographical market
Middle East and Africa	$	24,543	$	—	$	24,543	$	38,272	$	108	$	38,380
Asia	5,688		—		5,688		19,180		—		19,180
Americas	5,091		123		5,214		9,628		153		9,781
Europe	1,490		101		1,591		3,542		277		3,819

Total revenue	$	36,812	$	224	$	37,036	$	70,622	$	538	$	71,160

Channel
Megaproject	$	26,829	$	—	$	26,829	$	42,283	$	—	$	42,283
Original equipment manufacturer	5,083		224		5,307		16,415		430		16,845
Aftermarket	4,900		—		4,900		11,924		108		12,032

Total revenue	$	36,812	$	224	$	37,036	$	70,622	$	538	$	71,160


	Three Months Ended September 30, 2022						Nine Months Ended September 30, 2022
	Water		Emerging Technologies		Total		Water		Emerging Technologies		Total
	(In thousands)








Geographical market
Middle East and Africa	$	16,722	$	—	$	16,722	$	53,629	$	79	$	53,708
Asia	8,168		—		8,168		17,771		—		17,771
Americas	3,156		—		3,156		6,951		30		6,981
Europe	2,416		—		2,416		4,840		—		4,840

Total revenue	$	30,462	$	—	$	30,462	$	83,191	$	109	$	83,300

Channel
Megaproject	$	17,347	$	—	$	17,347	$	51,178	$	79	$	51,257
Original equipment manufacturer	9,032		—		9,032		21,392		—		21,392
Aftermarket	4,083		—		4,083		10,621		30		10,651

Total revenue	$	30,462	$	—	$	30,462	$	83,191	$	109	$	83,300

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contract Balances

The following table presents contract balances by category.



	September 30, 2023		December 31, 2022
	(In thousands)
Accounts receivable, net	$	23,337	$	34,062

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



Contract liabilities:








Contract liabilities, current	$	1,467	$	1,195







Contract liabilities, non-current (included in other liabilities, non-current)	89		121
Total contract liabilities	$	1,556	$	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.



	September 30, 2023		December 31, 2022
	(In thousands)
Contract liabilities, beginning of year	$	1,316	$	3,406
Revenue recognized	(1,117)		(3,123)
Cash received, excluding amounts recognized as revenue during the period	1,357		1,033
Contract liabilities, end of period	$	1,556	$	1,316

Future Performance Obligations

As of September 30, 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 three months)	$	5,924

2025	6,861


Total	$	12,785

Energy Recovery, Inc. | Q3'2023 Form 10-Q | 9

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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 common share excludes any dilutive effect of stock options and restricted stock units (“RSUs”).

•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 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 income per common share.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands, except per share amounts)
Numerator
Net income	$	9,660	$	4,789	$	1,699	$	10,324

Denominator (weighted average shares)
Basic common shares outstanding	56,443		55,881		56,346		56,291
Dilutive stock awards	1,526		1,491		1,415		1,417
Diluted common shares outstanding	57,969		57,372		57,761		57,708

Net income per share
Basic	$	0.17	$	0.09	$	0.03	$	0.18
Diluted	$	0.17	$	0.08	$	0.03	$	0.18

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
	(In thousands)


Anti-dilutive stock award shares	125	387	126	522

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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, such as cash amounts deposited in restricted cash accounts in connection with the Company’s credit cards. The following table presents a reconciliation of cash, cash equivalents and restricted cash, reported within the Condensed Consolidated Balance Sheets that sum to the total of such amounts presented for each period presented on the Condensed Consolidated Statements of Cash Flows.



	September 30, 2023		December 31, 2022		September 30, 2022
	(In thousands)
Cash and cash equivalents	$	51,440	$	56,354	$	52,131

Restricted cash, non-current (included in other assets, non-current)	126		104		104
Total cash, cash equivalents and restricted cash	$	51,566	$	56,458	$	52,235

Accounts Receivable, net



	September 30, 2023		December 31, 2022
	(In thousands)
Accounts receivable, gross	$	23,446	$	34,210
Allowance for doubtful accounts	(109)		(148)
Accounts receivable, net	$	23,337	$	34,062

Inventories, net



	September 30, 2023		December 31, 2022
	(In thousands)
Raw materials	$	9,050	$	11,178
Work in process	4,905		2,628
Finished goods	20,560		15,062
Inventories, gross	34,515		28,868
Valuation adjustments for excess and obsolete inventory	(627)		(502)
Inventories, net	$	33,888	$	28,366

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

Goodwill

Goodwill is tested for impairment annually in the third quarter of the Company’s fiscal year or more frequently if indicators of potential impairment exist. The Company monitors the industries in which it operates, and reviews its business performance for indicators of potential impairment. The recoverability of goodwill is measured at the reporting unit level, which represents the operating segment. The carrying amount of goodwill as of September 30, 2023 and December 31, 2022 was $12.8 million.

On July 1, 2023, the Company estimated the fair value of its reporting units using both the discounted cash flow and market approaches. The forecast of future cash flows, which is based on the Company’s best estimate of future net sales and operating expenses, is based primarily on expected category expansion, pricing, market segment, and general economic conditions. The Company incorporates other significant inputs to its fair value calculations, including discount rate and market multiples, to reflect current market conditions. The analysis performed indicated that the fair value of each reporting unit that is allocated goodwill significantly exceeds its carrying value. As a result of the Company’s annual impairment test, there was no impairment charge recorded during the three months ended September 30, 2023.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accrued Expenses and Other Liabilities



	September 30, 2023		December 31, 2022
	(In thousands)
Current
Payroll, incentives and commissions payable	$	8,261	$	10,479
Warranty reserve	944		968
















Other accrued expenses and other liabilities	2,197		3,246
Total accrued expenses and other liabilities	11,402		14,693













Other liabilities, non-current	222		121
Total accrued expenses, and current and non-current other liabilities	$	11,624	$	14,814

Energy Recovery, Inc. | Q3'2023 Form 10-Q | 12

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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.

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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.


						September 30, 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			$	17,408			$	—			$	—			$	17,408			$	33,268			$	—			$	—	$	33,268






Short-term investments
U.S. treasury securities			Level 2			2,894				—				(5)				2,889				3,629				1				—		3,630

Corporate notes and bonds			Level 2			19,939				—				(95)				19,844				26,060				—				(208)		25,852
Municipal and agency notes and bonds			Level 2			10,387				—				(25)				10,362				3,992				5				—		3,997
Total short-term investments	33,220			—				(125)				33,095				33,681				6				(208)				33,479

Long-term investments


Corporate notes and bonds			Level 2			13,417				—				(74)				13,343				3,178				—				(120)		3,058
Municipal and agency notes and bonds			Level 2			8,084				—				(33)				8,051				—				—				—		—
Total long-term investments	21,501			—				(107)				21,394				3,178				—				(120)				3,058
Total short and long-term investments	54,721			—				(232)				54,489				36,859				6				(328)				36,537
Total	$	72,129		$	—			$	(232)			$	71,897			$	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.


	September 30, 2023				December 31, 2022
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In thousands)
U.S. treasury securities	$	2,889	$	(5)	$	—	$	—

Corporate notes and bonds	31,687		(169)		28,911		(328)
Municipal and agency notes and bonds	18,413		(58)		—		—
Total available-for-sale investments with unrealized loss positions	$	52,989	$	(232)	$	28,911	$	(328)

Energy Recovery, Inc. | Q3'2023 Form 10-Q | 14

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Sales of Available-for-Sale Investments

The following table presents the sales of available-for-sale investments.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)



Corporate notes and bonds	$	—	$	—	$	2,966	$	—

Realized losses on sales of securities were immaterial during the nine months ended September 30, 2023.

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. During September 2023, the Company and JPMC amended the Credit Agreement (the “Second Amendment”) to increase the LC maximum allowable credit line component from $25.0 million to $30.0 million. No other components or features under the Credit Agreement (including the First Amendment dated July 15, 2022) were amended.

Under the Credit Agreement, as of September 30, 2023, there were no revolving loans outstanding. In addition, under the LCs component, the Company utilized $20.4 million of the maximum allowable credit line of $30.0 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.



	September 30, 2023		December 31, 2022
	(In thousands)
Outstanding letters of credit	$	19,501	$	15,487

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 September 30, 2023, the Company was not involved in any lawsuits, legal proceedings or claims that would have a material effect on the Company’s financial position, results of operations, or cash flows. Therefore, there were no material losses which were probable or reasonably possible.

Energy Recovery, Inc. | Q3'2023 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 September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(In thousands, except percentages)
Provision for (benefit from) income taxes	$	518		$	371		$	(906)		$	377
Discrete items	357			331			986			1,134
Provision for income taxes, excluding discrete items	$	875		$	702		$	80		$	1,511
Effective tax rate	5.1		%	7.2		%	(114.2		%)	3.5		%
Effective tax rate, excluding discrete items	8.6		%	13.6		%	10.0		%	14.1		%

The Company’s interim period tax provision for and (benefit from) income taxes, respectively, 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 and nine months ended September 30, 2023, the recognized provision for and (benefit from) income taxes, respectively, 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 and prior years’ discrete tax benefit largely related to increased tax credits. For the three and nine months ended September 30, 2022, the recognized provision for income taxes included a benefit primarily related to the 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 and nine months ended September 30, 2023, as compared to the comparable period in the prior year, differed primarily due to higher projected FDII and R&D tax credits and lower book income.

Energy Recovery, Inc. | Q3'2023 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 tables present a summary of the Company’s financial information by segment and corporate operating expenses.


	Three Months Ended September 30, 2023						Nine Months Ended September 30, 2023
	Water		Emerging Technologies		Total		Water		Emerging Technologies		Total
	(In thousands)
Revenue	$	36,812	$	224	$	37,036	$	70,622	$	538	$	71,160
Cost of revenue	11,114		40		11,154		23,136		444		23,580
Gross profit	25,698		184		25,882		47,486		94		47,580



Operating expenses
General and administrative	2,039		1,061		3,100		5,837		2,976		8,813
Sales and marketing	3,272		1,560		4,832		9,567		4,171		13,738

Research and development	1,098		2,871		3,969		3,121		8,922		12,043



Total operating expenses	6,409		5,492		11,901		18,525		16,069		34,594

Operating income (loss)	$	19,289	$	(5,308)	13,981		$	28,961	$	(15,975)	12,986

Less: Corporate operating expenses					4,848						14,550
Income (loss) from operations					$	9,133					$	(1,564)


	Three Months Ended September 30, 2022						Nine Months Ended September 30, 2022
	Water		Emerging Technologies		Total		Water		Emerging Technologies		Total
	(In thousands)
Revenue	$	30,462	$	—	$	30,462	$	83,191	$	109	$	83,300
Cost of revenue	9,417		—		9,417		25,817		18		25,835
Gross profit	21,045		—		21,045		57,374		91		57,465



Operating expenses
General and administrative	1,911		878		2,789		4,909		3,140		8,049
Sales and marketing	3,242		960		4,202