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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, 2022
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to __________

Commission File Number: 001-34112
erii-20220630_g1.jpg
Energy Recovery, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware01-0616867
(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 classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par valueERIIThe 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 27, 2022, there were 55,787,098 shares of the registrant’s common stock outstanding.





Table of Contents
ENERGY RECOVERY, INC.
TABLE OF CONTENTS
Page No.
Condensed Consolidated Balance Sheets — June 30, 2022 and December 31, 2021
Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2022 and 2021
Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Six Months Ended June 30, 2022 and 2021
Condensed Consolidated Statements of Stockholders’ Equity — Three and Six Months Ended June 30, 2022 and 2021
Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2022 and 2021

Energy Recovery, Inc. | Q2'2022 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, 2022, 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 desalination (“SWRO”) industry;
forecasted production and evaluations and judgments regarding supply chain matters, particularly in light of the global supply environment;
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 the Ultra PX addresses key challenges associated with treating industrial wastewater in a range of reverse osmosis (“RO”) applications;
our belief that the Ultra PX can accelerate adoption of RO in the growing zero liquid discharge (“ZLD”) and minimal liquid discharge (“MLD”) markets;
our belief that the Ultra PX can help make RO the preferred treatment option to achieve ZLD and MLD requirements by enhancing RO’s affordability and efficiency compared to thermal treatment options.
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 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 an economically viable and more sustainable option in the production of potable water;
our belief that our hydraulic turbochargers (“Turbochargers”) deliver substantial savings and ease of integration into desalination systems;
our anticipation that markets not traditionally associated with desalination, such as the United States of America (the “U.S.”) and China will inevitably develop and provide further revenue growth opportunities;
our belief that countries around the world will continue to mandate ZLD or MLD requirements for specific industries;
our belief that leveraging the Ultra PX with RO will significantly lower thermal demand;
our belief that, as the existing thermal technology is replaced with 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 ERD solution for megaproject (“MPD”) customers;
our belief that our PX offers market-leading value with the highest technological and economic benefit;
our estimate that MPD customer projects represent revenue opportunities from approximately $1 million to $21 million;
our belief that our solutions offer a competitive advantage compared to our competitors’ solutions because our ERDs provide the lowest life-cycle cost and are, therefore, the most cost-effective ERD solutions for RO desalination applications;
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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 help reduce 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 belief that we will be able to achieve efficiencies across a wider range of temperatures that exceed incumbent CO2 refrigeration technologies;
our belief that the Ultra PX can address the key challenges associated with treating industrial wastewater in ultra high-pressure reverse osmosis (“UHPRO”) applications;
our belief that the Ultra PX can help make UHPRO the preferred treatment option to achieve ZLD and MLD requirements by enhancing UHPRO’s affordability and efficiency compared to thermal treatment options;
our belief that our Ultra PX enables customers to optimize their wastewater treatment process for ZLD and MLD;
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;
the timing of our receipt of payment for products or services from our customers;
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 tax and accounting estimates and estimates regarding any potential operational cost savings as a result of our decision to cease the VorTeq commercialization efforts;
our belief that we expect to utilize all of our net operating loss (“NOL”) carryforwards in fiscal year 2022 due to our projected income exceeding the amount of NOL carryforwards;
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;
our share repurchase program will result in repurchases of our common stock or enhance long term stockholder value;
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, 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 3, 2022. 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. 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.

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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.

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PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements (unaudited)

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

June 30,
2022
December 31,
2021
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents$43,223 $74,358 
Short-term investments38,479 31,332 
Accounts receivable, net13,926 20,615 
Inventories, net28,235 20,383 
Prepaid expenses and other assets5,213 5,075 
Total current assets129,076 151,763 
Long-term investments4,809 2,298 
Deferred tax assets, net11,548 11,421 
Property and equipment, net18,958 20,361 
Operating lease, right of use asset13,898 14,653 
Goodwill and other intangible assets12,822 12,827 
Other assets, non-current365 367 
Total assets$191,476 $213,690 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$2,716 $909 
Accrued expenses and other liabilities9,483 13,994 
Lease liabilities1,505 1,564 
Contract liabilities1,507 3,318 
Total current liabilities15,211 19,785 
Lease liabilities, non-current14,177 14,879 
Other liabilities, non-current227 247 
Total liabilities29,615 34,911 
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock64 64 
Additional paid-in capital200,129 195,593 
Accumulated other comprehensive loss(515)(149)
Treasury stock(80,455)(53,832)
Retained earnings42,638 37,103 
Total stockholders’ equity161,861 178,779 
Total liabilities and stockholders’ equity$191,476 $213,690 

See Accompanying Notes to Condensed Consolidated Financial Statements
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ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
 (In thousands, except per share data)
Revenue$20,292 $20,607 $52,838 $49,547 
Cost of revenue6,920 7,181 16,418 16,162 
Gross profit13,372 13,426 36,420 33,385 
Operating expenses:
General and administrative6,996 6,178 13,547 12,788 
Sales and marketing3,849 2,537 7,213 5,240 
Research and development5,431 4,424 10,342 8,926 
Total operating expenses16,276 13,139 31,102 26,954 
Income (loss) from operations(2,904)287 5,318 6,431 
Other income (expense):
Interest income166 51 227 143 
Other non-operating expense, net(60)(12)(4)(22)
Total other income, net106 39 223 121 
Income (loss) before income taxes(2,798)326 5,541 6,552 
Provision for (benefit from) income taxes(439)(743)(1,383)
Net income (loss)$(2,359)$1,069 $5,535 $7,935 
Net income (loss) per share:
Basic(0.04)0.02 0.10 0.14 
Diluted(0.04)0.02 0.10 0.13 
Number of shares used in per share calculations:
Basic56,218 57,253 56,499 57,066 
Diluted56,218 58,999 57,858 58,822 

See Accompanying Notes to Condensed Consolidated Financial Statements


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ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
 (In thousands)
Net income (loss)$(2,359)$1,069 $5,535 $7,935 
Other comprehensive loss, net of tax
Foreign currency translation adjustments15 (20)
Unrealized loss on investments(112)(38)(370)(86)
Total other comprehensive loss, net of tax(97)(33)(366)(106)
Comprehensive income (loss)$(2,456)$1,036 $5,169 $7,829 

See Accompanying Notes to Condensed Consolidated Financial Statements


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ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
 (In thousands, except shares)
Common stock
Beginning balance$64 $63 $64 $62 
Issuance of common stock, net— — — 
Ending balance64 63 64 63 
Additional paid-in capital
Beginning balance198,211 187,083 195,593 179,161 
Issuance of common stock, net222 2,638 985 8,696 
Stock-based compensation1,696 1,366 3,551 3,230 
Ending balance200,129 191,087 200,129 191,087 
Accumulated other comprehensive loss
Beginning balance(418)(20)(149)53 
Other comprehensive loss
Foreign currency translation adjustments15 (20)
Unrealized loss on investments(112)(38)(370)(86)
Total other comprehensive loss, net(97)(33)(366)(106)
Ending balance(515)(53)(515)(53)
Treasury stock
Beginning balance(61,888)(30,486)(53,832)(30,486)
Common stock repurchased(18,567)(11,554)(26,623)(11,554)
Ending balance(80,455)(42,040)(80,455)(42,040)
Retained earnings
Beginning balance44,997 29,700 37,103 22,834 
Net income (loss)(2,359)1,069 5,535 7,935 
Ending balance42,638 30,769 42,638 30,769 
Total stockholders’ equity$161,861 $179,826 $161,861 $179,826 
Common stock issued (shares)
Beginning balance63,838,567 62,877,567 63,544,419 61,798,004 
Issuance of common stock, net96,811 389,726 390,959 1,469,289 
Ending balance63,935,378 63,267,293 63,935,378 63,267,293 
Treasury stock (shares)
Beginning balance7,136,594 5,455,935 6,721,153 5,455,935 
Common stock repurchased1,010,265 656,938 1,425,706 656,938 
Ending balance8,146,859 6,112,873 8,146,859 6,112,873 
Total common stock outstanding (shares)55,788,519 57,154,420 55,788,519 57,154,420 


See Accompanying Notes to Condensed Consolidated Financial Statements
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ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,
20222021
(In thousands)
Cash flows from operating activities:
Net income$5,535 $7,935 
Adjustments to reconcile net income to cash provided by operating activities
Stock-based compensation3,604 3,341 
Depreciation and amortization3,649 2,733 
Amortization of premiums and discounts on investments507 139 
Deferred income taxes(127)(1,441)
Other non-cash adjustments(91)149 
Changes in operating assets and liabilities:
Accounts receivable, net6,704 4,193 
Contract assets194 1,356 
Inventories, net(7,905)(3,621)
Prepaid and other assets(331)(47)
Accounts payable3,063 1,237 
Accrued expenses and other liabilities(5,477)(3,999)
Contract liabilities(1,846)(434)
Net cash provided by operating activities7,479 11,541 
Cash flows from investing activities:
Maturities of marketable securities25,421 14,861 
Purchases of marketable securities(35,964)(12,034)
Capital expenditures(2,436)(2,444)
Net cash (used in) provided by investing activities(12,979)383 
Cash flows from financing activities:
Net proceeds from issuance of common stock985 8,697 
Repurchase of common stock(26,623)(11,554)
Net cash used in financing activities(25,638)(2,857)
Effect of exchange rate differences on cash, cash equivalents and restricted cash(20)
Net change in cash, cash equivalents and restricted cash(31,134)9,047 
Cash, cash equivalents and restricted cash, beginning of year74,461 94,358 
Cash, cash equivalents and restricted cash, end of period$43,327 $103,405 

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®, Ultra PX, PX®, Pressure Exchanger®, PX Pressure Exchanger® (“PX”), PX G1300, PX G, PX PowerTrain, IsoBoost®, 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, 2021 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, 2022 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, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2022 (the “2021 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 Operations, 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; useful life and valuation of equipment; 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.

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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 August 3, 2022, 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 2021 Annual Report.

Recently Issued Accounting Pronouncement Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), which provided optional expedients and exceptions for applying U.S. 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.

On July 15, 2022, the Company amended its existing credit agreement (as defined in Note 6, “Lines of Credit”) to change the reference rate for borrowings from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The Company applied ASU 2020-04 and the optional expedients at the time of this modification. The Company’s adoption of ASU 2020-04 and ASU 2021-01 on July 15, 2022, did not have a material impact on the Company’s financial condition, results of operations, and cash flows. Refer to Note 6, “Lines of Credit,” for more information.

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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 product type, by primary geographical market based on the customer “shipped to” address, and by channel customers.

The Company classifies its channel customers as follows:

Megaproject (“MPD”). MPD customers are major firms that develop, design, build, own and/or operate large-scale desalination plants.
Original Equipment Manufacturer (“OEM”). OEM customers are companies that supply equipment, packaged systems, and various operating and maintenance solutions for small to medium-sized desalination plants, utilized by commercial and industrial entities, as well as national, state and local municipalities worldwide.
Aftermarket (“AM”). AM customers are desalination plant owners and/or operators who can utilize our technology to upgrade or keep their plant running.

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 June 30, 2022Six Months Ended June 30, 2022
WaterEmerging TechnologiesTotalWaterEmerging TechnologiesTotal
(In thousands)
Product type
PXs, pumps and turbo devices, and other$20,213 $79 $20,292 $52,729 $109 $52,838 
Primary geographical market
Middle East and Africa$14,779 $79 $14,858 $36,907 $79 $36,986 
Asia2,857 — 2,857 9,603 — 9,603 
Americas1,494 — 1,494 3,795 30 3,825 
Europe1,083 — 1,083 2,424 — 2,424 
Total revenue$20,213 $79 $20,292 $52,729 $109 $52,838 
Channel
Megaproject$9,991 $79 $10,070 $33,831 $79 $33,910 
Original equipment manufacturer7,689 — 7,689 12,360 — 12,360 
Aftermarket2,533 — 2,533 6,538 30 6,568 
Total revenue$20,213 $79 $20,292 $52,729 $109 $52,838 


Energy Recovery, Inc. | Q2'2022 Form 10-Q | 8


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended June 30, 2021Six Months Ended June 30, 2021
WaterEmerging TechnologiesTotalWaterEmerging TechnologiesTotal
(In thousands)
Product type
PXs, pumps and turbo devices, and other$20,568 $39 $20,607 $49,508 $39 $49,547 
Primary geographical market
Middle East and Africa$16,401 $39 $16,440 $37,361 $39 $37,400 
Asia2,325 — 2,325 9,503 — 9,503 
Americas945 — 945 1,368 — 1,368 
Europe897 — 897 1,276 — 1,276 
Total product revenue$20,568 $39 $20,607 $49,508 $39 $49,547 
Channel
Megaproject$13,236 $39 $13,275 $36,993 $39 $37,032 
Original equipment manufacturer4,274 — 4,274 7,065 — 7,065 
Aftermarket3,058 — 3,058 5,450 — 5,450 
Total revenue$20,568 $39 $20,607 $49,508 $39 $49,547 

Contract Balances

The following table presents contract balances by category.
June 30,
2022
December 31,
2021
(In thousands)
Accounts receivable, net$13,926 $20,615 
Contract assets, current (included in prepaid expenses and other assets)299 493 
Contract liabilities:
Contract liabilities, current$1,507 $3,318 
Contract liabilities, non-current (included in other liabilities, non-current)53 88 
Total contract liabilities$1,560 $3,406 

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.
June 30,
2022
December 31,
2021
(In thousands)
Contract liabilities, beginning of year$3,406 $1,640 
Revenue recognized(2,898)(1,415)
Cash received, excluding amounts recognized as revenue during the period1,052 3,181 
Contract liabilities, end of period$1,560 $3,406 

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ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Future Performance Obligations

As of June 30, 2022, 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 RecognizedFuture Performance Obligations
(In thousands)
2022 (remaining six months)$5,497 
202312,860 
20241,472 
Total$19,829 

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ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 — Net Income (Loss) Per Share

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

Basic net income (loss) per common share excludes any dilutive effect of stock options and restricted stock units ("RSU").
Diluted net income (loss) 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 (loss) per common share.
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
(In thousands, except per share amounts)
Numerator
Net income (loss)$(2,359)$1,069 $5,535 $7,935 
Denominator (weighted average shares)
Basic common shares outstanding56,218 57,253 56,499 57,066 
Dilutive stock awards— 1,746 1,359 1,756 
Diluted common shares outstanding56,218 58,999 57,858 58,822 
Net income (loss) per share
Basic(0.04)0.02 0.10 0.14 
Diluted(0.04)0.02 0.10 0.13 

Certain shares of common stock issuable under stock awards have been omitted from the diluted net income (loss) 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 (loss) per common share.
 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
(In thousands)
Anti-dilutive stock award shares3,140 357 457 

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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.
June 30,
2022
December 31,
2021
June 30,
2021
(In thousands)
Cash and cash equivalents$43,223 $74,358 $103,302 
Restricted cash, non-current (included in other assets, non-current)104 103 103 
Total cash, cash equivalents and restricted cash$43,327 $74,461 $103,405 

Accounts Receivable, net
 June 30,
2022
December 31,
2021
(In thousands)
Accounts receivable, gross$14,026 $20,732 
Allowance for doubtful accounts(100)(117)
Accounts receivable, net$13,926 $20,615 

Inventories, net
 June 30,
2022
December 31,
2021
(In thousands)
Raw materials$11,110 $7,352 
Work in process3,809 3,406 
Finished goods13,994 10,274 
Inventories, gross28,913 21,032 
Valuation adjustments for excess and obsolete inventory(678)(649)
Inventories, net$28,235 $20,383 

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

Prepaid Expenses and Other Assets
 June 30,
2022
December 31,
2021
(In thousands)
Contract assets$299 $493 
Cloud computing arrangement implementation costs964 1,041 
Supplier advances1,914 1,717 
Other prepaid expenses and other assets2,036 1,824 
Total prepaid expenses and other assets$5,213 $5,075 
Energy Recovery, Inc. | Q2'2022 Form 10-Q | 12


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property and Equipment

During June 2022, the Company made the decision to cease the VorTeq commercialization efforts. As a result of this decision, the Company reduced the carrying value of certain fixed assets to the estimated residual value resulting in additional depreciation costs of $0.9 million during the three months ended June 30, 2022. In July 2022, these assets were sold for approximately $0.7 million.

Goodwill and Other Intangible Assets
June 30,
2022
December 31,
2021
(In thousands)
Goodwill$12,790 $12,790 
Other intangible assets, net32 37 
Total goodwill and other intangible assets$12,822 $12,827 

The Company considered the impact of the decision to cease the VorTeq commercialization efforts and determined that goodwill related to the Company’s Emerging Technologies segment was not impaired as of June 30, 2022.

Accrued Expenses and Other Liabilities
 June 30,
2022
December 31,
2021
(In thousands)
Current
Payroll, incentives and commissions payable$6,375 $10,170 
Warranty reserve897 879 
Other accrued expenses and other liabilities2,211 2,945 
Total accrued expenses and other liabilities9,483 13,994 
Other liabilities, non-current227 247 
Total accrued expenses, and current and non-current other liabilities$9,710 $14,241 

Energy Recovery, Inc. | Q2'2022 Form 10-Q | 13


Table of Contents
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 corporate notes and bonds, are classified as available-for-sale. Available-for-sale investments were 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 2021 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.

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.
June 30, 2022December 31, 2021
Pricing CategoryAmortized
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$25,663 $— $— $25,663 $50,865 $— $— $50,865 
Total cash equivalents25,663 — — 25,663 50,865 — — 50,865 
Short-term and long-term investments
Corporate notes and bonds – short-term
Level 238,862 — (383)38,479 31,371 — (39)31,332 
Corporate notes and bonds – long-term
Level 24,945 — (136)4,809 2,307 — (9)2,298 
Total short and long-term investments43,807 — (519)43,288 33,678 — (48)33,630 
Total$69,470 $— $(519)$68,951 $84,543 $— $(48)$84,495 

Energy Recovery, Inc. | Q2'2022 Form 10-Q | 14


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
    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.
 June 30, 2022December 31, 2021
 Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
(In thousands)
Corporate notes and bonds$43,288 $(519)$33,630 $(48)

Energy Recovery, Inc. | Q2'2022 Form 10-Q | 15


Table of Contents
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 June 30, 2022, there were no revolving loans outstanding. In addition, under the LCs component, the Company utilized $16.5 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.

On July 15, 2022, the Company and JPMC agreed to a modification of the Credit Agreement to change the indicated reference rate from LIBOR to SOFR. Changes in the Credit Agreement reference rate to SOFR did not materially change the provisions defined in the original Credit Agreement nor will this change materially affect the Company’s financial statements.
The following table presents the total outstanding LCs and SBLCs issued by the Company to our customers related to product warranty and performance guarantees.
June 30,
2022
December 31,
2021
(In thousands)
Outstanding letters of credit$12,781 $13,960 
Energy Recovery, Inc. | Q2'2022 Form 10-Q | 16


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 — Commitments and Contingencies

Warranty

The following table presents the changes in the Company’s accrued product warranty reserve.
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
(In thousands)
Warranty reserve balance, beginning of period$914 $811 $879 $760 
Warranty costs charged to cost of revenue77 81 202 208 
Utilization charges against reserve(19)(13)(24)(13)
Release of accrual related to expired warranties(75)(70)(160)(146)
Warranty reserve balance, end of period$897 $809 $897 $809 

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. Other than noted below, as of June 30, 2022, the Company was not involved in any material lawsuits and there were no material losses which were probable or reasonably possible.

On September 10, 2014, the Company terminated the employment of its Senior Vice President, Sales, Borja Blanco. On November 24, 2014, Mr. Blanco filed an action in the Spanish courts seeking payment of an unpaid bonus, stock options, and non-compete compensation. This action was stayed pending resolution of a separate suit, which was resolved in 2018. Upon resolution of the separate suit, the court allowed Mr. Blanco a period of 1-year to reinitiate the case, which Mr. Blanco failed to do and the court subsequently closed the case in June 2019. However, in June 2022, Mr. Blanco petitioned the court, which has subsequently reopened the case. The Company denies any allegations of wrongdoing and intends to continue to vigorously defend against this lawsuit. Based on currently available information and review with outside counsel, the Company has determined that an award to Mr. Blanco is not probable. While a loss may be reasonably possible, an estimate of loss, if any, cannot reasonably be determined at this time due to the early state of this action.

Energy Recovery, Inc. | Q2'2022 Form 10-Q | 17


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 — Income Taxes
 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
(In thousands, except percentages)
Provision for (benefit from) income taxes$(439)$(743)$$(1,383)
Discrete items204 728 803 2,355 
Provision for (benefit from) income taxes, excluding discrete items$(235)$(15)$809 $972 
Effective tax rate15.7 %(227.9 %)0.1 %(21.1 %)
Effective tax rate, excluding discrete items8.4 %(5.1 %)14.6 %14.8 %

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 and six months ended June 30, 2022, the recognized income tax expense included a benefit primarily 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. For the three and six months ended June 30, 2021, the recognized income tax benefit included the U.S. federal R&D tax credit along with a discrete tax benefit due primarily to stock-based compensation.

The effective tax rate excluding discrete items for the six months ended June 30, 2022, as compared to the prior year, was marginally lower largely related to the projected FDII benefit offset by reduced federal R&D tax credit benefit for fiscal year 2022.
Energy Recovery, Inc. | Q2'2022 Form 10-Q | 18


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 June 30, 2022Six Months Ended June 30, 2022
WaterEmerging TechnologiesTotalWaterEmerging TechnologiesTotal
(In thousands)
Revenue$20,213 $79 $20,292 $52,729 $109 $52,838 
Cost of revenue6,920 — 6,920 16,400 18 16,418 
Gross profit13,293 79 13,372 36,329 91 36,420 
Operating expenses
General and administrative1,534 1,354 2,888 2,998 2,262 5,260 
Sales and marketing2,654 633 3,287 4,955 1,160 6,115 
Research and development1,143 4,288 5,431 1,943 8,399 10,342 
Total operating expenses5,331 6,275 11,606 9,896 11,821 21,717 
Operating income (loss)$7,962 $(6,196)1,766 $26,433 $(11,730)14,703 
Less: Corporate operating expenses4,670 9,385 
Income (loss) from operations$(2,904)$5,318 

Three Months Ended June 30, 2021Six Months Ended June 30, 2021
WaterEmerging TechnologiesTotalWaterEmerging TechnologiesTotal
(In thousands)
Revenue$20,568 $39 $20,607 $49,508 $39 $49,547 
Cost of revenue7,181 — 7,181 16,162 — 16,162 
Gross profit13,387 39 13,426 33,346 39 33,385 
Operating expenses
General and administrative1,779 1,315 3,094 3,340 2,481 5,821 
Sales and marketing2,121 229 2,350 4,285 408 4,693 
Research and development595 3,829 4,424 1,096 7,830 8,926 
Total operating expenses4,495 5,373 9,868 8,721 10,719 19,440 
Operating income (loss)$8,892 $(5,334)3,558 $24,625 $(10,680)13,945 
Less: Corporate operating expenses3,271 7,514 
Income from operations$287 $6,431 

Energy Recovery, Inc. | Q2'2022 Form 10-Q | 19


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 — Concentrations

Revenue

The following table presents the Water segment customers that account for 10% or more of the Company’s Water segment revenues. Although certain customers might account for greater than 10% of revenues at any one point in time, the concentration of revenue between a limited number of customers shifts regularly, depending on timing of shipments. 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 June 30,Six Months Ended June 30,
 2022202120222021
Customer A** ** 25%**
Customer B** 30%** 22%
Customer C** 22%** 19%
Customer D24%** 15%**
Customer E14%** ** **
Customer F** ** ** 12%
Customer G** ** ** 11%
**    Zero or less than 10%.

The following table presents the Emerging Technologies segment customers that account for 10% or more of the Company’s Emerging Technologies segment revenues.
Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Customer A100%100%72%100%
Customer B** ** 28%**
Energy Recovery, Inc. | Q2'2022 Form 10-Q | 20


Table of Contents
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 — Stockholders’ Equity

Share Repurchase Program

On March 9, 2021, the Company’s Board of Directors authorized a share repurchase program under which the Company may repurchase its outstanding common stock, at the discretion of management, up to $50.0 million in aggregate cost, which includes both the share value of the acquired common stock and the fees charged in connection with acquiring the common stock (the “March 2021 Authorization”). Under the March 2021 Authorization, purchases of shares of common stock may be made from time to time in the open market, or in privately negotiated transactions, in compliance with applicable state and federal securities laws. The March 2021 Authorization does not obligate the Company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time without prior notice.

The following table presents the share repurchase activities and remaining program balance under the March 2021 Authorization as of June 30, 2022.
Number of Shares Purchased
Average Price Paid per Share(1)
Plan Activity
(In thousands)
March 2021 Authorization$50,000 
Repurchases under March 2021 Authorization2,690,924$18.55(49,969)
Remaining amount under March 2021 Authorization$31 
(1)    Excluding commissions

On July 1, 2022, the Company concluded all share repurchases under the March 2021 Authorization. As of June 30, 2022, the Company has repurchased 8,146,859 shares of its common stock at an aggregate cost of $80.5 million under all of its share repurchase programs.

Energy Recovery, Inc. | Q2'2022 Form 10-Q | 21



Table of Contents
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Energy Recovery, Inc. (the “Company”, “Energy Recovery”, “we”, “our” and “us”) designs and manufactures solutions that make industrial processes more efficient and sustainable. Leveraging our pressure exchanger technology, which generates little to no emissions when operating, our 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, we are helping companies reduce their energy consumption in their industrial processes, which in turn, reduces their carbon footprint. We believe that our customers do not have to sacrifice quality and cost savings for sustainability and are committed to developing solutions that drive long-term value – both financial and environmental.

The original product application of our technology, the PX® Pressure Exchanger® (“PX”) energy recovery device (“ERD”), was a major contributor to the advancement of seawater reverse osmosis desalination (“SWRO”), significantly lowering the energy intensity and cost of water production globally from SWRO. We have since introduced our pressure exchanger technology to the fast growing industrial wastewater filtration market, such as battery manufacturers, mining operations, and manufacturing plants that discharge wastewater with significant levels of metals and pollutants, as well as the commercial and industrial refrigeration market.

Engineering, and research and development (“R&D”), have been, and remain, an essential part of our history, culture and corporate strategy. Since our formation, we have developed leading technology and engineering expertise through the continual evolution of our pressure exchanger technology, which can enhance environmental sustainability and improve productivity by reducing waste and energy consumption in high-pressure industrial fluid-flow systems. This versatile technology works as a platform to build product applications and is at the heart of many of our products. In addition, we have engineered and developed ancillary devices, such as our hydraulic turbochargers (“Turbochargers”) and circulation “booster” pumps, that complement our ERDs.

Quarterly Highlights

IR Magazine, the independent, global voice of the investor relations profession, recently awarded Energy Recovery as the winner of the “Best ESG Reporting (small to mid-cap company)” for our 2020 ESG Report and “Best ESG Communications.” In addition, our continued ESG efforts resulted in a further increase in our Morgan Stanley Capital International (“MSCI”) ESG rating position from A to a rating of AA. For further details on our Environmental, Social and Governance (“ESG”) efforts and initiative, please refer to our website at “https://ir.energyrecovery.com/websites/energyrecover/English/6500/esg-at-energy-recovery.html#”. We have included this website address only as an inactive textual reference and do not intend it to be an active link to our website.

During June 2022, we made the decision to cease the VorTeq commercialization efforts. As a result of this decision, we reduced the carrying value of certain fixed assets to the estimated residual value resulting in additional depreciation costs of $0.9 million during the second quarter of fiscal year 2022. In July 2022, these assets were sold for approximately $0.7 million. In addition, during the second quarter, we incurred certain employee severance costs and share-based compensation expenses of $0.5 million.


Energy Recovery, Inc. | Q2'2022 Form 10-Q | 22



Table of Contents
Results of Operations

A discussion regarding our financial condition and results of operations for the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021, is presented below.

Revenue

Variability in revenue from quarter to quarter is typical, therefore year-on-year quarterly and year-to-date comparisons are not necessarily indicative of the trend for the full year due to these variations.

Revenues by channel customers are presented in the following tables.
Three Months Ended June 30,
20222021
$% of Revenue$% of RevenueChange
(In thousands, except percentages)
Megaproject$10,070 50 %$13,275 64 %$(3,205)(24 %)
Original equipment manufacturer7,689 38 %4,274 21 %3,415 80 %
Aftermarket2,533 12 %3,058 15 %(525)(17 %)
Total revenue$20,292 100 %$20,607 100 %$(315)(2 %)

Six Months Ended June 30,
20222021
$% of Revenue$% of RevenueChange
(In thousands, except percentages)
Megaproject$33,910 64 %$37,032 75 %$(3,122)(8 %)
Original equipment manufacturer12,360 23 %7,065 14 %5,295 75 %
Aftermarket6,568 13 %5,450 11 %1,118 21 %
Total revenues$52,838 100 %$49,547 100 %$3,291 %

The Megaproject (“MPD”) channel has been the main driver of our long-term growth as revenue from this channel benefits from the growing number of projects as well as an increase in the capacity of these projects. Comparative differences over the prior year’s revenue were subject to timing of delivery of PXs, which is dependent on the MPD shipment cycle which is project specific. The lower revenues for the three and six months ended June 30, 2022, were due primarily to lower shipments of PXs.

The Original Equipment Manufacturer (“OEM”) channel, where we sell into a number of industries, including tourism and hospitality, contains projects of shorter duration. For the revenues in the three and six months ended June 30, 2022, the increases in SWRO OEM revenues were due primarily to increased project sizes in America, Europe, Middle East and Africa regions, as well as the reactivation of suspended and delayed projects due to the onset of the novel coronavirus (“COVID-19”). In addition, in the three and six months ended June 30, 2022, industrial wastewater OEM channel revenues, which were minimal in the prior year, accounted for 15.7% and 13.2% of the total OEM revenues.

The Aftermarket (“AM”) channel revenues generally fluctuate from year-to-year depending on support and services rendered to our installed customer base. In the three months ended June 30, 2022, we experienced a decrease in sales of spare parts and components. In the six months ended June 30, 2022, we experienced increased sales of product, primarily in the first quarter of the fiscal year, which we believe is a result of our customers consuming their existing spare parts inventory and strategically increasing their stock of critical components in advance of greater expected water needs in the near future. The AM channel had higher year-to-date revenues related to spare parts consumption in the Asia and America regions.

Energy Recovery, Inc. | Q2'2022 Form 10-Q | 23



Table of Contents
Gross Profit and Gross Margin

Gross profit represents our revenue less our cost of revenue. Our cost of revenue consists primarily of raw materials, personnel costs (including share-based compensation), manufacturing overhead, warranty costs, depreciation expense and manufactured components.
 Three Months Ended June 30,
 20222021
$Gross Margin$Gross MarginChange in Product Gross Profit
(In thousands, except percentages)
Gross profit and gross margin$13,372 65.9 %$13,426 65.1 %$(54)(0.4 %)

 Six Months Ended June 30,
 20222021
$Gross Margin$Gross MarginChange in Product Gross Profit
(In thousands, except percentages)