Energy Recovery ERII Form 10-Q filing Q2 FY2026

Page No.

PART I

FINANCIAL INFORMATION

Item 1 Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets — June 30, 2026 and December 31, 2025 1

Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2026 and 2025 2

Condensed Consolidated Statements of ComprehensiveIncome (Loss) — Three and Six Months Ended June 30, 2026 and 2025 3

Condensed Consolidated Statements of Stockholders’Equity — Three and Six Months Ended June 30, 2026 and 2025 4

Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2026 and 2025 5

Notes to Condensed Consolidated Financial Statements 6

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 24

Item 3 Quantitative and Qualitative Disclosures About Market Risk 33

Item 4 Controls and Procedures 34

PART II

OTHER INFORMATION

Item 1 Legal Proceedings 35

Item 1A Risk Factors 35

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 37

Item 3 Defaults Upon Senior Securities 37

Item 4 Mine Safety Disclosures 38

Item 5 Other Information 38

Item 6 Exhibits 39

Exhibit Index 39

Signatures 40

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | FLS 1

Report on Form 10-Q.

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements (unaudited)

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

See Accompanying Notes to Condensed Consolidated Financial Statements

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 5

See Accompanying Notes to Condensed Consolidated Financial Statements

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 6

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 world-

class energy-saving technology for critical infrastructure that communities rely on every day, driving a more resilient and sustainable future.

Leveraging the Company’s pressure exchanger technology, which generates little to no emissions when operating, the Company believes its

solutions lower costs, save energy, reduce waste, and minimize emissions for companies across a variety of commercial and 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 the Company is committed to developing solutions that drive

long-term value – both financial and environmental. The Company’s solutions are marketed, sold in, and developed for, the fluid-flow and

gas markets, such as seawater and wastewater desalination, natural gas, chemical processing and CO2-based refrigeration systems, under

the trademarks ERI®, PX®, Pressure Exchanger®, PX® Pressure Exchanger® (“PX”), Ultra High-Pressure 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, 2025 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, 2026 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, 2025 included in the Company’s Annual

Report on Form 10-K filed with the SEC on February 25, 2026 (the “2025 Annual Report”).

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 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; stock-based compensation expense;

equipment useful life and valuation; goodwill valuation and impairment; inventory valuation and allowances, 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.

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 5, 2026, 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 publicly update 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 - Significant Accounting Policies,” of the Notes to Consolidated Financial Statements included in Item 8,

“Financial Statements and Supplementary Data,” of the 2025 Annual Report.

Recently Adopted Accounting Pronouncement

In July 2025, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2025-05, Measurement of

Credit Losses for Accounts Receivable and Contract Assets (“ASU 2025-05”). ASU 2025-05 provides a practical expedient for measuring

expected credit losses on current accounts receivables and contract assets by assuming that conditions at the balance sheet date remain

unchanged over the life of the asset. The Company adopted ASU 2025-05 on January 1, 2026 and the adoption did not have a material

impact on the Company’s results of operations, cash flows, or financial condition.

Recently Issued Accounting Pronouncements Not Yet Adopted

There have been no issued accounting pronouncements that have not yet been adopted during the six months ended June 30, 2026

that apply to the Company other than the pronouncements disclosed in Note 1, “Description of Business and Significant Accounting Policies -

Recently Issued Accounting Pronouncements Not Yet Adopted,” of the Notes to Consolidated Financial Statements included in Item 8,

“Financial Statements and Supplementary Data,” of the 2025 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.

1Corporate and Other includes amounts not allocated to segments, which includes revenue associated with what was previously the

Emerging Technologies segment.

1Corporate and Other includes amounts not allocated to segments, which includes revenue associated with what was previously the

Emerging Technologies segment.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contract Balances

The following table presents contract balances by category.

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 the change in contract liability balances during the reported periods.

Remaining Performance Obligations

As of June 30, 2026, the following table presents the revenue that is expected to be recognized related to performance obligations that are unsatisfied or partially unsatisfied. These amounts exclude the value of remaining performance obligations for contracts with an

original expected delivery date of one year or less.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 — Income (Loss) Per Share

Net income (loss) for the reported period is divided by the weighted average number of basic and diluted common shares outstanding

during the reported period to calculate the basic and diluted income (loss) per share, respectively. Outstanding stock options to purchase

common shares, unvested restricted stock units (“RSUs”), and unvested performance restricted stock units (“PRSUs”) are collectively

referred to as “equity awards.”

• Basic income (loss) per share is computed using the weighted average number of common shares outstanding during the period.
• Diluted income (loss) per share is computed using the weighted average number of common and potentially dilutive shares

outstanding during the period, using the treasury stock method. Any anti-dilutive effect of equity awards outstanding is not

included in the computation of diluted income (loss) per share.

The following tables present the computation of basic and diluted income (loss) per share.

The following tables present the equity awards that are excluded from diluted income (loss) per share because (i) their effect would

have been anti-dilutive, or (ii) the equity awards were contingent upon conditions for issuance which were not satisfied as of June 30, 2026.

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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 for each period within the Condensed Consolidated Balance

Sheets and the Condensed Consolidated Statements of Cash Flows that sum to the total of such amounts.

Inventories, net

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.

In February 2026, the Company wound down operations of the CO2 retail grocery business within its Emerging Technologies segment due to a fundamental change in the outlook of the business. The Company considered the wind down to be an indicator of

impairment and performed a quantitative impairment test using the discounted cash flow approach and market approach. Based on the

results of the analysis, the Company determined that the carrying value of the reporting unit exceeded its fair value and recorded an

impairment charge of $1.7 million during the six months ended June 30, 2026. No impairment charges were recorded during the three

months ended June 30, 2026.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accrued Expenses and Other Liabilities

Restructuring

2024 Restructuring Plan

During the fourth quarter of fiscal year 2024, the Company implemented a restructuring plan which included reductions primarily within the G&A function, in order to lower the Company’s operating cost structure, and to position the Company for profitable growth. The Company

recorded a restructuring charge of approximately $2.8 million in total, of which $0.5 million was recorded during the six months ended June

30, 2025. No restructuring charges were recorded during the three months ended June 30, 2025. The total restructuring charge recorded

relates to severance and benefits, including reemployment assistance, for 38 terminated employees, which was approximately 15% of the

Company’s workforce. The restructuring plan was complete as of December 31, 2025. All expenses associated with the Company’s

restructuring plan are included in “Restructuring charges” in the Condensed Consolidated Statements of Operations.

2026 Restructuring Plan

During the first quarter of fiscal year 2026, the Company wound down operations of the CO2 retail grocery business within its

Emerging Technologies segment due to a fundamental change in the outlook of the business. The Company recorded a restructuring charge

of approximately $2.4 million during the six months ended June 30, 2026, of which $0.9 million was recorded during the three months ended

June 30, 2026. The restructuring charge recorded relates to severance and benefits, including reemployment assistance, for 23 terminated

employees. In addition, during the six months ended June 30, 2026, the Company incurred other related charges associated with the wind

down of the CO2 retail grocery business, including excess and obsolescence reserves taken on CO2 inventory of approximately $1.6 million

and impairment of goodwill of approximately $1.7 million, which are included in “Restructuring - inventory reserve” and “Impairment of

goodwill” in the Condensed Consolidated Statements of Operations, respectively. The Company did not incur any excess and obsolescence

reserves or impairments of goodwill during the three months ended June 30, 2026. Refer to section Goodwill within this footnote for additional

information. The restructuring plan was substantially complete by the end of the second quarter of fiscal year 2026 and the Company does

not expect to incur significant additional expenses related to the restructuring.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the change in the Company’s restructuring accrual balances, which is included within Accrued expenses

and other liabilities on the Condensed Consolidated Balance Sheets, during the six months ended June 30, 2026:

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 — Investments and Fair Value Measurements

Fair Value of Financial Instruments

The following table presents the Company’s financial assets measured on a recurring basis by contractual maturity, including pricing

category, amortized cost and fair value. Gross unrealized gains and losses were not material for the periods presented. As of June 30, 2026

and December 31, 2025, the Company had no financial liabilities and no Level 3 financial assets.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 — Lines of Credit

Credit Agreement

The Company entered into a credit agreement with JPMorgan Chase Bank, N.A. on December 22, 2021 (as amended, the “Credit

Agreement”). The Credit Agreement was amended on January 21, 2026 to extend the expiration date from December 21, 2026 to

January 21, 2031. The Credit Agreement 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, 2026, there were no revolving loans outstanding. In addition, under the LCs component,

as of June 30, 2026 and December 31, 2025, the Company utilized $20.0 million and $20.4 million, respectively, of the maximum allowable

credit line of $30.0 million, which includes newly issued LCs and previously issued and unexpired stand-by letters of credit (“SBLCs”).

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 — Commitments and Contingencies

Sublease

On March 10, 2025, the Company entered into an agreement to sublease its Katy, Texas operating lease. The sublease commenced

on March 10, 2025 and will expire on December 31, 2029. The sublease is classified as an operating lease and has a remaining lease term

of 3.5 years as of June 30, 2026. Sublease income was immaterial during the six months ended June 30, 2026 and 2025, and is recorded as

a reduction of lease expense in general and administrative within the Company’s Condensed Consolidated Statements of Operations.

The Company considered the sublease to be an indicator of impairment of the original lease. The Company compared the

undiscounted cash flows from the sublease to the carrying value of the Katy, Texas operating lease, which included the associated right-of-

use asset and leasehold improvements. The Company concluded that the carrying value was not recoverable as it exceeded the estimated

undiscounted cash flows.

The Company calculated the impairment charge by comparing the carrying value of the Katy, Texas operating lease to its fair value,

which was calculated based on the net discounted cash flows associated with the sublease. The Company recorded a total impairment

charge of $0.4 million during the six months ended June 30, 2025, of which $0.2 million and $0.2 million was recorded against the right-of-

use asset and the associated leasehold improvements, respectively. No impairment charges were incurred during the three months ended

June 30, 2025. The allocation of the impairment charge was based on the relative carrying value of the assets. The impairment charge was

recorded in general and administrative within the Company’s Condensed Consolidated Statements of Operations.

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 June 30, 2026, 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 estimable and accordingly, the Company did not record a provision for

litigation as of June 30, 2026 and December 31, 2025.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 — Income Taxes

The Company’s interim period tax benefit from income taxes 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, the applicability of special tax regimes, and changes in

how the Company does business.

For the three and six months ended June 30, 2026, the recognized benefit from income taxes resulted from the tax projection based

on the full year forecast and included benefits related to the U.S. federal research and development (“R&D”) tax credit, reduced by certain

permanent differences, such as non-deductible stock-based compensation as well as an increase in the California valuation allowance for

California R&D tax credits.

For the three and six months ended June 30, 2025, the recognized provision for and (benefit from) income taxes, respectively,

resulted from the tax projection based on the full year forecasted profit and included benefits related to the U.S. federal foreign-derived

intangible income (“FDII”), federal R&D tax credit, certain permanent differences, such as stock-based compensation shortfalls, and partial

release of California valuation allowance.

The effective tax rate excluding discrete items for the three months ended June 30, 2026, as compared to the prior year, differed

primarily due to a change in the full year forecast for 2026, with the projection that the Company will not generate any tax incentives from the

U.S. federal foreign-derived intangible income (“FDDEI”), previously called “FDII”, in 2026, combined with non-deductible expenses, most of

which relates to non-deductible stock-based compensation and an increase in the state valuation allowance as a result of the change in

forecast.

The effective tax rate excluding discrete items for the six months ended June 30, 2026, as compared to the prior year, differed

primarily due to the projection that the Company will not generate the FDDEI deduction in 2026 due to the Company’s forecasted loss in

On July 4, 2025, the One Big Beautiful Bill (“OBBBA”) Act, which includes a broad range of tax reform provisions, was signed into law

in the United States. During the three and six months ended June 30, 2026, the Company recorded its best estimate of the impact of the

OBBBA on the income tax provision. The Company will continue to evaluate the elections available within the OBBBA, which may impact the timing of permanent and temporary differences within the Company’s tax provision.

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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 Interim President and 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.

During the six months ended June 30, 2026, the Company changed the composition of its reportable segments to better reflect how the CODM manages the business. During the first quarter of fiscal 2026, the Water segment was separated into two segments, the

Desalination segment and the Wastewater segment, as both met the criteria of a reportable segment. During the first quarter of fiscal 2026,

the CO2 retail grocery business within the Emerging Technologies segment was wound-down, which resulted in the Emerging Technologies

segment no longer meeting the criteria of a reportable segment as of the second quarter of fiscal 2026. As a result, revenue and expenses

associated with the former Emerging Technologies segment have been included within Corporate and Other. Prior periods have been recast

to conform to the current year presentation. The recast of prior year information had no impact on the Company’s Condensed Consolidated

Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss)

and Condensed Consolidated Statements of Cash Flows.

Segment Definition

Income and type of expense activities that are included in the Desalination, Wastewater and Corporate and Other are as follows:

Desalination segment: The continued development, sales and support of the PX, hydraulic turbochargers and pumps used in

seawater desalination treatment facilities.

Wastewater segment: The continued development, sales and support of the PX, hydraulic turbochargers and pumps used in

wastewater treatment facilities.

Corporate and Other: The Corporate and Other include certain unallocated expenses outside of the operating segments, such

as audit and accounting services, legal services, board of director fees and expenses, human resources activities, information

systems activities and other separately managed general expenses not related to the identified segments. In addition,

Corporate and Other includes the development costs, sales and support of activities related to Emerging Technologies as this

segment no longer met the criteria of a reportable segment as of June 30, 2026.

The following tables present a summary of the Company’s financial information by segment, including significant segment expenses,

and corporate operating expenses.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 — Concentrations

Revenue by Country

The following tables present the Company’s product revenue by country.

**Zero or less than 10%.

(1) Countries representing more than 10% of product revenues for the periods presented.

(2) Countries in the aggregate, individually representing less than 10% of product revenues for the periods presented.

Customer Revenue Concentration

The following tables present the customers that account for 10% or more of the Company’s revenue and their related segment for each of the periods presented. Although certain customers might account for greater than 10% of the Company’s revenue at any one point in

time, the concentration of revenue between a limited number of customers shifts regularly, depending on when revenue is recognized. The

percentages by customer reflect specific relationships or contracts that would concentrate revenue for the periods presented and do not

indicate a trend specific to any one customer.

**Zero or less than 10%.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 — Stockholders’ Equity

Share Repurchase Programs

The Company’s Board, from time-to-time, has authorized share repurchase programs under which the Company may, at the discretion of management, repurchase its outstanding common stock in the open market, or in privately negotiated transactions, in

compliance with applicable state and federal securities laws. The timing and amounts of any purchase under the Company’s share

repurchase programs is based on market conditions and other factors including price, regulatory requirements, and capital availability. The

Company accounts for stock repurchases under these programs using the cost method. As of June 30, 2026, the Company has repurchased

15,917,012 shares of its common stock at an aggregate cost of $186.8 million under all share repurchase programs.

February 2025 Authorization

On February 26, 2025, the Company announced that the Board authorized a share repurchase program under which the Company

may repurchase its outstanding common stock, at the discretion of management, for up to $30.0 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 “February 2025

Authorization”). On August 19, 2025, the Company concluded all share repurchases under the February 2025 Authorization. Under the

February 2025 Authorization, the Company repurchased 2,183,648 shares at an aggregate cost of $30.0 million.

August 2025 Authorization

On August 6, 2025, the Company announced that the Board authorized a share repurchase program under which the Company may

repurchase its outstanding common stock, at the discretion of management, for up to $25.0 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 “August 2025

Authorization”). The August 2025 Authorization expired in May 2026. Under the August 2025 Authorization, the Company repurchased

2,179,419 shares at an aggregate cost of $25.0 million.

The following table presents the share repurchase activities under the August 2025 Authorization as of June 30, 2026.

(1) Excluding commissions

Of the 2,179,419 shares purchased, 832,550 and 1,792,853 were purchased during the three and six months ended June 30, 2026

for $8.7 million and $19.3 million, respectively.

May 2026 Authorization

On May 6, 2026, the Company announced that the Board authorized a share repurchase program under which the Company may

repurchase its outstanding common stock, at the discretion of management, for up to $25.0 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 “May 2026

Authorization”). The May 2026 Authorization will expire in April 2027. The Company began to purchase under the May 2026 Authorization in

May 2026.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the share repurchase activities under the May 2026 Authorization as of June 30, 2026.

(1) Excluding commissions

All 156,900 shares were purchased during the three and six months ended June 30, 2026 for $1.3 million.

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ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 — Subsequent Events

In July 2026, the Company entered into a lease agreement for a manufacturing facility in Saudi Arabia with a noncancellable lease

term of approximately five years. The lease commenced in July 2026.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 24

Item 1F. Financial Statements (Unaudited)

Item 1 — Financial Statements (unaudited)

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

See Accompanying Notes to Condensed Consolidated Financial Statements

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ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

See Accompanying Notes to Condensed Consolidated Financial Statements

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 5

See Accompanying Notes to Condensed Consolidated Financial Statements

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 6

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 world-

class energy-saving technology for critical infrastructure that communities rely on every day, driving a more resilient and sustainable future.

Leveraging the Company’s pressure exchanger technology, which generates little to no emissions when operating, the Company believes its

solutions lower costs, save energy, reduce waste, and minimize emissions for companies across a variety of commercial and 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 the Company is committed to developing solutions that drive

long-term value – both financial and environmental. The Company’s solutions are marketed, sold in, and developed for, the fluid-flow and

gas markets, such as seawater and wastewater desalination, natural gas, chemical processing and CO2-based refrigeration systems, under

the trademarks ERI®, PX®, Pressure Exchanger®, PX® Pressure Exchanger® (“PX”), Ultra High-Pressure 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, 2025 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, 2026 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, 2025 included in the Company’s Annual

Report on Form 10-K filed with the SEC on February 25, 2026 (the “2025 Annual Report”).

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 certain notes to the Condensed Consolidated Financial Statements to conform to the current period presentation.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 7

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; stock-based compensation expense;

equipment useful life and valuation; goodwill valuation and impairment; inventory valuation and allowances, 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.

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 5, 2026, 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 publicly update 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 - Significant Accounting Policies,” of the Notes to Consolidated Financial Statements included in Item 8,

“Financial Statements and Supplementary Data,” of the 2025 Annual Report.

Recently Adopted Accounting Pronouncement

In July 2025, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2025-05, Measurement of

Credit Losses for Accounts Receivable and Contract Assets (“ASU 2025-05”). ASU 2025-05 provides a practical expedient for measuring

expected credit losses on current accounts receivables and contract assets by assuming that conditions at the balance sheet date remain

unchanged over the life of the asset. The Company adopted ASU 2025-05 on January 1, 2026 and the adoption did not have a material

impact on the Company’s results of operations, cash flows, or financial condition.

Recently Issued Accounting Pronouncements Not Yet Adopted

There have been no issued accounting pronouncements that have not yet been adopted during the six months ended June 30, 2026

that apply to the Company other than the pronouncements disclosed in Note 1, “Description of Business and Significant Accounting Policies -

Recently Issued Accounting Pronouncements Not Yet Adopted,” of the Notes to Consolidated Financial Statements included in Item 8,

“Financial Statements and Supplementary Data,” of the 2025 Annual Report.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 8

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.

1Corporate and Other includes amounts not allocated to segments, which includes revenue associated with what was previously the

Emerging Technologies segment.

1Corporate and Other includes amounts not allocated to segments, which includes revenue associated with what was previously the

Emerging Technologies segment.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 9

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contract Balances

The following table presents contract balances by category.

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 the change in contract liability balances during the reported periods.

Remaining Performance Obligations

As of June 30, 2026, the following table presents the revenue that is expected to be recognized related to performance obligations that are unsatisfied or partially unsatisfied. These amounts exclude the value of remaining performance obligations for contracts with an

original expected delivery date of one year or less.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 10

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 — Income (Loss) Per Share

Net income (loss) for the reported period is divided by the weighted average number of basic and diluted common shares outstanding

during the reported period to calculate the basic and diluted income (loss) per share, respectively. Outstanding stock options to purchase

common shares, unvested restricted stock units (“RSUs”), and unvested performance restricted stock units (“PRSUs”) are collectively

referred to as “equity awards.”

• Basic income (loss) per share is computed using the weighted average number of common shares outstanding during the period.
• Diluted income (loss) per share is computed using the weighted average number of common and potentially dilutive shares

outstanding during the period, using the treasury stock method. Any anti-dilutive effect of equity awards outstanding is not

included in the computation of diluted income (loss) per share.

The following tables present the computation of basic and diluted income (loss) per share.

The following tables present the equity awards that are excluded from diluted income (loss) per share because (i) their effect would

have been anti-dilutive, or (ii) the equity awards were contingent upon conditions for issuance which were not satisfied as of June 30, 2026.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 11

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 for each period within the Condensed Consolidated Balance

Sheets and the Condensed Consolidated Statements of Cash Flows that sum to the total of such amounts.

Inventories, net

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.

In February 2026, the Company wound down operations of the CO2 retail grocery business within its Emerging Technologies segment due to a fundamental change in the outlook of the business. The Company considered the wind down to be an indicator of

impairment and performed a quantitative impairment test using the discounted cash flow approach and market approach. Based on the

results of the analysis, the Company determined that the carrying value of the reporting unit exceeded its fair value and recorded an

impairment charge of $1.7 million during the six months ended June 30, 2026. No impairment charges were recorded during the three

months ended June 30, 2026.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 12

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accrued Expenses and Other Liabilities

Restructuring

2024 Restructuring Plan

During the fourth quarter of fiscal year 2024, the Company implemented a restructuring plan which included reductions primarily within the G&A function, in order to lower the Company’s operating cost structure, and to position the Company for profitable growth. The Company

recorded a restructuring charge of approximately $2.8 million in total, of which $0.5 million was recorded during the six months ended June

30, 2025. No restructuring charges were recorded during the three months ended June 30, 2025. The total restructuring charge recorded

relates to severance and benefits, including reemployment assistance, for 38 terminated employees, which was approximately 15% of the

Company’s workforce. The restructuring plan was complete as of December 31, 2025. All expenses associated with the Company’s

restructuring plan are included in “Restructuring charges” in the Condensed Consolidated Statements of Operations.

2026 Restructuring Plan

During the first quarter of fiscal year 2026, the Company wound down operations of the CO2 retail grocery business within its

Emerging Technologies segment due to a fundamental change in the outlook of the business. The Company recorded a restructuring charge

of approximately $2.4 million during the six months ended June 30, 2026, of which $0.9 million was recorded during the three months ended

June 30, 2026. The restructuring charge recorded relates to severance and benefits, including reemployment assistance, for 23 terminated

employees. In addition, during the six months ended June 30, 2026, the Company incurred other related charges associated with the wind

down of the CO2 retail grocery business, including excess and obsolescence reserves taken on CO2 inventory of approximately $1.6 million

and impairment of goodwill of approximately $1.7 million, which are included in “Restructuring - inventory reserve” and “Impairment of

goodwill” in the Condensed Consolidated Statements of Operations, respectively. The Company did not incur any excess and obsolescence

reserves or impairments of goodwill during the three months ended June 30, 2026. Refer to section Goodwill within this footnote for additional

information. The restructuring plan was substantially complete by the end of the second quarter of fiscal year 2026 and the Company does

not expect to incur significant additional expenses related to the restructuring.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 13

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the change in the Company’s restructuring accrual balances, which is included within Accrued expenses

and other liabilities on the Condensed Consolidated Balance Sheets, during the six months ended June 30, 2026:

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 14

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 — Investments and Fair Value Measurements

Fair Value of Financial Instruments

The following table presents the Company’s financial assets measured on a recurring basis by contractual maturity, including pricing

category, amortized cost and fair value. Gross unrealized gains and losses were not material for the periods presented. As of June 30, 2026

and December 31, 2025, the Company had no financial liabilities and no Level 3 financial assets.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 15

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. on December 22, 2021 (as amended, the “Credit

Agreement”). The Credit Agreement was amended on January 21, 2026 to extend the expiration date from December 21, 2026 to

January 21, 2031. The Credit Agreement 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, 2026, there were no revolving loans outstanding. In addition, under the LCs component,

as of June 30, 2026 and December 31, 2025, the Company utilized $20.0 million and $20.4 million, respectively, of the maximum allowable

credit line of $30.0 million, which includes newly issued LCs and previously issued and unexpired stand-by letters of credit (“SBLCs”).

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 16

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 — Commitments and Contingencies

Sublease

On March 10, 2025, the Company entered into an agreement to sublease its Katy, Texas operating lease. The sublease commenced

on March 10, 2025 and will expire on December 31, 2029. The sublease is classified as an operating lease and has a remaining lease term

of 3.5 years as of June 30, 2026. Sublease income was immaterial during the six months ended June 30, 2026 and 2025, and is recorded as

a reduction of lease expense in general and administrative within the Company’s Condensed Consolidated Statements of Operations.

The Company considered the sublease to be an indicator of impairment of the original lease. The Company compared the

undiscounted cash flows from the sublease to the carrying value of the Katy, Texas operating lease, which included the associated right-of-

use asset and leasehold improvements. The Company concluded that the carrying value was not recoverable as it exceeded the estimated

undiscounted cash flows.

The Company calculated the impairment charge by comparing the carrying value of the Katy, Texas operating lease to its fair value,

which was calculated based on the net discounted cash flows associated with the sublease. The Company recorded a total impairment

charge of $0.4 million during the six months ended June 30, 2025, of which $0.2 million and $0.2 million was recorded against the right-of-

use asset and the associated leasehold improvements, respectively. No impairment charges were incurred during the three months ended

June 30, 2025. The allocation of the impairment charge was based on the relative carrying value of the assets. The impairment charge was

recorded in general and administrative within the Company’s Condensed Consolidated Statements of Operations.

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 June 30, 2026, 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 estimable and accordingly, the Company did not record a provision for

litigation as of June 30, 2026 and December 31, 2025.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 17

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 — Income Taxes

The Company’s interim period tax benefit from income taxes 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, the applicability of special tax regimes, and changes in

how the Company does business.

For the three and six months ended June 30, 2026, the recognized benefit from income taxes resulted from the tax projection based

on the full year forecast and included benefits related to the U.S. federal research and development (“R&D”) tax credit, reduced by certain

permanent differences, such as non-deductible stock-based compensation as well as an increase in the California valuation allowance for

California R&D tax credits.

For the three and six months ended June 30, 2025, the recognized provision for and (benefit from) income taxes, respectively,

resulted from the tax projection based on the full year forecasted profit and included benefits related to the U.S. federal foreign-derived

intangible income (“FDII”), federal R&D tax credit, certain permanent differences, such as stock-based compensation shortfalls, and partial

release of California valuation allowance.

The effective tax rate excluding discrete items for the three months ended June 30, 2026, as compared to the prior year, differed

primarily due to a change in the full year forecast for 2026, with the projection that the Company will not generate any tax incentives from the

U.S. federal foreign-derived intangible income (“FDDEI”), previously called “FDII”, in 2026, combined with non-deductible expenses, most of

which relates to non-deductible stock-based compensation and an increase in the state valuation allowance as a result of the change in

forecast.

The effective tax rate excluding discrete items for the six months ended June 30, 2026, as compared to the prior year, differed

primarily due to the projection that the Company will not generate the FDDEI deduction in 2026 due to the Company’s forecasted loss in

On July 4, 2025, the One Big Beautiful Bill (“OBBBA”) Act, which includes a broad range of tax reform provisions, was signed into law

in the United States. During the three and six months ended June 30, 2026, the Company recorded its best estimate of the impact of the

OBBBA on the income tax provision. The Company will continue to evaluate the elections available within the OBBBA, which may impact the timing of permanent and temporary differences within the Company’s tax provision.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (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 Interim President and 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.

During the six months ended June 30, 2026, the Company changed the composition of its reportable segments to better reflect how the CODM manages the business. During the first quarter of fiscal 2026, the Water segment was separated into two segments, the

Desalination segment and the Wastewater segment, as both met the criteria of a reportable segment. During the first quarter of fiscal 2026,

the CO2 retail grocery business within the Emerging Technologies segment was wound-down, which resulted in the Emerging Technologies

segment no longer meeting the criteria of a reportable segment as of the second quarter of fiscal 2026. As a result, revenue and expenses

associated with the former Emerging Technologies segment have been included within Corporate and Other. Prior periods have been recast

to conform to the current year presentation. The recast of prior year information had no impact on the Company’s Condensed Consolidated

Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss)

and Condensed Consolidated Statements of Cash Flows.

Segment Definition

Income and type of expense activities that are included in the Desalination, Wastewater and Corporate and Other are as follows:

Desalination segment: The continued development, sales and support of the PX, hydraulic turbochargers and pumps used in

seawater desalination treatment facilities.

Wastewater segment: The continued development, sales and support of the PX, hydraulic turbochargers and pumps used in

wastewater treatment facilities.

Corporate and Other: The Corporate and Other include certain unallocated expenses outside of the operating segments, such

as audit and accounting services, legal services, board of director fees and expenses, human resources activities, information

systems activities and other separately managed general expenses not related to the identified segments. In addition,

Corporate and Other includes the development costs, sales and support of activities related to Emerging Technologies as this

segment no longer met the criteria of a reportable segment as of June 30, 2026.

The following tables present a summary of the Company’s financial information by segment, including significant segment expenses,

and corporate operating expenses.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 19

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 20

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 — Concentrations

Revenue by Country

The following tables present the Company’s product revenue by country.

**Zero or less than 10%.

(1) Countries representing more than 10% of product revenues for the periods presented.

(2) Countries in the aggregate, individually representing less than 10% of product revenues for the periods presented.

Customer Revenue Concentration

The following tables present the customers that account for 10% or more of the Company’s revenue and their related segment for each of the periods presented. Although certain customers might account for greater than 10% of the Company’s revenue at any one point in

time, the concentration of revenue between a limited number of customers shifts regularly, depending on when revenue is recognized. The

percentages by customer reflect specific relationships or contracts that would concentrate revenue for the periods presented and do not

indicate a trend specific to any one customer.

**Zero or less than 10%.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 21

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 — Stockholders’ Equity

Share Repurchase Programs

The Company’s Board, from time-to-time, has authorized share repurchase programs under which the Company may, at the discretion of management, repurchase its outstanding common stock in the open market, or in privately negotiated transactions, in

compliance with applicable state and federal securities laws. The timing and amounts of any purchase under the Company’s share

repurchase programs is based on market conditions and other factors including price, regulatory requirements, and capital availability. The

Company accounts for stock repurchases under these programs using the cost method. As of June 30, 2026, the Company has repurchased

15,917,012 shares of its common stock at an aggregate cost of $186.8 million under all share repurchase programs.

February 2025 Authorization

On February 26, 2025, the Company announced that the Board authorized a share repurchase program under which the Company

may repurchase its outstanding common stock, at the discretion of management, for up to $30.0 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 “February 2025

Authorization”). On August 19, 2025, the Company concluded all share repurchases under the February 2025 Authorization. Under the

February 2025 Authorization, the Company repurchased 2,183,648 shares at an aggregate cost of $30.0 million.

August 2025 Authorization

On August 6, 2025, the Company announced that the Board authorized a share repurchase program under which the Company may

repurchase its outstanding common stock, at the discretion of management, for up to $25.0 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 “August 2025

Authorization”). The August 2025 Authorization expired in May 2026. Under the August 2025 Authorization, the Company repurchased

2,179,419 shares at an aggregate cost of $25.0 million.

The following table presents the share repurchase activities under the August 2025 Authorization as of June 30, 2026.

(1) Excluding commissions

Of the 2,179,419 shares purchased, 832,550 and 1,792,853 were purchased during the three and six months ended June 30, 2026

for $8.7 million and $19.3 million, respectively.

May 2026 Authorization

On May 6, 2026, the Company announced that the Board authorized a share repurchase program under which the Company may

repurchase its outstanding common stock, at the discretion of management, for up to $25.0 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 “May 2026

Authorization”). The May 2026 Authorization will expire in April 2027. The Company began to purchase under the May 2026 Authorization in

May 2026.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 22

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the share repurchase activities under the May 2026 Authorization as of June 30, 2026.

(1) Excluding commissions

All 156,900 shares were purchased during the three and six months ended June 30, 2026 for $1.3 million.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 23

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 — Subsequent Events

In July 2026, the Company entered into a lease agreement for a manufacturing facility in Saudi Arabia with a noncancellable lease

term of approximately five years. The lease commenced in July 2026.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 24

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, we believe our solutions lower costs, save energy, reduce waste, and minimize emissions for companies across a variety of

commercial and 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 we 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, 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. Our pressure exchanger technology is being applied to the wastewater filtration market, such as

battery manufacturers, mining operations, municipalities, and other manufacturing plants that discharge wastewater with significant levels of

metals and pollutants.

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

and circulation “booster” pumps, that complement our energy recovery devices.

Segments

Our reportable operating segments consist of the Desalination and Wastewater segments. These segments are based on the

industries in which the technology solutions are sold, the type of energy recovery device or other technology sold and the related solution and

service. Other factors for determining the reportable operating segments include the manner in which our Chief Operating Decision Maker

(“CODM”), our Interim President and Chief Executive Officer, evaluates our performance combined with the nature of the individual business

activities. In addition, our Corporate and Other include expenditures in support of the Desalination and Wastewater segments, as well as

revenue and expenditures associated with the former Emerging Technologies segment. We continue to monitor and review our segment

reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our

reportable segments.

During the six months ended June 30, 2026, we changed the composition of our reportable segments to better reflect how the CODM

manages the business. During the fist quarter of fiscal 2026, the Water segment was separated into two segments, the Desalination segment

and the Wastewater segment. During the first quarter of fiscal 2026, the CO2 retail grocery business within the Emerging Technologies

segment was wound-down, which resulted in the Emerging Technologies segment no longer meeting the criteria of a reportable segment as

of the second quarter of fiscal 2026. As a result, revenue and expenses associated with the former Emerging Technologies segment have

been included within Corporate and Other. Prior periods have been recast to conform to the current year presentation.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 25

Results of Operations

A discussion regarding our financial condition and results of operations for the three and six months ended June 30, 2026, compared

to the three and six months ended June 30, 2025, is presented below.

Revenue

As a significant portion of our revenue is derived from large project contract deliveries that are up to 36 months from contract date,

variability in revenue from quarter to quarter is typical, therefore year-on-year comparisons are not necessarily indicative of the trend for the

full year due to these variations. There is no specific seasonality in our revenues to highlight.

Revenue by Channel Customers

Revenue Attributable to Primary Geographical Markets by Segments

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 26

Three months ended June 30, 2026, as compared to the three months ended June 30, 2025

The decrease in Original Equipment Manufacturer (“OEM”) revenue of $3.2 million was due primarily to:

• Desalination: The decrease in revenue of $1.3 million was due primarily to lower shipments of products to the Asia and Africa

markets, partially offset by higher shipments of products to the America, Europe and Middle East markets.

• Wastewater: The decrease in revenue of $1.9 million was due primarily to lower shipments of products to the Asia markets.

The decrease in After Market (“AM”) revenue of $0.8 million was due primarily to lower shipment of products to the Europe and Asia

markets, partially offset by higher shipments of products to the Middle East market.

The decrease in Megaproject (“MPD”) revenue of $12.1 million was primarily due to lower shipments of products to the Europe,

Middle East and Asia markets.

Six months ended June 30, 2026, as compared to the six months ended June 30, 2025

The decrease in OEM revenue of $0.6 million was due primarily to:

• Desalination: The increase in revenue of $0.8 million was due primarily to higher shipments of products to the Europe, Middle

East and Africa markets, partially offset by lower shipments of products to the Asia market.

• Wastewater: The decrease in revenue of $1.4 million was due primarily to lower shipments of products to the Asia market.

The decrease in AM revenue of $2.1 million was primarily due to lower shipments to the Asia and Europe markets.

The decrease in MPD revenue of $11.8 million was due primarily to lower shipments to the Europe, Asia and Middle East markets.

Concentration of Revenue

See Note10, “Concentrations,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Statements

(unaudited),” of this Quarterly Report on Form 10-Q (the “Notes”) for further discussion regarding our concentration of revenue.

Gross Profit and Gross Margin

Gross profit represents revenue less cost of revenue. Cost of revenue consists primarily of raw materials, personnel costs (including

stock-based compensation), manufacturing overhead, warranty costs, and depreciation expense.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 27

The decrease in gross profit for the three months ended June 30, 2026, as compared to the prior year, was due primarily to lower

volume as compared to the prior year, partially offset by decreases to indirect manufacturing costs and channel mix.

The increase in gross margin for the three months ended June 30, 2026, as compared to the prior year, was due primarily to indirect

manufacturing costs and channel mix, partially offset by lower volume.

The decrease in gross profit and gross margin for the six months ended June 30, 2026, as compared to the prior year, was due

primarily to lower volume as compared to the prior year as well as $1.6 million of restructuring charges booked to inventory associated with

the wind down of the CO2 retail grocery business, as well as increased costs related to product and channel mix, pricing, and tariffs, partially

offset by improvements to indirect manufacturing costs during the six months ended June 30, 2026.

Operating Expenses

The total material changes of general and administrative (“G&A”), sales and marketing (“S&M”) and R&D operating expenses for the

three months ended June 30, 2026, as compared to the comparable periods in the prior year, are discussed within the following overall

operating expenditures, and the segment and corporate operating expenses discussions below.

Three months ended June 30, 2026, as compared to the three months ended June 30, 2025

Overall Operating Expenditures. Overall operating expenditures decreased $1.6 million, or (10.0%). This decrease was primarily due

to lower employee compensation costs, including stock-based compensation expense, and lower consulting costs, partially offset by

restructuring charges incurred in the three months ended June 30, 2026.

Desalination Segment. Desalination segment operating expenses increased by $1.5 million, or 35.2%. This increase was primarily

due to higher employee costs, including stock-based compensation expense.

Wastewater Segment. Wastewater segment operating expenses increased by $0.5 million, or 26%. This increase was primarily due

to higher employee costs and higher consulting costs.

Corporate and Other. Corporate and Other decreased by $3.6 million, or (35.5)%. This decrease was primarily due to lower

employee compensation costs, including stock-based compensation expense, lower consulting costs, and lower emerging technology

development costs, partially offset by restructuring charges incurred in the three months ended June 30, 2026.

Restructuring Charges. During the first quarter of fiscal year 2026, we wound down operations of the CO2 retail grocery business

within our Emerging Technologies segment due to a fundamental change in the outlook of the business. We recorded a restructuring charge

of approximately $0.9 million during the three months ended June 30, 2026. The total restructuring charge recorded relates to severance and

benefits, including reemployment assistance, for 23 terminated employees. The restructuring plan was substantially complete by the end of

the second quarter of fiscal year 2026 and we do not expect to incur significant additional expenses related to the restructuring.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 28

Six months ended June 30, 2026, as compared to the six months ended June 30, 2025

Overall Operating Expenditures. Overall operating expenditures decreased by $1.1 million, or (3.3%). This decrease was primarily

due to to lower employee compensation costs, including stock-based compensation expense, and lower consulting costs, and was partially

offset by impairment of goodwill and restructuring charges incurred as part of the wind down of the CO2 retail grocery business.

Desalination Segment. Desalination segment related operating expenses increased by $2.8 million, or 34.1%. This increase was

primarily due to to higher employee costs, including stock-based compensation costs, and higher restructuring charges.

Wastewater Segment. Wastewater segment related operating expenses increased by $0.6 million, or 14.2%. This increase was

primarily due to to higher employee costs and higher consulting costs.

Corporate and Other. Corporate and Other decreased by $4.5 million, or (21.2)%. This decrease was primarily due to lower

employee costs, including stock-based compensation expense, lower consulting costs and lower emerging technology development costs,

partially offset by impairment of goodwill and restructuring charges incurred as part of the wind down of the CO2 retail grocery business.

Restructuring Charges. During the first quarter of fiscal year 2026, we wound down operations of the CO2 retail grocery business within

our Emerging Technologies segment due to a fundamental change in the outlook of the business. We recorded a restructuring charge of

approximately $2.4 million during the six months ended June 30, 2026. The total restructuring charge recorded relates to severance and

benefits, including reemployment assistance, for 23 terminated employees. In addition to the restructuring charges, we incurred other related

charges associated with the wind down of the CO2 retail grocery business, including excess and obsolescence reserves taken on CO2

inventory of approximately $1.6 million and impairment of goodwill of approximately $1.7 million, which are included in “Restructuring -

inventory reserve” and “Impairment of goodwill” in the Condensed Consolidated Statements of Operations, respectively. The restructuring

plan was substantially complete by the end of the second quarter of fiscal year 2026 and we do not expect to incur significant additional

expenses related to the restructuring.

During the fourth quarter of fiscal year 2024, we implemented a restructuring plan which included reductions in our workforce in all

functions of the organization, primarily within the G&A function, in order to lower our operating cost structure, and to position the Company for

profitable growth. We recorded total restructuring charges of approximately $2.8 million, of which $0.5 million was recorded during the six

months ended June 30, 2025. The total restructuring charge relates to severance and benefits, including reemployment assistance, for

38 terminated employees, which was approximately 15% of our workforce. The implementation of the restructuring plan was complete as of

December 31, 2025. See Note 4, “Other Financial Information – Restructuring,” of the Notes for further discussion and disclosure on our#ifd4dcf2ed025450bad44245a407c26d6_328

restructuring program.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 29

Other Income, Net

The decrease in “Total other income, net” in the three and six months ended June 30, 2026, as compared to the comparable period in

the prior year, was primarily due to a decrease in the interest rate for short- and long-term investments.

Income Taxes

The interim period tax benefit from income taxes is determined using an estimate of our annual effective tax rate, adjusted for discrete

items, if any, that arise during the period. Each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual

effective tax rate changes, we make a cumulative adjustment in such period. The quarterly tax provision and estimate of our annual effective

tax rate are subject to variation due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of

jurisdictions to which they relate, the applicability of special tax regimes, and changes in how we do business.

For the three and six months ended June 30, 2026, the recognized benefit from income taxes resulted from the tax projection based

on the full year forecast and included benefits related to the U.S. federal research and development (“R&D”) tax credit, and certain

permanent differences, such as non-deductible stock-based compensation as well as an increase in the California valuation allowance for

California R&D tax credits.

For the three and six months ended June 30, 2025, the recognized provision for and (benefit from) income taxes, respectively,

resulted from the tax projection based on the full year forecasted profit and included benefits related to the U.S. federal foreign-derived

intangible income (“FDII”), federal R&D tax credit, certain permanent differences, such as stock-based compensation shortfalls, and partial

release of California valuation allowance.

The effective tax rate excluding discrete items for the six months ended June 30, 2026, as compared to the prior year, differed

primarily due to the projection that the Company will not generate the U.S. federal foreign-derived intangible income deduction in 2026 due to

the Company’s forecasted loss in 2026.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 30

Liquidity and Capital Resources

Overview

From time-to-time, management and our Board of Directors (the “Board”) review our liquidity and future cash needs and may make a

decision to (1) return capital to our shareholders through a share repurchase program or dividend payout; or (2) seek additional debt or equity

financing. As of June 30, 2026, our principal sources of liquidity consisted of (i) unrestricted cash and cash equivalents of $61.4 million that

are held in cash accounts and invested in money market funds and U.S. treasury securities; (ii) investment-grade short-term and long-term

marketable debt instruments of $36.6 million that are primarily invested in U.S. treasury securities and corporate notes and bonds; and

(iii) accounts receivable, net of allowances, of $14.2 million. As of June 30, 2026, there was unrestricted cash of $0.9 million held outside

the U.S. We invest cash not needed for current operations predominantly in investment-grade, marketable debt instruments with the intent to

make such funds available for future operating purposes, as needed. Although these securities are available for sale, we generally hold

these securities to maturity, and therefore, do not currently see a need to trade these securities in order to support our liquidity needs in the

foreseeable future. We believe the risk of this portfolio to us is in the ability of the underlying companies or government agencies to cover

their obligations at maturity, not in our ability to trade these securities at a profit. Based on current projections, we believe existing cash

balances and future cash inflows from this portfolio will meet our liquidity needs for at least the next 12 months.

Credit Agreement

We entered into a credit agreement with JPMorgan Chase Bank, N.A. on December 22, 2021 (as amended, the “Credit Agreement”).

The Credit Agreement provides a committed revolving credit line of $50.0 million and includes both a revolving loan and a letters of credit

(“LCs”) component. The Credit Agreement was amended on January 21, 2026 to extend the expiration date from December 21, 2026 to

January 21, 2031. The maximum allowable LCs under the credit line component of the Credit Agreement is $30.0 million. As of June 30,

2026, the Company was in compliance with all covenants under the Credit Agreement.

See Note 6, “Lines of Credit,” of the Notes for further discussion related to the Credit Agreement.

Share Repurchase Programs

The Board, from time-to-time, has authorized share repurchase programs under which we may, at our discretion, repurchase the

Company’s outstanding common stock in the open market, or in privately negotiated transactions, in compliance with applicable state and

federal securities laws. The timing and amounts of any purchase under the share repurchase programs are based on market conditions and

other factors including price, regulatory requirements, and capital availability. We account for stock repurchases under these programs using

the cost method. As of June 30, 2026, we have cumulatively repurchased 15.9 million shares of the Company’s common stock at an

aggregate cost of $186.8 million under all share repurchase programs. The following is a discussion of the current share repurchase

program during the three and six months ended June 30, 2026. See Note 11, “Stockholders’ Equity – Share Repurchase Programs,” of the

Notes for further discussion related to share repurchase programs and a reconciliation of the latest share repurchase plan balance.

On August 6, 2025, we announced that the Board authorized a share repurchase program under which we may repurchase our

outstanding common stock, at the discretion of management, up to $25.0 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 “August 2025 Authorization”). We began

repurchasing our outstanding common stock under the August 2025 Authorization in August 2025. The August 2025 Authorization expired in

May 2026. As of June 30, 2026, we have repurchased 2,179,419 shares of our common stock at an aggregate cost of approximately

$25.0 million of which 832,550 and 1,792,853 were purchased during the three and six months ended June 30, 2026 at an aggregate cost of

approximately $8.7 million and $19.3 million, respectively.

On May 6, 2026, we announced that the Board authorized a share repurchase program under which we may repurchase our

outstanding common stock, at the discretion of management, for up to $25.0 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 “May 2026 Authorization”). We began

repurchasing our outstanding common stock under the May 2026 Authorization in May 2026. The May 2026 Authorization will expire in April

2027. As of June 30, 2026, we have repurchased 156,900 shares of our common stock at an aggregate cost of approximately $1.3 million. All

156,900 shares were purchased during the three and six months ended June 30, 2026.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 31

Cash Flows

Cash Flows from Operating Activities

Net cash provided by operating activities is subject to the project driven, non-cyclical nature of our business. Operating cash flow can

fluctuate significantly from reporting period to reporting period, due to the timing of receipts of large project orders. Operating cash flow may

be negative in one reporting period and significantly positive in the next. Consequently, individual reporting period results and comparisons

may not necessarily indicate a significant trend, either positive or negative.

The higher net cash provided by operating assets and liabilities for the six months ended June 30, 2026, as compared to the prior

year, was due primarily to the following factors:

• Accounts receivable: an increase in cash provided due to an increase in collections related to revenues earned late in the fourth

quarter of 2025;

• Accrued liabilities: an increase in cash provided due to incentives and restructuring expenses paid out in 2025, partially offset by,
• Inventories: a decrease in cash provided due to cash used to build finished goods inventory in the first half of 2026.

Cash Flows from Investing Activities

Net cash (used in) provided by investing activities primarily relates to maturities and purchases of investment-grade marketable debt

instruments, and capital expenditures supporting our growth. The decrease in cash provided during the six months ended June 30, 2026, as

compared to the prior year, is primarily due to fewer maturities as well as higher purchases of marketable securities. We believe our

investments in marketable debt instruments are structured to preserve principal and liquidity while at the same time maximizing yields without

significantly increasing risk.

Cash Flows from Financing Activities

Net cash used in financing activities for the six months ended June 30, 2026 was lower as compared to the cash used in financing

activities in the prior year, due to lower repurchases of our common stock as well as a $0.4 million refund received for excise tax payments

made during the previous fiscal year.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 32

Liquidity and Capital Resource Requirements

We believe that our existing resources and cash generated from our operations will be sufficient to meet our anticipated capital

requirements for at least the next 12 months. However, we may need to raise additional capital or incur additional indebtedness to continue

to fund our operations or to support acquisitions in the future and/or to fund investments in our latest technology arising from rapid market

adoption. These needs could require us to seek additional equity or debt financing. Our future capital requirements will depend on many

factors including the continuing market acceptance of our products, our rate of revenue growth, the timing of new product introductions, the

expansion of our R&D, manufacturing and S&M activities, and the timing and extent of our expansion into new geographic territories. In

addition, we may enter into potential material investments in, or acquisitions of, complementary businesses, services or technologies in the

future which could also require us to seek additional equity or debt financing. Should we need additional liquidity or capital funds, these funds

may not be available to us on favorable terms, or at all.

Recent Accounting Pronouncements

Refer to Note 1, “Description of Business and Significant Accounting Policies – Significant Accounting Policies,” of the Notes to

Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Statements (unaudited),” of this Quarterly Report on Form 10-Q.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 33

Item 2M. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, we believe our solutions lower costs, save energy, reduce waste, and minimize emissions for companies across a variety of

commercial and 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 we 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, 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. Our pressure exchanger technology is being applied to the wastewater filtration market, such as

battery manufacturers, mining operations, municipalities, and other manufacturing plants that discharge wastewater with significant levels of

metals and pollutants.

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

and circulation “booster” pumps, that complement our energy recovery devices.

Segments

Our reportable operating segments consist of the Desalination and Wastewater segments. These segments are based on the

industries in which the technology solutions are sold, the type of energy recovery device or other technology sold and the related solution and

service. Other factors for determining the reportable operating segments include the manner in which our Chief Operating Decision Maker

(“CODM”), our Interim President and Chief Executive Officer, evaluates our performance combined with the nature of the individual business

activities. In addition, our Corporate and Other include expenditures in support of the Desalination and Wastewater segments, as well as

revenue and expenditures associated with the former Emerging Technologies segment. We continue to monitor and review our segment

reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our

reportable segments.

During the six months ended June 30, 2026, we changed the composition of our reportable segments to better reflect how the CODM

manages the business. During the fist quarter of fiscal 2026, the Water segment was separated into two segments, the Desalination segment

and the Wastewater segment. During the first quarter of fiscal 2026, the CO2 retail grocery business within the Emerging Technologies

segment was wound-down, which resulted in the Emerging Technologies segment no longer meeting the criteria of a reportable segment as

of the second quarter of fiscal 2026. As a result, revenue and expenses associated with the former Emerging Technologies segment have

been included within Corporate and Other. Prior periods have been recast to conform to the current year presentation.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 25

Results of Operations

A discussion regarding our financial condition and results of operations for the three and six months ended June 30, 2026, compared

to the three and six months ended June 30, 2025, is presented below.

Revenue

As a significant portion of our revenue is derived from large project contract deliveries that are up to 36 months from contract date,

variability in revenue from quarter to quarter is typical, therefore year-on-year comparisons are not necessarily indicative of the trend for the

full year due to these variations. There is no specific seasonality in our revenues to highlight.

Revenue by Channel Customers

Revenue Attributable to Primary Geographical Markets by Segments

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 26

Three months ended June 30, 2026, as compared to the three months ended June 30, 2025

The decrease in Original Equipment Manufacturer (“OEM”) revenue of $3.2 million was due primarily to:

• Desalination: The decrease in revenue of $1.3 million was due primarily to lower shipments of products to the Asia and Africa

markets, partially offset by higher shipments of products to the America, Europe and Middle East markets.

• Wastewater: The decrease in revenue of $1.9 million was due primarily to lower shipments of products to the Asia markets.

The decrease in After Market (“AM”) revenue of $0.8 million was due primarily to lower shipment of products to the Europe and Asia

markets, partially offset by higher shipments of products to the Middle East market.

The decrease in Megaproject (“MPD”) revenue of $12.1 million was primarily due to lower shipments of products to the Europe,

Middle East and Asia markets.

Six months ended June 30, 2026, as compared to the six months ended June 30, 2025

The decrease in OEM revenue of $0.6 million was due primarily to:

• Desalination: The increase in revenue of $0.8 million was due primarily to higher shipments of products to the Europe, Middle

East and Africa markets, partially offset by lower shipments of products to the Asia market.

• Wastewater: The decrease in revenue of $1.4 million was due primarily to lower shipments of products to the Asia market.

The decrease in AM revenue of $2.1 million was primarily due to lower shipments to the Asia and Europe markets.

The decrease in MPD revenue of $11.8 million was due primarily to lower shipments to the Europe, Asia and Middle East markets.

Concentration of Revenue

See Note10, “Concentrations,” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Statements

(unaudited),” of this Quarterly Report on Form 10-Q (the “Notes”) for further discussion regarding our concentration of revenue.

Gross Profit and Gross Margin

Gross profit represents revenue less cost of revenue. Cost of revenue consists primarily of raw materials, personnel costs (including

stock-based compensation), manufacturing overhead, warranty costs, and depreciation expense.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 27

The decrease in gross profit for the three months ended June 30, 2026, as compared to the prior year, was due primarily to lower

volume as compared to the prior year, partially offset by decreases to indirect manufacturing costs and channel mix.

The increase in gross margin for the three months ended June 30, 2026, as compared to the prior year, was due primarily to indirect

manufacturing costs and channel mix, partially offset by lower volume.

The decrease in gross profit and gross margin for the six months ended June 30, 2026, as compared to the prior year, was due

primarily to lower volume as compared to the prior year as well as $1.6 million of restructuring charges booked to inventory associated with

the wind down of the CO2 retail grocery business, as well as increased costs related to product and channel mix, pricing, and tariffs, partially

offset by improvements to indirect manufacturing costs during the six months ended June 30, 2026.

Operating Expenses

The total material changes of general and administrative (“G&A”), sales and marketing (“S&M”) and R&D operating expenses for the

three months ended June 30, 2026, as compared to the comparable periods in the prior year, are discussed within the following overall

operating expenditures, and the segment and corporate operating expenses discussions below.

Three months ended June 30, 2026, as compared to the three months ended June 30, 2025

Overall Operating Expenditures. Overall operating expenditures decreased $1.6 million, or (10.0%). This decrease was primarily due

to lower employee compensation costs, including stock-based compensation expense, and lower consulting costs, partially offset by

restructuring charges incurred in the three months ended June 30, 2026.

Desalination Segment. Desalination segment operating expenses increased by $1.5 million, or 35.2%. This increase was primarily

due to higher employee costs, including stock-based compensation expense.

Wastewater Segment. Wastewater segment operating expenses increased by $0.5 million, or 26%. This increase was primarily due

to higher employee costs and higher consulting costs.

Corporate and Other. Corporate and Other decreased by $3.6 million, or (35.5)%. This decrease was primarily due to lower

employee compensation costs, including stock-based compensation expense, lower consulting costs, and lower emerging technology

development costs, partially offset by restructuring charges incurred in the three months ended June 30, 2026.

Restructuring Charges. During the first quarter of fiscal year 2026, we wound down operations of the CO2 retail grocery business

within our Emerging Technologies segment due to a fundamental change in the outlook of the business. We recorded a restructuring charge

of approximately $0.9 million during the three months ended June 30, 2026. The total restructuring charge recorded relates to severance and

benefits, including reemployment assistance, for 23 terminated employees. The restructuring plan was substantially complete by the end of

the second quarter of fiscal year 2026 and we do not expect to incur significant additional expenses related to the restructuring.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 28

Six months ended June 30, 2026, as compared to the six months ended June 30, 2025

Overall Operating Expenditures. Overall operating expenditures decreased by $1.1 million, or (3.3%). This decrease was primarily

due to to lower employee compensation costs, including stock-based compensation expense, and lower consulting costs, and was partially

offset by impairment of goodwill and restructuring charges incurred as part of the wind down of the CO2 retail grocery business.

Desalination Segment. Desalination segment related operating expenses increased by $2.8 million, or 34.1%. This increase was

primarily due to to higher employee costs, including stock-based compensation costs, and higher restructuring charges.

Wastewater Segment. Wastewater segment related operating expenses increased by $0.6 million, or 14.2%. This increase was

primarily due to to higher employee costs and higher consulting costs.

Corporate and Other. Corporate and Other decreased by $4.5 million, or (21.2)%. This decrease was primarily due to lower

employee costs, including stock-based compensation expense, lower consulting costs and lower emerging technology development costs,

partially offset by impairment of goodwill and restructuring charges incurred as part of the wind down of the CO2 retail grocery business.

Restructuring Charges. During the first quarter of fiscal year 2026, we wound down operations of the CO2 retail grocery business within

our Emerging Technologies segment due to a fundamental change in the outlook of the business. We recorded a restructuring charge of

approximately $2.4 million during the six months ended June 30, 2026. The total restructuring charge recorded relates to severance and

benefits, including reemployment assistance, for 23 terminated employees. In addition to the restructuring charges, we incurred other related

charges associated with the wind down of the CO2 retail grocery business, including excess and obsolescence reserves taken on CO2

inventory of approximately $1.6 million and impairment of goodwill of approximately $1.7 million, which are included in “Restructuring -

inventory reserve” and “Impairment of goodwill” in the Condensed Consolidated Statements of Operations, respectively. The restructuring

plan was substantially complete by the end of the second quarter of fiscal year 2026 and we do not expect to incur significant additional

expenses related to the restructuring.

During the fourth quarter of fiscal year 2024, we implemented a restructuring plan which included reductions in our workforce in all

functions of the organization, primarily within the G&A function, in order to lower our operating cost structure, and to position the Company for

profitable growth. We recorded total restructuring charges of approximately $2.8 million, of which $0.5 million was recorded during the six

months ended June 30, 2025. The total restructuring charge relates to severance and benefits, including reemployment assistance, for

38 terminated employees, which was approximately 15% of our workforce. The implementation of the restructuring plan was complete as of

December 31, 2025. See Note 4, “Other Financial Information – Restructuring,” of the Notes for further discussion and disclosure on our#ifd4dcf2ed025450bad44245a407c26d6_328

restructuring program.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 29

Other Income, Net

The decrease in “Total other income, net” in the three and six months ended June 30, 2026, as compared to the comparable period in

the prior year, was primarily due to a decrease in the interest rate for short- and long-term investments.

Income Taxes

The interim period tax benefit from income taxes is determined using an estimate of our annual effective tax rate, adjusted for discrete

items, if any, that arise during the period. Each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual

effective tax rate changes, we make a cumulative adjustment in such period. The quarterly tax provision and estimate of our annual effective

tax rate are subject to variation due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of

jurisdictions to which they relate, the applicability of special tax regimes, and changes in how we do business.

For the three and six months ended June 30, 2026, the recognized benefit from income taxes resulted from the tax projection based

on the full year forecast and included benefits related to the U.S. federal research and development (“R&D”) tax credit, and certain

permanent differences, such as non-deductible stock-based compensation as well as an increase in the California valuation allowance for

California R&D tax credits.

For the three and six months ended June 30, 2025, the recognized provision for and (benefit from) income taxes, respectively,

resulted from the tax projection based on the full year forecasted profit and included benefits related to the U.S. federal foreign-derived

intangible income (“FDII”), federal R&D tax credit, certain permanent differences, such as stock-based compensation shortfalls, and partial

release of California valuation allowance.

The effective tax rate excluding discrete items for the six months ended June 30, 2026, as compared to the prior year, differed

primarily due to the projection that the Company will not generate the U.S. federal foreign-derived intangible income deduction in 2026 due to

the Company’s forecasted loss in 2026.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 30

Liquidity and Capital Resources

Overview

From time-to-time, management and our Board of Directors (the “Board”) review our liquidity and future cash needs and may make a

decision to (1) return capital to our shareholders through a share repurchase program or dividend payout; or (2) seek additional debt or equity

financing. As of June 30, 2026, our principal sources of liquidity consisted of (i) unrestricted cash and cash equivalents of $61.4 million that

are held in cash accounts and invested in money market funds and U.S. treasury securities; (ii) investment-grade short-term and long-term

marketable debt instruments of $36.6 million that are primarily invested in U.S. treasury securities and corporate notes and bonds; and

(iii) accounts receivable, net of allowances, of $14.2 million. As of June 30, 2026, there was unrestricted cash of $0.9 million held outside

the U.S. We invest cash not needed for current operations predominantly in investment-grade, marketable debt instruments with the intent to

make such funds available for future operating purposes, as needed. Although these securities are available for sale, we generally hold

these securities to maturity, and therefore, do not currently see a need to trade these securities in order to support our liquidity needs in the

foreseeable future. We believe the risk of this portfolio to us is in the ability of the underlying companies or government agencies to cover

their obligations at maturity, not in our ability to trade these securities at a profit. Based on current projections, we believe existing cash

balances and future cash inflows from this portfolio will meet our liquidity needs for at least the next 12 months.

Credit Agreement

We entered into a credit agreement with JPMorgan Chase Bank, N.A. on December 22, 2021 (as amended, the “Credit Agreement”).

The Credit Agreement provides a committed revolving credit line of $50.0 million and includes both a revolving loan and a letters of credit

(“LCs”) component. The Credit Agreement was amended on January 21, 2026 to extend the expiration date from December 21, 2026 to

January 21, 2031. The maximum allowable LCs under the credit line component of the Credit Agreement is $30.0 million. As of June 30,

2026, the Company was in compliance with all covenants under the Credit Agreement.

See Note 6, “Lines of Credit,” of the Notes for further discussion related to the Credit Agreement.

Share Repurchase Programs

The Board, from time-to-time, has authorized share repurchase programs under which we may, at our discretion, repurchase the

Company’s outstanding common stock in the open market, or in privately negotiated transactions, in compliance with applicable state and

federal securities laws. The timing and amounts of any purchase under the share repurchase programs are based on market conditions and

other factors including price, regulatory requirements, and capital availability. We account for stock repurchases under these programs using

the cost method. As of June 30, 2026, we have cumulatively repurchased 15.9 million shares of the Company’s common stock at an

aggregate cost of $186.8 million under all share repurchase programs. The following is a discussion of the current share repurchase

program during the three and six months ended June 30, 2026. See Note 11, “Stockholders’ Equity – Share Repurchase Programs,” of the

Notes for further discussion related to share repurchase programs and a reconciliation of the latest share repurchase plan balance.

On August 6, 2025, we announced that the Board authorized a share repurchase program under which we may repurchase our

outstanding common stock, at the discretion of management, up to $25.0 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 “August 2025 Authorization”). We began

repurchasing our outstanding common stock under the August 2025 Authorization in August 2025. The August 2025 Authorization expired in

May 2026. As of June 30, 2026, we have repurchased 2,179,419 shares of our common stock at an aggregate cost of approximately

$25.0 million of which 832,550 and 1,792,853 were purchased during the three and six months ended June 30, 2026 at an aggregate cost of

approximately $8.7 million and $19.3 million, respectively.

On May 6, 2026, we announced that the Board authorized a share repurchase program under which we may repurchase our

outstanding common stock, at the discretion of management, for up to $25.0 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 “May 2026 Authorization”). We began

repurchasing our outstanding common stock under the May 2026 Authorization in May 2026. The May 2026 Authorization will expire in April

2027. As of June 30, 2026, we have repurchased 156,900 shares of our common stock at an aggregate cost of approximately $1.3 million. All

156,900 shares were purchased during the three and six months ended June 30, 2026.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 31

Cash Flows

Cash Flows from Operating Activities

Net cash provided by operating activities is subject to the project driven, non-cyclical nature of our business. Operating cash flow can

fluctuate significantly from reporting period to reporting period, due to the timing of receipts of large project orders. Operating cash flow may

be negative in one reporting period and significantly positive in the next. Consequently, individual reporting period results and comparisons

may not necessarily indicate a significant trend, either positive or negative.

The higher net cash provided by operating assets and liabilities for the six months ended June 30, 2026, as compared to the prior

year, was due primarily to the following factors:

• Accounts receivable: an increase in cash provided due to an increase in collections related to revenues earned late in the fourth

quarter of 2025;

• Accrued liabilities: an increase in cash provided due to incentives and restructuring expenses paid out in 2025, partially offset by,
• Inventories: a decrease in cash provided due to cash used to build finished goods inventory in the first half of 2026.

Cash Flows from Investing Activities

Net cash (used in) provided by investing activities primarily relates to maturities and purchases of investment-grade marketable debt

instruments, and capital expenditures supporting our growth. The decrease in cash provided during the six months ended June 30, 2026, as

compared to the prior year, is primarily due to fewer maturities as well as higher purchases of marketable securities. We believe our

investments in marketable debt instruments are structured to preserve principal and liquidity while at the same time maximizing yields without

significantly increasing risk.

Cash Flows from Financing Activities

Net cash used in financing activities for the six months ended June 30, 2026 was lower as compared to the cash used in financing

activities in the prior year, due to lower repurchases of our common stock as well as a $0.4 million refund received for excise tax payments

made during the previous fiscal year.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 32

Liquidity and Capital Resource Requirements

We believe that our existing resources and cash generated from our operations will be sufficient to meet our anticipated capital

requirements for at least the next 12 months. However, we may need to raise additional capital or incur additional indebtedness to continue

to fund our operations or to support acquisitions in the future and/or to fund investments in our latest technology arising from rapid market

adoption. These needs could require us to seek additional equity or debt financing. Our future capital requirements will depend on many

factors including the continuing market acceptance of our products, our rate of revenue growth, the timing of new product introductions, the

expansion of our R&D, manufacturing and S&M activities, and the timing and extent of our expansion into new geographic territories. In

addition, we may enter into potential material investments in, or acquisitions of, complementary businesses, services or technologies in the

future which could also require us to seek additional equity or debt financing. Should we need additional liquidity or capital funds, these funds

may not be available to us on favorable terms, or at all.

Recent Accounting Pronouncements

Refer to Note 1, “Description of Business and Significant Accounting Policies – Significant Accounting Policies,” of the Notes to

Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Statements (unaudited),” of this Quarterly Report on Form 10-Q.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 33

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk may be found primarily in two areas: foreign currency and interest rates.

Foreign Currency Risk

Our foreign currency exposures are due to fluctuations in exchange rates for the U.S. dollar (“USD”) versus the British pound, Saudi

riyal, Emirati dirham, European euro, Chinese yuan, Indian rupee and Canadian dollar. Changes in currency exchange rates could adversely

affect our consolidated operating results or financial position.

Our revenue contracts have been denominated in the USD. At times, our international customers may have difficulty obtaining

the USD to pay our receivables, thus increasing collection risk and potential bad debt expense.

In addition, we pay many vendors in foreign currency and, therefore, are subject to changes in foreign currency exchange rates. Our

international sales and service operations incur expense that is denominated in foreign currencies. This expense could be materially affected

by currency fluctuations. Our international sales and services operations also maintain cash balances denominated in foreign currencies. To

decrease the inherent risk associated with translation of foreign cash balances into our reporting currency, we do not maintain excess cash

balances in foreign currencies.

We have not hedged our exposure to changes in foreign currency exchange rates because expenses in foreign currencies have been

insignificant to date and exchange rate fluctuations have had little impact on our operating results and cash flows. In addition, we do not

have any exposure to the Russian ruble.

Interest Rate and Credit Risks

The primary objective of our investment activities is to preserve principal and liquidity while at the same time maximizing yields without

significantly increasing risk. We invest primarily in investment-grade short-term and long-term marketable debt instruments that are subject

to counter-party credit risk. To minimize this risk, we invest pursuant to an investment policy approved by the Board. The policy mandates

high credit rating requirements and restricts our exposure to any single corporate issuer by imposing concentration limits.

As of June 30, 2026, our investment portfolio of $37.6 million, in investment-grade marketable debt instruments, such as U.S. treasury

securities, and corporate notes and bonds, are classified as either cash equivalents or short-term and/or long-term investments on our

Condensed Consolidated Balance Sheets. These investments are subject to interest rate fluctuations and a decrease in market value to the

extent interest rates increase. To minimize the exposure due to adverse shifts in interest rates, we maintain investments with a weighted

average maturity of approximately five months. As of June 30, 2026, a hypothetical 1% increase in interest rates would have resulted in

approximately $0.1 million decrease in the fair value of our investments in marketable debt instruments as of such date.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 34

Item 3Q. Quantitative and Qualitative Disclosures About Market Risk

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk may be found primarily in two areas: foreign currency and interest rates.

Foreign Currency Risk

Our foreign currency exposures are due to fluctuations in exchange rates for the U.S. dollar (“USD”) versus the British pound, Saudi

riyal, Emirati dirham, European euro, Chinese yuan, Indian rupee and Canadian dollar. Changes in currency exchange rates could adversely

affect our consolidated operating results or financial position.

Our revenue contracts have been denominated in the USD. At times, our international customers may have difficulty obtaining

the USD to pay our receivables, thus increasing collection risk and potential bad debt expense.

In addition, we pay many vendors in foreign currency and, therefore, are subject to changes in foreign currency exchange rates. Our

international sales and service operations incur expense that is denominated in foreign currencies. This expense could be materially affected

by currency fluctuations. Our international sales and services operations also maintain cash balances denominated in foreign currencies. To

decrease the inherent risk associated with translation of foreign cash balances into our reporting currency, we do not maintain excess cash

balances in foreign currencies.

We have not hedged our exposure to changes in foreign currency exchange rates because expenses in foreign currencies have been

insignificant to date and exchange rate fluctuations have had little impact on our operating results and cash flows. In addition, we do not

have any exposure to the Russian ruble.

Interest Rate and Credit Risks

The primary objective of our investment activities is to preserve principal and liquidity while at the same time maximizing yields without

significantly increasing risk. We invest primarily in investment-grade short-term and long-term marketable debt instruments that are subject

to counter-party credit risk. To minimize this risk, we invest pursuant to an investment policy approved by the Board. The policy mandates

high credit rating requirements and restricts our exposure to any single corporate issuer by imposing concentration limits.

As of June 30, 2026, our investment portfolio of $37.6 million, in investment-grade marketable debt instruments, such as U.S. treasury

securities, and corporate notes and bonds, are classified as either cash equivalents or short-term and/or long-term investments on our

Condensed Consolidated Balance Sheets. These investments are subject to interest rate fluctuations and a decrease in market value to the

extent interest rates increase. To minimize the exposure due to adverse shifts in interest rates, we maintain investments with a weighted

average maturity of approximately five months. As of June 30, 2026, a hypothetical 1% increase in interest rates would have resulted in

approximately $0.1 million decrease in the fair value of our investments in marketable debt instruments as of such date.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 34

Item 4 — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Interim President and Chief Executive Officer and our Interim Chief Financial Officer,

have evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of

1934 as of the end of the period covered by this report.

Based on that evaluation, our Interim President and Chief Executive Officer and our Interim Chief Financial Officer have concluded

that, as of June 30, 2026, our disclosure controls and procedures were effective.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the period covered by this report that have materially

affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 35

PART II — OTHER INFORMATION

Item 4C. Controls and Procedures

Item 4 — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Interim President and Chief Executive Officer and our Interim Chief Financial Officer,

have evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of

1934 as of the end of the period covered by this report.

Based on that evaluation, our Interim President and Chief Executive Officer and our Interim Chief Financial Officer have concluded

that, as of June 30, 2026, our disclosure controls and procedures were effective.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the period covered by this report that have materially

affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 35

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

We have been, and may be from time to time, involved in legal proceedings or subject to claims incident to the ordinary course of

business. We are not presently a party to any legal proceedings that we believe are likely to have a material adverse effect on our business,

financial condition, or operating results. Regardless of the outcome, such proceedings or claims can have an adverse impact on us because

of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be

obtained.

Item 1A — Risk Factors

Except as noted below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, “Risk Factors,”

in the 2025 Annual Report.

Our Water segment revenues largely depend on the construction of new large-scale desalination plants and the retrofit of

existing desalination plants, and as a result, our operating results have historically experienced, and may continue to experience,

significant variability due to volatility in capital spending, availability of project financing, project timing, execution, war or other

hostilities and other factors affecting the broader water desalination industry.

We currently derive the majority of our Water segment revenues from sales of energy recovery products and services used in newly

constructed, large-scale desalination plants and the retrofit of existing desalination plants, particularly in dry or drought-ridden regions of the

world. The demand for our products used in the Water segment may decrease if the construction of these large-scale desalination plants or

the retrofit of existing plants declines for any reason, including, any global or regional economic downturns, worsening global or regional

political conflicts, war or other hostilities, such as the 2026 conflict in Iran and escalating tensions in the Middle East, worsening regional

conditions, changing government priorities, or the impact of any global or regional conflicts.

Other factors that could affect the number and capacity of large-scale desalination plants built or the timing of their completion,

include the availability of required engineering and design resources; availability of credit and other forms of financing; the health of the global

economy; inflation rates; changes in government regulation, permitting requirements, or priorities; and reduced capital spending for water

desalination solutions. Each of these factors could result in reduced or uneven demand for our products. Pronounced variability, complete

cancellations or delays in the construction of such plants or reductions in spending for desalination in general could negatively impact our

Water segment sales, which in turn could have an adverse effect on our entire business, financial condition, or results of operations, and

make it difficult for us to accurately forecast our future sales.

A sustained downturn in the economy or global unrest could impact the future of new, and the retrofit of existing,

desalination plants, and the treatment of various wastewater verticals, which could result in decreased demand for our water

products and services.

The demand for our water products and services depends primarily on the continued construction of new large-scale desalination

plants, the retrofit of existing plants, and the construction of wastewater treatment facilities, particularly in the countries that are part of the

Gulf Cooperation Council, China, Taiwan and India. Weak economic conditions, global uncertainty including the continuing conflicts in

Ukraine, the continuing 2026 conflict in Iran and escalating conflicts in the Middle East, as well as the impact of increased inflation and a

potential stagflation resulting from such conflicts may have a negative economic impact on these and other countries, which may impact the

levels of spending on, timing of, delays to, and availability of, project financing for new desalination and retrofit plant projects. The inability of

our customers to secure credit or financing for these projects, may result in the postponement or cancellation of these projects. In addition,

the change in government priorities and/or their reduction in spending for water treatment projects could result in decreased demand for our

products and services, which could have an adverse effect on our business, financial condition or results of operations.

Uncertainty in the global geopolitical landscape and macro-economic environment may impact our operations outside the

U.S., including in the Middle East where many of our water megaprojects are planned.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 36

We conduct our business on a global basis. Our products are sold in numerous countries worldwide, with a large percentage of our

sales generated outside the U.S., specifically in the Middle East and Africa, and Asian markets which provide a significant portion of our total

revenue. Therefore, we are exposed to, and impacted by, global macroeconomic factors, U.S. and foreign government policies, and foreign

exchange fluctuations. There is uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by the supply chain

environment, inflationary pressure, rising interest rates, and labor shortages. These global macroeconomic factors, coupled with the U.S.

political climate, political unrest internationally, and conflicts in Europe and the Middle East, such as the continuing 2026 conflict in Iran and

Iran’s response to attacks by the United States and Israel, have created global economic and political uncertainty, and have impacted

demand for certain of our products. Further escalation of the conflict could heighten inflationary pressures on our input costs, adversely affect

global financial markets, increase currency exchange rate volatility, and elevate interest rates, which could increase the cost of future

financing. While the impact and longevity of these factors remain uncertain, we are constantly evaluating the extent to which these factors

will impact our business, financial condition, or results of operations. Over the long-term, demand for our energy recovery devices could

correlate to global macroeconomic and geopolitical factors. Any disruption to the economic factors and regulations in these regions, which

remain uncertain, may adversely affect our results of operations and financial condition.

In addition, there is uncertainty as to the position the U.S. will take with respect to world affairs. This uncertainty may include such

issues as the U.S. support for existing treaty and trade relationships with other countries, including, notably, China, Mexico and Canada. This

uncertainty, together with other recent key global events, such as currency control regulations and tariff regimes, economic sanctions and

export controls, trade restrictions, ongoing terrorist activity, and hostilities in the Middle East, may adversely impact (i) the ability or

willingness of non-U.S. companies to transact business with U.S. companies, including with us; (ii) our ability to transact business in other

countries where we have existing or prospective customer relationships, including the Middle East, where many of the water megaprojects

are planned; (iii) regulation and trade agreements affecting U.S. companies; (iv) global stock markets (including The NASDAQ Global Select

Market Composite on which our common shares are traded); and (v) general global economic conditions. Furthermore, the conflicts in

Europe and the Middle East have resulted in worldwide geopolitical and macroeconomic uncertainty, and we cannot predict how these

conflicts will evolve or their timing. If these conflicts continue for a significant time, further expand to other countries or regions or cannot be

stabilized by any diplomatic efforts, they could have additional adverse effects on macroeconomic conditions that may have a direct adverse

impact on our business and/or our supply chain, business partners or customers in the broader region. All of these factors are outside of our

control, but may nonetheless cause us to adjust our strategy in order to compete effectively in global markets.

We face risks associated with our first international manufacturing facility in Saudi Arabia.

We are investing significant resources to establish and operate our first manufacturing facility outside the United States, located in

Saudi Arabia. The successful construction, commissioning, and operation of this facility are subject to a variety of risks and uncertainties that

could materially and adversely affect our business, financial condition, results of operations, and cash flows.

The facility is currently under development and is expected to begin operations in 2027. Establishing a new manufacturing

operation in a foreign jurisdiction presents challenges that we have not previously encountered at this scale, including obtaining and

maintaining licenses, permits, and regulatory approvals; complying with local labor, tax, environmental, health and safety, customs, and other

legal requirements; hiring, training, and retaining a skilled local workforce; and implementing our manufacturing processes, quality systems,

and internal controls in a new operating environment. Any delays, cost overruns, construction deficiencies, supply chain disruptions, labor

shortages, or difficulties in commissioning equipment could postpone the facility’s operational readiness, increase our costs, and delay

anticipated benefits.

Our operations in Saudi Arabia also expose us to additional geopolitical, economic, and operational risks. These risks include

changes in government policies, trade regulations, local content requirements, taxation, foreign investment rules, import and export controls,

sanctions regimes, currency restrictions, and political or security conditions in the region. Any deterioration in regional stability, changes in

regulatory frameworks, or actions by governmental authorities could adversely affect the facility, our employees, our suppliers, or our

customers and could result in increased costs, operational disruptions, or limitations on our ability to conduct business in the region.

Further, the transfer of manufacturing knowledge, proprietary processes, and technology to a new foreign operation may increase

the risk of unauthorized disclosure, misuse, or infringement of our intellectual property. We may also face challenges in maintaining

consistent oversight, cybersecurity protections, internal controls, and compliance programs across geographically dispersed operations.

If we are unable to successfully construct, commission, ramp, and operate the Saudi Arabian facility on the timeline we expect, or if

the facility fails to achieve its anticipated operational, financial, or strategic objectives, our growth prospects, competitive position, operating

results, and long-term business strategy could be materially and adversely affected.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 37

Because the facility is not yet operational, there is substantial uncertainty regarding the timing and effectiveness of the

commissioning and ramp-up process. Initial production volumes, labor productivity, manufacturing yields, quality metrics, and operating

efficiencies may fall short of expectations. We may also encounter unforeseen technical, engineering, infrastructure, equipment integration, or

supply chain issues during startup. Any such challenges could require additional capital expenditures, delay customer deliveries, increase

operating costs, and adversely affect our ability to achieve expected returns on our investment.

Item 1L. Legal Proceedings

Item 1 — Legal Proceedings

We have been, and may be from time to time, involved in legal proceedings or subject to claims incident to the ordinary course of

business. We are not presently a party to any legal proceedings that we believe are likely to have a material adverse effect on our business,

financial condition, or operating results. Regardless of the outcome, such proceedings or claims can have an adverse impact on us because

of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be

obtained.

Item 1A — Risk Factors

Except as noted below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, “Risk Factors,”

in the 2025 Annual Report.

Our Water segment revenues largely depend on the construction of new large-scale desalination plants and the retrofit of

existing desalination plants, and as a result, our operating results have historically experienced, and may continue to experience,

significant variability due to volatility in capital spending, availability of project financing, project timing, execution, war or other

hostilities and other factors affecting the broader water desalination industry.

We currently derive the majority of our Water segment revenues from sales of energy recovery products and services used in newly

constructed, large-scale desalination plants and the retrofit of existing desalination plants, particularly in dry or drought-ridden regions of the

world. The demand for our products used in the Water segment may decrease if the construction of these large-scale desalination plants or

the retrofit of existing plants declines for any reason, including, any global or regional economic downturns, worsening global or regional

political conflicts, war or other hostilities, such as the 2026 conflict in Iran and escalating tensions in the Middle East, worsening regional

conditions, changing government priorities, or the impact of any global or regional conflicts.

Other factors that could affect the number and capacity of large-scale desalination plants built or the timing of their completion,

include the availability of required engineering and design resources; availability of credit and other forms of financing; the health of the global

economy; inflation rates; changes in government regulation, permitting requirements, or priorities; and reduced capital spending for water

desalination solutions. Each of these factors could result in reduced or uneven demand for our products. Pronounced variability, complete

cancellations or delays in the construction of such plants or reductions in spending for desalination in general could negatively impact our

Water segment sales, which in turn could have an adverse effect on our entire business, financial condition, or results of operations, and

make it difficult for us to accurately forecast our future sales.

A sustained downturn in the economy or global unrest could impact the future of new, and the retrofit of existing,

desalination plants, and the treatment of various wastewater verticals, which could result in decreased demand for our water

products and services.

The demand for our water products and services depends primarily on the continued construction of new large-scale desalination

plants, the retrofit of existing plants, and the construction of wastewater treatment facilities, particularly in the countries that are part of the

Gulf Cooperation Council, China, Taiwan and India. Weak economic conditions, global uncertainty including the continuing conflicts in

Ukraine, the continuing 2026 conflict in Iran and escalating conflicts in the Middle East, as well as the impact of increased inflation and a

potential stagflation resulting from such conflicts may have a negative economic impact on these and other countries, which may impact the

levels of spending on, timing of, delays to, and availability of, project financing for new desalination and retrofit plant projects. The inability of

our customers to secure credit or financing for these projects, may result in the postponement or cancellation of these projects. In addition,

the change in government priorities and/or their reduction in spending for water treatment projects could result in decreased demand for our

products and services, which could have an adverse effect on our business, financial condition or results of operations.

Uncertainty in the global geopolitical landscape and macro-economic environment may impact our operations outside the

U.S., including in the Middle East where many of our water megaprojects are planned.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 36

We conduct our business on a global basis. Our products are sold in numerous countries worldwide, with a large percentage of our

sales generated outside the U.S., specifically in the Middle East and Africa, and Asian markets which provide a significant portion of our total

revenue. Therefore, we are exposed to, and impacted by, global macroeconomic factors, U.S. and foreign government policies, and foreign

exchange fluctuations. There is uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by the supply chain

environment, inflationary pressure, rising interest rates, and labor shortages. These global macroeconomic factors, coupled with the U.S.

political climate, political unrest internationally, and conflicts in Europe and the Middle East, such as the continuing 2026 conflict in Iran and

Iran’s response to attacks by the United States and Israel, have created global economic and political uncertainty, and have impacted

demand for certain of our products. Further escalation of the conflict could heighten inflationary pressures on our input costs, adversely affect

global financial markets, increase currency exchange rate volatility, and elevate interest rates, which could increase the cost of future

financing. While the impact and longevity of these factors remain uncertain, we are constantly evaluating the extent to which these factors

will impact our business, financial condition, or results of operations. Over the long-term, demand for our energy recovery devices could

correlate to global macroeconomic and geopolitical factors. Any disruption to the economic factors and regulations in these regions, which

remain uncertain, may adversely affect our results of operations and financial condition.

In addition, there is uncertainty as to the position the U.S. will take with respect to world affairs. This uncertainty may include such

issues as the U.S. support for existing treaty and trade relationships with other countries, including, notably, China, Mexico and Canada. This

uncertainty, together with other recent key global events, such as currency control regulations and tariff regimes, economic sanctions and

export controls, trade restrictions, ongoing terrorist activity, and hostilities in the Middle East, may adversely impact (i) the ability or

willingness of non-U.S. companies to transact business with U.S. companies, including with us; (ii) our ability to transact business in other

countries where we have existing or prospective customer relationships, including the Middle East, where many of the water megaprojects

are planned; (iii) regulation and trade agreements affecting U.S. companies; (iv) global stock markets (including The NASDAQ Global Select

Market Composite on which our common shares are traded); and (v) general global economic conditions. Furthermore, the conflicts in

Europe and the Middle East have resulted in worldwide geopolitical and macroeconomic uncertainty, and we cannot predict how these

conflicts will evolve or their timing. If these conflicts continue for a significant time, further expand to other countries or regions or cannot be

stabilized by any diplomatic efforts, they could have additional adverse effects on macroeconomic conditions that may have a direct adverse

impact on our business and/or our supply chain, business partners or customers in the broader region. All of these factors are outside of our

control, but may nonetheless cause us to adjust our strategy in order to compete effectively in global markets.

We face risks associated with our first international manufacturing facility in Saudi Arabia.

We are investing significant resources to establish and operate our first manufacturing facility outside the United States, located in

Saudi Arabia. The successful construction, commissioning, and operation of this facility are subject to a variety of risks and uncertainties that

could materially and adversely affect our business, financial condition, results of operations, and cash flows.

The facility is currently under development and is expected to begin operations in 2027. Establishing a new manufacturing

operation in a foreign jurisdiction presents challenges that we have not previously encountered at this scale, including obtaining and

maintaining licenses, permits, and regulatory approvals; complying with local labor, tax, environmental, health and safety, customs, and other

legal requirements; hiring, training, and retaining a skilled local workforce; and implementing our manufacturing processes, quality systems,

and internal controls in a new operating environment. Any delays, cost overruns, construction deficiencies, supply chain disruptions, labor

shortages, or difficulties in commissioning equipment could postpone the facility’s operational readiness, increase our costs, and delay

anticipated benefits.

Our operations in Saudi Arabia also expose us to additional geopolitical, economic, and operational risks. These risks include

changes in government policies, trade regulations, local content requirements, taxation, foreign investment rules, import and export controls,

sanctions regimes, currency restrictions, and political or security conditions in the region. Any deterioration in regional stability, changes in

regulatory frameworks, or actions by governmental authorities could adversely affect the facility, our employees, our suppliers, or our

customers and could result in increased costs, operational disruptions, or limitations on our ability to conduct business in the region.

Further, the transfer of manufacturing knowledge, proprietary processes, and technology to a new foreign operation may increase

the risk of unauthorized disclosure, misuse, or infringement of our intellectual property. We may also face challenges in maintaining

consistent oversight, cybersecurity protections, internal controls, and compliance programs across geographically dispersed operations.

If we are unable to successfully construct, commission, ramp, and operate the Saudi Arabian facility on the timeline we expect, or if

the facility fails to achieve its anticipated operational, financial, or strategic objectives, our growth prospects, competitive position, operating

results, and long-term business strategy could be materially and adversely affected.

Energy Recovery, Inc. | Q2'2026 Quarterly Report (Form 10-Q) | 37

Because the facility is not yet operational, there is substantial uncertainty regarding the timing and effectiveness of the

commissioning and ramp-up process. Initial production volumes, labor productivity, manufacturing yields, quality metrics, and operating

efficiencies may fall short of expectations. We may also encounter unforeseen technical, engineering, infrastructure, equipment integration, or

supply chain issues during startup. Any such challenges could require additional capital expenditures, delay customer deliveries, increase

operating costs, and adversely affect our ability to achieve expected returns on our investment.