Good day, everyone, and welcome to the Energy Recovery's Third Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Chris Gannon. Please go ahead, sir.

Good morning, everyone, and welcome to Energy Recovery's earnings conference call for the third quarter of 2016. My name is Chris Gannon, Chief Financial Officer of Energy Recovery, and I'm here today with our President and Chief Executive Officer, Mr. Joel Gay. To begin, some of our comments and responses to questions may contain forward-looking statements about market trends, the Company’s ability to achieve the milestones under the Schlumberger licensing agreement, future revenues under the Schlumberger licensing agreement, the Middle East IsoBoost purchase order, centrifugal product line licensing, percentage-of-completion revenue recognition, growth expectations, cost structure, gross profit margins, new products and their performance, and business strategy, including strategic partnerships. Such forward-looking statements are based on current expectations about future events and are subject to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act. Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed. A detailed discussion of these risks, factors and uncertainties is contained in the reports that the Company files with the U.S. Securities and Exchange Commission, including our most recent Form 10-K filed on March 3, 2016. The Company assumes no obligation to update any forward-looking statements made during this call except as required by law. In addition some of our comments include certain non-GAAP financial measures, which do not reflect a comprehensive system of accounting. Generally a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either exclude or include amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP measures should be considered as a supplement to and not a substitute for or superior…

Thank you, Chris. As a continuation of the previous two quarters, the third quarter’s performance was in keeping with management's expectations and establishes the foundation for a record year both in terms of asset turnover and gross profitability. With total revenues of $12.3 million and at a 68% gross margin, this quarter produced the most efficient financial performance of all third quarters in the company's history respective to gross margin. Having now established a new high gross margin watermark for three consecutive quarters, the results of the [programmatic], and in fact comprehensive strategic and operational overall initiated in January of 2015 are self-evident. While gross margins are lifted by the quarterly amortization of the $75 million exclusivity fee paid in conjunction with the VorTeq licensing agreement, product gross margins of 64% alone demonstrate the prohibitive nature of our offerings, the sophistication of our manufacturing process, and the pricing power that we have reclaimed and deployed over the last 21 months. The quarter’s and year-to-date performance levels are empirical evidence towards Energy Recovery maturing from the phase of potential to that of delivery and in doing so generating premium risk adjusted return levels for our shareholders. Now for an update on our progress against the four imperatives that comprise our long-term corporate strategy namely, one, to establish and drive growth in the PX as a pump market beginning with the commercialization of our VorTeq technology; two, to create a rapid-fire innovation machine, resulting in the achievement of proof-of-concept of one derivative of the pressure exchanger in 24 month development cycles; three, to enhance our market position in desalination through the expansion of our product and service offering; and four, to monetize our centrifugal product line, IsoBoost and IsoGen, through alternative commercial vehicles. Let's begin with an update on our VorTeq commercialization…

[Operator Instructions] We will go first to James West with Evercore ISI. Your line is open.

Good morning guys. This is Blake Gendron stepping in for James. A couple of questions for you, the first one is on the VorTeq, in our discussions I know we talked about viscosity considerations with cross-linker or gel, and I know in the lab you guys did pump those just as well as you would have slickwater, my question is in our talks with industry contacts and actually Liberty too, they were open to the idea of maybe moving forward with the VorTeq commercialize if you were to commercialize with Schlumberger if you get the slickwater frac configuration down, there are lot of operational nuances especially with those higher viscosity crosslinks would you be open to possibly discussing the Schlumberger, maybe moving ahead with the commercialization as long as you get the slickwater down or are you going to basically get this thing working in all configurations before you go to commercialize it?

No, a great question. Actually the way we structured the agreement was to allow for commercialization sequentially beginning with slickwater. So as and when we commercialize the VorTeq fully, it gets the KPIs that we have described in the past. For slickwater applications we will begin deploying the missile into Schlumberger’s fleet, and then we will step into the commercialization process for non-slickwater chemistries. As I am sure you are aware the market has developed quite interestingly over the last call it 9 to 12 months as you think about pressure pumping and you further segment it by frac chemistry, there has been a significant move away from the more elaborate frac chemistries, hybrids, fibers et cetera and towards slickwater. So we think that bodes well for the early commercialization prospects for our company but of course, we were confident that over time and through a disciplined and diligent effort we can round out the capabilities of the VorTeq to accommodate our frac chemistries.

Got it. My second question is just a quick one just the range on the settlement fee, you talked about the aforementioned legal matters, can you give an estimate for the range of the settlement values?

No. We don’t disclose that. There will not be a direct expense. It is being covered under our [DNO] policy, but we do not disclose the actual settlement amount.

Got it. Thanks Joel.

Thank you.

[Operator Instructions] We will go next to Laurence Alexander with Jefferies. Your line is open.

Hi, this is [Indiscernible] for Laurence. Outside of water desalination, where capital costs can pose a challenge for customers, when in discussions with other potential partners for new applications, where are the conversations being held up if at all, is it design, functionality cost, lack of data and have conversations around value capture shifted now that the Schlumberger deal is in motion?

Well, look I think you have to evaluate each potential partnership on its own merits and of course it relates to the merits of the underlying technology. Other than pursuing partnerships as a means of more broadly disseminating our technology, we don't provide real time updates as to the status of each one of those conversations. What I will do is hark it back to the comments in my prepared remarks, in that we have found in particular in oil and gas as the market prepares for a medium to longer environment and that is certainly our opinion here at Energy Recovery, they are increasingly receptive to technologies that afford them a definitive cost advantage whether they be upstream, midstream or downstream and most importantly we are finding that the level of risk aversion has decreased commensurately with the price of oil, which is to say in a more depressed market with increasing levels of downward pricing pressure, end users are more apt to give a nod to due diligence, what they would otherwise consider to be nascent and foreign technologies. So that is how I would characterize my response to that.

Thank you.

[Operator Instructions] We will go next to Tom Curran with FBR Capital Markets. Your line is open.

Good morning guys.

Good morning Tom

At [analyst round table] on October 21, the update Schlumberger gave from their perspective on the VorTeq system testing, it sounded pretty encouraging at least in terms of how they conveyed their commitment to seeing it through to commercialization. Joel, could you share some more color for us around the respective roles Energy Recovery and Schlumberger have on the work that is being done to resolve these force and vibration pulse issues with regards to the missile, is it entirely in Schlumberger’s hands now, or is it a collaboration and who is getting to make the key design change calls along the way trying to resolve these challenges?

Sure. So I will start with the first part of your question, which was I guess to characterize the relationship between Schlumberger and our company, we believe it to be a very strong partnership and I will second what they disclosed during their Q3 roundtable, which is to say that our perception is that they are very supportive of the process, and they in fact want to see this through commercialization. And I don't even have to characterize or second what they have said, it is evidence in the quote that they provided in our press release and understanding how austere they are with communications. I think that speaks volumes. With respect to how we are remediating the design challenges that we have encountered with the missile namely pipe excitation, which is a manifestation of pressure and force pulsations, it is a collaborative effort. We start with our core competencies, which are fluid physics and material science. Our core competencies do not necessarily include the manufacturing or the design of the missile. I would submit that Schlumberger has forgotten more about missile design than we will ever learn, so we are certainly leaning very heavily on them, and the teams that are working together I think I described the process in the last call with the steering committee and whatnot. There is a very cooperative and I would characterize it as a synergistic relationship between the two companies where our engineers and their engineers are executing tests. They are reviewing the telemetry or the data from tests and then we are actioning remediation plans. Now specific to the march towards milestone one, milestone one will be attempted if not achieved with the current missile, which is to say our prototype missile. So we are going to make and we are in the process of making and I've already made some comprehensive structural changes to that piece of equipment. After the achievement of milestone one, we will take a step back. We will evaluate the data, we will confer with our license partner and we will determine the best path forward. And when I say the best path forward Tom that is the path that is the shortest distance between where we are at that point in time and commercialization, and that could include the critical path to milestone two and commercialization could include the design and manufacturing of an entirely new missile such that we don't have to continue to band aid and stitch the prototype, that served us very well however, anymore.

So then two follow-ups on that Joel, to help clarify the range of scenarios upon passing the milestone one test, just how long could the distance be between milestone one and milestone two in the most extreme scenario where you are going to completely redesign and rebuild the missile, and there is still definitely going to be a milestone two test regardless of which path you take after achieving milestone one, correct?

Yes, that is correct. All right. So let me take a step back and answer this in the most prudent manner possible. Since the onset of this process we have been allowed to provide very specific tightly book-ended guidance around timing. So, the predicate of your question is what sort of a time lapse could we expect after the achievement of milestone one to the attempt of milestone two assuming that we had to entirely redesign and manufacture a new missile. I will give you indicative lead times. Let us assume that the missile design effort was 50% complete by the time that we achieve milestone one, and why I would say 50% complete? Clearly the data acquired through the first milestone test will influence the design of a new missile. So it is a chicken or the egg scenario. We execute milestone one, we have some design concepts in hand and then we would spend let just say another 4 to 8 weeks completing the design. After that period we would go into a – either us or our licensing partner would execute the manufacturing process, which could be anywhere from 12 to 16 weeks. So that is indicative timing assuming that there was a complete overhaul and redesign effort. But we are in no way shape or form saying that 16 to 20 weeks would be the maximum amount of time that would transpire between milestone one and milestone two if we were to execute an entire redesign. The takeaway is we are going to take all of the time necessary to ensure that we one, maximize the probability of success and number two, in doing so abbreviate the timeline to commercialization to the greatest extent possible.

Very helpful Joel. I appreciate the additional details and clarification.

Thank you Tom. I appreciate the questions.

[Operator Instructions] We will go now to a follow-up from James West with Evercore ISI. Your line is open.

Hi, jumping back in if I may, and I know you touched on this with your discussion of the second imperative, but if you could give a little color on commercialization of a new product, maybe qualitatively the timeline what sort of implications or applications that product would serve?

Yes. Well that is the million-dollar question. What I can tell you is we are going to execute or attempt to execute against the same go to market process that we did with the VorTeq. As I stated in my prepared remarks, let us first start with what the corporate objective is, which is to take a product from concept to proof of concept in a 24 month development cycle. I have twice stated now on the last call and of course on this call that we expect to be in a position to announce a new offering, specifically a new derivative of the pressure exchanger in 2017. Now to the extent that we do sell prior to December 31, 2017 we would have outperformed to that 24 month development cycle. Now in terms of commercialization that is all a function of how quickly we can engage an early stage technology partner. Now in the example of the VorTeq, our early-stage technology partner was Liberty Oil Field Services, and that is a relationship that continues to bear fruit. And then ultimately our broader technology partner ended up being Schlumberger. So with this new offering we will again attempt to identify, engage and solicit an early stage technology partner, with whom we would coordinate to put this new offering into the field and validate its metal. And then we would seek to identify a longer-term or broader technology partner that could ultimately assist us in commercializing the offering. It would be unduly speculative if not imprudent for me to give you any timing around the commercialization process other than the color around the process itself that I just provided. The one timing point that I can give you is we expect to be in a position to announce that product offering in 2017, and we are bullish on that product.

Okay and just a quick follow-up, giving color on actually testing the field, you are insinuating that it could have oil and gas implications?

It will be in oil and gas, I can tell you that.

Got you. Thank you.

Thank you. And we have no further questions at this time. I'd like to turn the call back to our presenters for any closing remarks today.

Thank you for joining us this morning and we look forward to talking to you when we announce our year-end results or sooner if something momentous comes up. Thank you. Have a good day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.