Good afternoon, everyone, and welcome to Energy Recovery's Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Jim Siccardi, Vice President of Investor Relations of Energy Recovery. I'm here today with our Chairman and Interim President and Chief Executive Officer, Bob Mao; and our Chief Financial Officer, Joshua Ballard. During today's call, we may make projections and other forward-looking statements under the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the company. These statements may discuss our business, economic and market outlook, the company's ability to achieve the milestones and commercialization under the VorTeq licensing agreement, growth expectations, new products and their performance, cost structure and business strategy. Forward-looking statements are based on information currently available to us and on management's beliefs, assumptions, estimates or projections. Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. We refer you to documents the company files on time to time with the SEC, specifically the company's Form 10-K and Form 10-Q. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. All statements made during this call are made only as of today, March 5, 2020, and the company expressly disclaims any intent or obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances unless otherwise required by law. In addition, we may make some references to non-GAAP financial measures during this call. You will find supplemental data in the company's earnings press release, which was released to newswires and furnished to the SEC earlier today. The press release includes reconciliations of the non-GAAP measures to the comparable GAAP results. At this point, I'd like to turn the call over to our Chairman and Interim President and Chief Executive Officer, Bob Mao. Bob, the floor is yours.

Thank you, Jim, and thank you, everyone, for joining us today. 2019 was yet another good year for Energy Recovery. It was our third consecutive year of record-setting revenue in our Water business, our fifth consecutive year of revenue growth and our fourth consecutive year of 100% market share in the Mega project channel, our fastest growing channel. The reputation of our PX Pressure Exchanger and its lifetime value proposition is unmatched by our competitors. How do you compete against a product that rarely if ever fails and needs no maintenance? The value proposition is increasingly important today as mega plants grow even larger and will have nearly double the size from an average of roughly 150,000 cubic meters per day in 2018 to nearly 270,000 by 2021. We just recently announced a contract with the largest seawater reverse osmosis plant in history that will produce over 700,000 cubic liters of water per day. This is not only a major milestone for Energy Recovery but for the entire industry. The reverse osmosis desalination is indeed borne as evidenced by DesalData's recent estimates of seawater reverse osmosis CapEx spending, which is expected to increase from roughly $3.3 billion 2018 to over $8.9 billion in 2021. In such large plants, the cost of unplanned downtime can cost operators hundreds of thousands of dollars per day. Plant operator knows that our PX rarely fail. This reputation should continue to serve us well, given what is shaping up to be yet another record year in 2020. We are confident in our ability to continue to execute even as our backlog and pipeline grow. Even though our strong 2019 end of year results increased the base from which our outlook was calculated, we remain confident in our ability to generate 20% to 25% revenue growth…

Thank you, Bob. We ended the year strong and somewhat above our Q3 2019 guidance, generating total revenue of $19.5 million, representing 10% growth year-over-year for the fourth quarter ending December 31. For the full fiscal year, we achieved total revenues of $86.9 million, 17% growth over the same period in 2018. Our Water business generated $16 million in revenue during the fourth quarter, representing growth of 14% year-over-year. We achieved revenues of $73 million for the total fiscal year, 20% increase over the same period in 2018. Our mega-project channel led this annual growth increasing 40% in 2019. We expect mega-projects to continue to drive growth in 2020 and 2021. The significant annual growth in our mega-project channel drove its revenues up to 52% of our water sales, an increase from 45% in 2018. OEM was 32% of water sales and aftermarket 16% for the year. While the majority of our water growth was in the Middle East, more than 20% of our 2019 increase occurred in Latin America, where we are seeing increased project activity related to industrial sectors as water needs increase in the region. We couldn’t be proud of our water team for this tremendous growth. As Bob mentioned, we are currently guiding growth of 20% to 25% 2020 off these higher end year results, which increases our guidance $3 million to $4 million for 2020 or about 4%. We hope to adjust this guidance further in the coming quarters as bookings finalize and any potential effect on the coronavirus becomes clear. We recognized total revenue of $3.7 million for the fourth quarter in our Oil and Gas business, an increase back to normalized levels from our decline in the third quarter. For fiscal year 2019, we recognized a total of $14.1 million in license revenue.…

Our first question today is coming from Pavel Molchanov from Raymond James. Your line is now live.

Thanks very much. First a question on the water revenue guidance. You said up 20% to 25% for the year as a whole. Do you anticipate any front end weighted or backend weighted cadence or should it be fairly stable from quarter-to-quarter?

This is Josh. Hi, Pavel. I’d assume a weighting of probably 40% to 60% – 40% in the first half and 60% the other in the second half.

Okay, very clear. And on the testing progress with regard to VorTeq given that 2020 marks five year mark milestone from the original Schlumberger agreement. Are you committing to get to at least step M1 before the year is out?

Yes.

And what gives you the confidence in that?

As we described in my update we passed 2.1 million pounds of sand. That’s seven stages. I’m sure you’ll remember, M1 is five stages. And also we have frozen our production prototype. So we are not – it is still tinkering around in R&D. And furthermore, our product partner has enough confidence in what they have seen. And we are actively sourcing potential live frac. These are the data points.

Okay. We’ll look forward to hearing more about it. Thank you.

Thank you. Our next question today is coming from Tom Curran from FBR. Your line is now live.

Good evening. Bob, it sounds as if so, in your prepared remarks, the product partner, you referenced, presumably with Schlumberger and then by live well, my understanding is that M1 was going to be conducted with a Schlumberger crew and frac spread, I believe originally intended at Kellyville, is that what you mean by live one. Is that a reference to the original plan for M1? Or has that changed? And are you referencing by live well, a frac job site that would include an actual operator, that's a customer?

Our product partner is Liberty in this effort. And it will be at a live frac site, that's where we're searching, a live frac site at a end customer of Liberty's.

I see. So you expect, over the course of this year to both move forward and conduct testing with Liberty at a live frac job site with one of Liberty's actual customers as well as resuming and completing M1 with Schlumberger, you expect to move forward with both this year?

That’s correct, yes.

Great. And then regarding the recent full-scale testing you've done in Katy, the sand data you shared was very helpful. Would you perhaps quantify what your recent testing ranges had been for BPM, meaning flow rate and then pressure?

Pressure is up to 10,000 psi. Flow rates – the more important one, as I mentioned, is that we're testing four to six and eight pounds of sand. Since you are apparently quite familiar with M1. M1, in fact, was only envisioning two pounds of sand. And with the sand density, if you will, changes, the flow rate would also vary because of that sand density.

Right. Makes sense. And that all sounds technically very encouraging. When it comes to milestones 1 and 2, have you yet agreed to? Or do you expect to have to negotiate any changes, including potential modifications to the KPIs for each test? It doesn't sound as if those KPIs have changed?

No. We are not contemplating or are we negotiating any changes to those KPIs.

Great. Thanks for fielding my questions.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Well, this is Bob, and thank you for joining us this afternoon. We look forward to providing an update on our next earning call in eight weeks. Have a good day. Thank you.