erii20180421_def14a.htm

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

 

 

 

Filed by the Registrant
Filed by a party other than the Registrant

Check the appropriate box:

 

Preliminary Proxy Statement

Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Definitive Proxy Statement

Definitive additional materials

Soliciting material under Rule 14a-12

 

Energy Recovery, Inc.

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

No fee required.

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)

Title of each class of securities to which transaction applies:

 

(2)

Aggregate number of securities to which transactions applies:

 

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

(4)

Proposed maximum aggregate value of transaction:

 

(5)

Total fee paid:

Fee paid previously with preliminary materials:

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

 

(1)

Amount previously paid:

 

(2)

Form, Schedule or Registration Statement No.

 

(3)

Filing Party:

 

(4)

Date Filed:

 

 

 

 

Energy Recovery, Inc.

 
 

1717 Doolittle Drive

San Leandro, CA 94577

 
 

NOTICE OF 2018 ANNUAL MEETING OF STOCKHOLDERS
To Be Held On Thursday, June
14, 2018

 

Dear Stockholders of Energy Recovery, Inc.:

 

We are pleased to invite you to attend our 2018 Annual Meeting of Stockholders to be held on Thursday, June 14, 2018, at 10:00 a.m. Pacific Daylight Time at the Company’s headquarters located at 1717 Doolittle Drive, San Leandro, CA 94577 (the “Annual Meeting”). At the Annual Meeting, we will ask you to consider the following proposals:

 

  To elect two (2) Class I directors to serve until our 2021 annual meeting of stockholders or until their respective successors have been elected and qualified, or until the director’s earlier removal or resignation;
     
 

To ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2018;

 

 

To hold a non-binding advisory vote on executive compensation; and

 

 

To transact such other business that may properly come before the Annual Meeting or any adjournment or postponement thereof.

 

Our Board of Directors has fixed the close of business on April 20, 2018, as the record date for the Annual Meeting. Stockholders of record as of April 20, 2018 may vote at the Annual Meeting or any postponements or adjournments of the meeting. This notice of annual meeting, notice of internet availability, proxy statement, annual report on Form 10-K and form of proxy are being made available on or about April 30, 2018.

 

 

 

Your vote is important. Whether or not you plan to attend the meeting in person, we would like for your shares to be represented. Please vote as soon as possible via the Internet, telephone, or mail.

 

At the meeting, we will also report on our 2017 business results and other matters of potential interest to our stockholders.

 

 

 

 

Sincerely,

 

 

Chris Gannon
President and Chief Executive Officer

 

San Leandro, California
April 30, 2018

 

Whether or not you expect to participate in the Annual Meeting, please vote via the Internet, by phone, or complete, date, sign and promptly return the accompanying proxy card or voting instruction card in the enclosed postage-paid envelope so that your shares may be represented at the Annual Meeting.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Stockholder Meeting To Be Held on June 14, 2018: This Proxy Statement, along with the Annual Report on Form 10-K for the fiscal year ended December 31, 2017, is available free of charge at the following website: www.proxyvote.com.

 

 

 

PROXY STATEMENT

     


2017 ANNUAL MEETING OF STOCKHOLDERS

To Be Held On Thursday, June 14, 2018

     

 

TABLE OF CONTENTS 

Page

 

PROXY STATEMENT

1

INFORMATION ABOUT THE ANNUAL MEETING

1

 

1.

What is the purpose of the Annual Meeting

1

 

2.

How do I vote

1

 

3.

How does the Board of Directors recommend I vote on these proposals

2

 

4.

What is included in the proxy materials

2

 

5.

Why did I receive a Notice of Internet Availability of Proxy Materials instead of a full set of proxy materials

2

 

6.

How many votes do I have

3

 

7.

Can I change my vote or revoke my proxy after submitting my proxy

3

 

8.

Can I attend the meeting in person

3

 

9.

What if I return a proxy card but do not make specific choices

3

 

10.

Who pays for the expenses related to the preparation and mailing of the Proxy Statement

3

 

11.

Who can vote at the Annual Meeting

4

 

12.

Will there be any other items of business on the agenda

4

 

13.

How many votes are required for the approval of each item

4

 

14.

What is the quorum requirement

4

 

15.

What is a record holder

4

 

16.

What is a beneficial owner

4

 

17.

How are votes counted

5

 

18.

Who counts or tabulates the votes

6

 

19.

How do I access the proxy materials and annual report via the Internet

6

 

20.

What should I do if I get more than one proxy or voting instruction card

7

 

21.

I share an address with another stockholder, and we received only one paper copy of the proxy materials.  How may I obtain an additional copy of the proxy materials

7

 

22.

What if I have questions about my Energy Recovery shares or need to change my mailing address

8

 

23.

Where can I find the voting results of the Annual Meeting

8

PROPOSALS TO BE VOTED ON AT THE MEETING

9

PROPOSAL NO. 1 ELECTION OF DIRECTORS

9

PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

11

 

Principal Accountant Fees and Services

12

 

Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

12

PROPOSAL NO. 3 NON-BINDING ADVISORY VOTE ON EXECUTIVE COMPENSATION

13

BOARD AND CORPORATE GOVERNANCE MATTERS

14

 

Board of Directors

14

 

Director Independence

14

 

Relationships Among Directors or Executive Officers

15

 

Board Leadership and Risk Oversight

15

 

Committees and Meetings of the Board of Directors

16

 

-i-

 

 

Committee Membership

16

 

The Audit Committee

16

 

The Compensation Committee

17

 

The Nominating and Corporate Governance Committee

17

 

Compensation Committee Interlocks and Insider Participation

18

 

Communication between Stockholders and Directors

19

 

Director Compensation

19

 

Director Compensation for the Year Ended December 31, 2017

19

 

Stock Ownership Guidelines

20

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

21

EXECUTIVE COMPENSATION

23

 

Compensation Discussion and Analysis

23

 

 

Compensation Philosophy and Objectives

23

 

 

Pay Best Practices

24

 

 

Executive Compensation Process

25

 

 

Independent Compensation Consultant for Compensation Committee

26

 

 

Consideration of “Say on Pay” Results

26

 

 

Competitive Positioning

27

 

 

Base Salaries of Named Executive Officers

27

 

 

Annual Cash Incentive Compensation

28

 

 

Equity-Based Incentive Compensation

29

 

 

2017 Equity-Based Incentive Awards

29

 

 

Benefits

30

 

 

Change in Control Severance Plan

30

 

 

Severance and Termination Compensation

30

 

 

Tax Deductibility

31

 

 

Compensation Policies and Practices as They Relate to Risk Management

31

REPORT OF THE COMPENSATION COMMITTEE

31

 

Summary Compensation Table

32

 

Grants of Plan-Based Awards in 2017

33

 

Outstanding Equity Awards as of December 31, 2017

35

 

Option Exercises and Stock Vested in 2017

36

 

Potential Payments Upon Termination or Change of Control

36

 

Key Defined Terms of the Change In Control Plan

37

 

Benefits under the Change in Control Plan

40

CEO PAY RATIO

40

REPORT OF THE AUDIT COMMITTEE

41

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

43

 

Directors

43

 

Nominees for Director

43

 

Executive Officers

46

RELATED PERSON POLICIES AND TRANSACTIONS

48

CODE OF BUSINESS CONDUCT AND ETHICS

49

STOCKHOLDER PROPOSALS

50

 

Requirements for Stockholder Proposals to be Brought Before an Annual Meeting

50

 

Requirements for Stockholder Proposals to be Considered for Inclusion in the Company’s Proxy Materials

50

OTHER MATTERS

50

 

Section 16(a) Beneficial Ownership Reporting Compliance

50

OTHER MATTERS

50

ANNUAL REPORTS

50

 

-ii-

 

ENERGY RECOVERY, INC.

 

PROXY STATEMENT

2018 ANNUAL MEETING OF STOCKHOLDERS

To Be Held at 10:00 a.m. Pacific Daylight Time on Thursday, June 14, 2018

 

This proxy statement and the enclosed form of proxy (“Proxy Statement”) are furnished in connection with the solicitation of proxies by our Board of Directors (the “Board” or “Board of Directors”) for use at the 2018 annual meeting of stockholders of Energy Recovery, Inc., a Delaware corporation, and any postponements, adjournments or continuations thereof (the “Annual Meeting”). The Annual Meeting will be held on Thursday, June 14, 2018 at 10:00 a.m. Pacific Daylight Time at the Company’s headquarters located at 1717 Doolittle Drive, San Leandro, CA 94577. The telephone number at that location is (510) 746-7370. References in this Proxy Statement to “we,” “us,” “our,” “the Company” or “Energy Recovery” refer to Energy Recovery, Inc.

 

The Notice of Internet Availability of Proxy Materials (the “Notice”) containing instructions on how to access this Proxy Statement and our Annual Report is first being mailed on or about April 30, 2018 to all stockholders entitled to vote at the Annual Meeting.

 

The information provided in the “question and answer” format below is for your convenience only and is merely a summary of the information contained in this proxy statement. You should read this entire proxy statement carefully.

 

ENERGY RECOVERY, INC.

 

INFORMATION ABOUT THE annual MEETING

 

Q:

What is the purpose of the Annual Meeting?

 

A:

Stockholders of record at the close of business on April 20, 2018 (the “Record Date”) will vote on the following items at the Annual Meeting:

 

 

to elect Ole Peter Lorentzen and Olav Fjell as Class I directors to serve until our 2021 annual meeting of stockholders or until their respective successors have been elected and qualified;

 

 

to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2018;

 

 

to hold a non-binding advisory vote on executive compensation;

 

 

to transact such other business that may properly come before the Annual Meeting or at any adjournment or postponement thereof.

 

Q:

How do I vote?

 

A:

If you are a stockholder of record as of the Record Date, there are four ways to vote:

 

 

In person. You may vote in person at the Annual Meeting. The Company will give you a ballot when you arrive.

 

 

Via the Internet. You may vote by proxy via the Internet by following the instructions found on the proxy card or the Notice.

 

1

 

 

By Telephone. You may vote by proxy by calling the toll-free number found on the proxy card or the Notice.

 

 

By Mail. You may vote by proxy by filling out the proxy card and returning it in the envelope provided. If you vote by mail, your proxy card must be received by June 13, 2018.

 

Please note that the Internet and telephone voting facilities will close at 11:59 p.m. Eastern Daylight Time (8:59 p.m. Pacific Daylight Time) on June 13, 2018.

 

If, as of the Record Date, you are a beneficial owner of shares held in street name, you should have received from your broker, bank, trustee or other nominee instructions on how to vote or instruct the broker to vote your shares, which are generally contained in a “vote instruction form” sent by the broker, bank, trustee or other nominee. Please follow their instructions carefully. Street name stockholders generally may vote by one of the following methods:

 

 

In person. If you wish to vote in person at the Annual Meeting, you must obtain a legal proxy from the organization that holds your shares. Please contact that organization for instructions regarding obtaining a legal proxy to you by your broker, bank, trustee, or other nominee.

 

 

Via the Internet. You may vote by proxy via the Internet by following the instruction form provided to you by your broker, bank, trustee, or other nominee.

 

 

By Telephone. You may vote by proxy by calling the toll-free number found on the vote instruction form provided to you by your broker, bank, trustee, or other nominee.

 

 

By Mail. You may vote by proxy by filling out the vote instruction form and returning it in the envelope provided to you by your broker, bank, trustee, or other nominee.

 

Q:

How does the Board of Directors recommend I vote on these proposals?

 

A:

The Board recommends a vote:

 

 

FOR the election of directors Ole Peter Lorentzen and Olav Fjell;

 

 

FOR the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2018; and

 

 

FOR the approval of our executive compensation.

 

Q:

What is included in the proxy materials?

 

A:

The proxy materials include this Proxy Statement and our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”) on March 8, 2018 (the “Annual Report”). These materials were first made available to you via the Internet on or about April 30, 2018. Our principal executive offices are located at 1717 Doolittle Drive, San Leandro, CA 94577, and our telephone number is (510) 483-7370. We maintain a website at www.energyrecovery.com. The information on our website is not a part of this Proxy Statement.

 

Q:

Why did I receive a Notice of Internet Availability of Proxy Materials instead of a full set of proxy materials?

 

A:

In accordance with the rules of the SEC, we have elected to furnish our proxy materials, including this Proxy Statement and the Annual Report, primarily via the Internet. The Notice containing instructions on how to access our proxy materials is first being mailed on or about April 30, 2018 to all stockholders entitled to vote at the Annual Meeting. Stockholders may request to receive all future proxy materials in printed form by mail or electronically by e-mail by following the instructions contained in the Notice. We encourage stockholders to take advantage of the availability of our proxy materials via the Internet to help reduce the environmental impact of our Annual Meetings.

 

2

 

Q:

How many votes do I have?

 

A:

On each matter to be voted upon, you have one vote for each share of common stock you own as of the Record Date.

 

Q:

Can I change my vote or revoke my proxy after submitting my proxy?

 

A:

You may change your vote or revoke your proxy at any time prior to the taking of the vote at the Annual Meeting.

 

If you are the stockholder of record, you may change your vote by (1) granting a new proxy bearing a later date (which automatically revokes the earlier proxy) using any of the methods described on pages 1 and 2 of this Proxy Statement (and until the applicable deadline for each method); (2) providing a written notice of revocation to the Company’s Secretary at Energy Recovery, Inc., 1717 Doolittle Drive, San Leandro, CA 94577 prior to your shares being voted; or (3) attending the Annual Meeting and voting in person. Attendance at the Annual Meeting will not cause your previously granted proxy to be revoked unless you specifically so request or vote in person at the Annual Meeting.

 

For shares you hold beneficially in street name, you generally may change your vote by submitting new voting instructions to your broker, bank, trustee, or nominee following the instructions they provided, or, if you have obtained a legal proxy from your broker, bank, trustee, or nominee giving you the right to vote your shares, by attending the Annual Meeting and voting in person.

 

Q:

Can I attend the meeting in person?

 

A:

You are invited to attend the Annual Meeting if you are a registered stockholder or a street name stockholder as of April 20, 2018, the Record Date. In order to enter the Annual Meeting, you must present a form of photo identification acceptable to us, such as a valid driver’s license or passport. If you hold your shares beneficially in street name, you will need to provide proof of stock ownership as of the Record Date. Please note that since a street name stockholder is not the stockholder of record, you may not vote your shares in person at the Annual Meeting unless you follow your broker’s procedures for obtaining a legal proxy.

 

Q:

What if I return a proxy card but do not make specific choices?

 

A:

When proxies are properly dated, executed, and returned, the shares represented by such proxies will be voted at the Annual Meeting in accordance with the instructions of the stockholder. If no specific instructions are given, the shares will be voted in accordance with the recommendations of our Board of Directors as described on page 2 of this Proxy Statement. If any matters not described in this Proxy Statement are properly presented at the Annual Meeting, the proxy holders will use their own judgment to determine how to vote your shares. If the Annual Meeting is postponed or adjourned, the proxy holders can vote your shares on the new meeting date as well, unless you have revoked your proxy instructions, as described above under “Can I change my vote or revoke my proxy after submitting my proxy?”

 

Q:

Who pays for the expenses related to the preparation and mailing of the Proxy Statement?

 

The Company will bear the costs of soliciting proxies, including the costs for the preparation, assembly, printing, and mailing of the Proxy Statement and related proxy materials. In addition, the Company will reimburse brokerage firms and other nominees representing beneficial owners of shares for their expenses in forwarding solicitation materials to beneficial owners of those shares. We have retained Alliance Advisors as our proxy solicitors, and proxies may be solicited by a representative of that firm. For its services, we will pay Alliance Advisors a fee of $6,000, plus reasonable expenses. Proxies may also be solicited by certain of the Company’s directors, officers, and regular employees, without additional compensation, either personally, by telephone, facsimile, or mail.

 

3

 

Q:

Who can vote at the Annual Meeting?

 

Only stockholders of record at the close of business on April 20, 2018, the Record Date, will be entitled to notice of, and to vote at, our Annual Meeting. Each stockholder of record will be entitled to one vote on each matter for each share of common stock held on the Record Date. On the Record Date, the Company had 53,651,381shares of common stock outstanding, held by 38 holders of record.

 

Q:

Will there be any other items of business on the agenda?

 

A:

We do not know of any business to be considered at the Annual Meeting other than the proposals described in this Proxy Statement; however, the proxy holders (who are the management representatives named on the proxy card) may vote using their discretion with respect to any other matters properly presented for a vote at the meeting.

 

Q:

How many votes are required for the approval of each item?

 

A:

Proposal No. 1 (election of directors): The candidates who receive the greatest number of votes cast at the Annual Meeting will be elected, provided that a quorum is present. The Board recommends a vote “FOR” all nominees.

 

Proposal No. 2 (ratification of Deloitte & Touche LLP as our independent registered public accountants) and Proposal No. 3 (advisory approval of the Company’s executive compensation): An affirmative vote of a majority of the shares of the Company’s common stock present and entitled to vote is required to approve Proposals No. 2 and No. 3, provided that a quorum is present. The Board recommends a vote “FOR” each of the Proposals No. 2 and No. 3.

 

Q:

What is the quorum requirement?

 

A:

A “quorum” of stockholders must be present for us to hold a valid meeting of stockholders. Stockholders representing a majority (more than 50%) of the voting power of our outstanding common stock as of the Record Date, present in person or represented by proxy, constitute a quorum for the transaction of business at the Annual Meeting.

 

Your shares will be counted towards the quorum only if you submit a valid proxy or if you vote in person at the meeting. Stockholders who submit signed and dated proxies without specifying their votes and broker “non-votes” described below will be counted towards the quorum requirement. If there is no quorum, the chairperson of the meeting or a majority of the votes present at the meeting may adjourn the meeting to another date.

 

Q:

What is a record holder?

 

A:

If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, you are considered a “record holder” of those shares. If you are a record holder, you will receive a Notice on how you may access and review the proxy materials on the Internet.

 

Q:

What is a beneficial owner?

 

A:

If your shares are held in a stock brokerage account, by a bank, or by another nominee, those shares are registered with American Stock Transfer & Trust Company in the “street name” of the brokerage account, bank, or other nominee, and you are considered the “beneficial owner” of those shares. If you are a beneficial owner, your broker or other nominee will send you a form of voting instructions along with instructions on how to access proxy materials.

 

4

 

As a beneficial owner, you have the right to direct your broker, bank, or other nominee on how to vote your shares by using the voting instruction form included in the mailing or by following the instructions on the voting instruction card for voting via the Internet or telephone.

 

If there are multiple beneficial owners in the same household, your broker or other nominee may send only one set of voting instructions or copy of the proxy materials to your household. If you are receiving multiple copies of these materials and would like to receive a single copy in the future, please contact your broker, bank, or other nominee to request a single copy in the future.

 

Q:

How are votes counted?

 

A:

All shares of common stock represented by valid proxies will be voted in accordance with their instructions. In the absence of instructions, proxies will be voted “FOR” Proposals 1, 2 and 3.

 

Brokers, banks, and other nominees may submit a proxy card for shares of common stock that they hold for a beneficial owner, but may decline to vote on certain items because they have not received instructions from the beneficial owner. These are called “Broker Non-Votes” and are not included in the tabulation of the voting results for the election of directors or for purposes of determining the number of votes cast with respect to a particular proposal. Consequently, Broker Non-Votes will not count as votes cast for purposes of Proposals No. 1 and 3.

 

Brokers have the discretion to vote such shares for which they have not received voting instructions from the beneficial owners on routine matters but not on non-routine matters. The only routine matter up for vote this year is the ratification of the independent registered public accounting firm (Proposal No. 2).

 

A broker is prohibited from voting on a non-routine matter unless the broker receives specific voting instructions from the beneficial owner of the shares. The election of directors (Proposal No. 1) and the advisory vote on executive compensation (Proposal No. 3) are non-routine matters, and your broker cannot vote your shares on these proposals unless you have timely returned applicable voting instructions to your broker.

 

Abstentions have no effect on the outcome of voting for Proposal No. 1, election of directors. Abstentions are treated as shares present or represented and voting regarding Proposals No. 2 and No. 3, so abstentions have the same effect as negative votes on those proposals.

 

5

 

A summary of the voting provisions, provided a valid quorum is present or represented at the Annual Meeting, for the matters described in “What is the purpose of the Annual Meeting?” is as follows:

 

Proposal

No.

Vote

Board Voting

Recommendation

Routine or

Non-Routine

Discretionary

Voting by

Broker

Permitted?

Vote

Required for

Approval

Impact of

Abstentions

Impact of

Broker Non-

votes

(Uninstructed

Shares)

1

Election of director nominees

FOR

Non-routine, thus if you hold your shares in street name, your broker may not vote your shares for you.

No

Plurality1

No impact

No impact

2

Ratification of independent registered public accountants

FOR

Routine, thus if you hold your shares in street name, your broker may vote your shares for you absent any other instructions from you.

Yes

Majority of shares present or represented by proxy and entitled to vote

Has the same effect as a vote against

Broker has the discretion to vote

3

Advisory, non-binding approval of executive compensation

FOR

Non-routine, thus if you hold your shares in street name, your broker may not vote your shares for you.

No

Majority of shares present or represented by proxy and entitled to vote

Has the same effect as a vote against

No impact

1“Plurality” means that the nominees who receive the largest number of votes cast “for” are elected as directors. Accordingly, the two nominees receiving the highest number of affirmative votes will be elected as Class I directors to serve until the 2021 annual meeting of stockholders or until their respective successors are duly elected and qualified. Abstentions and broker non-votes will have no effect on the outcome of the vote.

 

 

Q:

Who counts or tabulates the votes?

 

A:

The votes of stockholders attending the Annual Meeting and voting in person will be counted or tabulated by an independent inspector of election. For our meeting, a representative of Broadridge Investor Communications Solutions, Inc. will tabulate votes cast by proxy and in person.

 

Q:

How do I access the proxy materials and annual report via the Internet?

 

A:

A Notice will be mailed or emailed with instructions on how to access proxy materials via the Internet. This Proxy Statement, the 2017 Annual Report, and related proxy materials for the Annual Meeting of Stockholders to be Held on June 14, 2018 will also be available electronically at http://ir.energyrecovery.com.

 

6

 

If you have previously chosen to receive the proxy materials via the Internet, you will be receiving an e-mail on or about April 30, 2018 with information on how to access stockholder information and instructions for voting over the Internet. Stockholders of record may vote via the Internet until 11:59 p.m. Eastern Daylight Time on June 13, 2018.

 

If your shares are registered in the name of a brokerage firm and you have not elected to receive proxy materials over the Internet, you may still be eligible to vote shares electronically over the Internet. Many brokerage firms participate in programs that provide eligible stockholders who receive a paper copy of the Proxy Statement and Annual Report the opportunity to vote via the Internet. If your brokerage firm participates in such a program, a form from the broker will provide voting instructions.

 

Stockholders can elect to view future Proxy Statements and Annual Reports over the Internet instead of receiving paper copies. Stockholders of record wishing to receive future stockholder materials electronically can elect this option by following the instructions provided when voting over the Internet at www.proxyvote.com.

 

Upon electing to view future Proxy Statements and Annual Reports over the Internet, you will receive an e-mail notification next year with instructions containing the Internet address of those materials. The choice to view future Proxy Statements and Annual Reports over the Internet will remain in effect until you contact your broker or the Company to rescind the instructions. Internet access does not have to be elected each year.

 

Stockholders who elected to receive this Proxy Statement electronically over the Internet and who would now like to receive a paper copy of this Proxy Statement so that they may submit a paper proxy in lieu of an electronic proxy should contact either their broker or the Company.

 

Q:

What should I do if I get more than one proxy or voting instruction card?

 

A:

Stockholders may receive more than one set of voting materials, including multiple copies of the proxy materials and multiple Notices, proxy cards, or voting instruction cards. For example, stockholders who hold shares in more than one brokerage account may receive separate sets of proxy materials for each brokerage account in which shares are held. Stockholders of record whose shares are registered in more than one name will receive more than one set of proxy materials or one Notice. You should vote in accordance with all of the proxy cards and voting instruction cards you receive relating to our Annual Meeting to ensure that all of your shares are counted.

 

Q:

I share an address with another stockholder, and we received only one paper copy of the proxy materials. How may I obtain an additional copy of the proxy materials?

 

A:

The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for Proxy Statements and annual reports with respect to two or more stockholders sharing the same address by delivering a single Proxy Statement addressed to those stockholders. This process is commonly referred to as “house-holding.”

 

Brokers with account holders who are Energy Recovery stockholders may be house-holding our proxy materials. A single set of proxy materials may be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that it will be house-holding communications to your address, house-holding will continue until you are notified otherwise or until you notify your broker or The Company that you no longer wish to participate in house-holding.

 

If, at any time, you no longer wish to participate in house-holding and would prefer to receive a separate Proxy Statement and Annual Report, you may (1) notify your broker, (2) direct your written request to: Investor Relations, Energy Recovery, Inc., 1717 Doolittle Drive, San Leandro, CA 94577 or (3) contact our Investor Relations department by email at IR@energyrecover.com or by telephone at (510) 746-2501. Stockholders who receive multiple copies of the Proxy Statement or Annual Report at their address and would like to request house-holding of their communications should contact their broker. In addition, we will promptly deliver, upon written or oral request to the address or telephone number above, a separate copy of the Annual Report and Proxy Statement to a stockholder at a shared address to which a single copy of the documents was delivered.

 

7

 

Q:

What if I have questions about my Energy Recovery shares or need to change my mailing address?

 

A:

You may contact our transfer agent, American Stock Transfer & Trust Company, by telephone at (800) 937-5449 (U.S.) or (718) 921-8124 (outside the U.S.), or by email at info@amstock.com, if you have questions about your Energy Recovery shares or need to change your mailing address.

 

Q:

Where can I find the voting results of the Annual Meeting?

 

A:

We will announce preliminary voting results at the Annual Meeting. We will also disclose voting results on a Current Report on Form 8-K that we will file with the SEC within four business days after the Annual Meeting. If final voting results are not available to us in time to file a Current Report on Form 8-K within four business days after the Annual Meeting, we will file a Current Report on Form 8-K to publish preliminary results and will provide the final results in an amendment to this Current Report on Form 8-K as soon as they become available.

 

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PROPOSALs to be voted on at the meeting

 

Proposal NO. 1

ELECTION OF DIRECTORS

 

The Company’s Amended and Restated Certificate of Incorporation (our “Charter”) provides that the Board shall be divided into three classes, with the directors in each class serving three-year terms. At the Annual Meeting, two Class I directors will be elected for three year terms.

 

The Nominating and Corporate Governance Committee of the Board of Directors has recommended, and the Board of Directors approved Ole Peter Lorentzen and Olav Fjell as nominees for election as Class I directors at the Annual Meeting. If elected, each newly elected director will serve until the 2021 annual meeting of stockholders, or until each director’s successor is duly elected and qualified, or until the director’s earlier removal or resignation.

 

Each of the nominees is currently a director of the Company and each of the nominees named below has consented, if elected as a director of the Company, to serve until his term expires.

 

In the event that any nominee of the Company is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee who shall be designated by the present Board of Directors to fill the vacancy. In the event that additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them in such a manner as will assure the election of as many of the nominees listed below as possible. In such event, the specific nominees to be voted for will be determined by the proxy holders. The Board has no reason to believe that any of the persons named below will be unable or unwilling to serve as a director, if elected. Each of the two nominees for director who receives the greatest number of votes will be elected.

 

Set forth below are the names, ages, and certain biographical information relating to the Class I director nominees as of April 20, 2018.

 

DIRECTOR NOMINEES

 

 

 

Olav Fjell

Age: 66

 

 

Director Since: 2015

Current Board Committees:

-Nominating and Corporate Governance

-Audit

Education: M.Sc. Business Administration and Economics, Norwegian School of Economics and Business Administration

 

Mr. Fjell joined the Board of Directors of the Company in June 2015. Mr. Fjell is a seasoned business leader with experience in the oil and gas industry, finance industry and high tech engineering industry. He is chair of the boards of Moelven AS, Nofima AS, Concedo ASA, Bene Agere Norden AS, IFE and Franzefoss AS. He is the deputy chair of Lotos Exploration and Production Norge and a member of the board of Turbulent Flux AS. Mr. Fjell was the CEO of Statoil from 1999 to 2003, Lindorff from 2005 to 2007 and Hurtigruten from 2007 to 2012. He has also served as the CEO of Postbanken and been part of the senior management teams at Kongsberg Våpenfabrikk and DNB. Mr. Fjell holds an M.Sc. in Business Administration and Economics (sivilokonom) from the Norwegian School of Economics and Business Administration.

 

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Ole Peter Lorentzen

Age: 65

 

Director Since: 2015

Current Board Committees:

-Nominating and Corporate Governance (chair)

-Compensation

Education: Bachelor’s Business Administration, Lund University

 

Mr. Lorentzen previously served on our Board from January 2007 until the Company went public in 2008. He joined our Board again in 2015. Since December 1987 Mr. Lorentzen has been the Chairman and beneficial owner of Ludvig Lorentzen, an investment company that typically holds a concentrated portfolio of investments for seven to fifteen years. He has extensive experience in working with management teams and Boards to seek methods of enhancing value for all shareholders. He served as Director of Agasti Holding ASA from May 2010 through May 2013. He served as a Director of Opera Software ASA until June 21, 2007. Mr. Lorentzen holds a bachelor’s degree in business administration from Lund University in Sweden.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE ELECTION OF EACH OF Ole peter Lorentzen AND Olav fjell AS CLASS I DIRECTORS.

 

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PROPOSAL NO. 2

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC Accounting firm

 

The Audit Committee has appointed Deloitte & Touche LLP, as our independent registered public accounting firm for the fiscal year ending December 31, 2018. Deloitte & Touche LLP was retained by us on April 11, 2018, as announced in our Current Report on Form 8-K, filed on April 13, 2018. Prior to Deloitte & Touche LLP, BDO USA, LLP acted as our independent registered public accounting firm. BDO USA, LLP audited the Company’s financial statements for the fiscal years ending December 31, 2017 and 2016. On April 11, 2018, in connection with its selection of Deloitte & Touche LLP, the Audit Committee approved the dismissal of BDO USA, LLP. A representative of Deloitte & Touche LLP is expected to be present at the Annual Meeting. The representative will have an opportunity to make a statement and to respond to any questions. Representatives of BDO USA, LLP are not expected to be present at the Annual Meeting.

 

The Audit Committee recognizes the importance of maintaining the independence of the Company’s independent auditor, both in fact and appearance. Each year, the Audit Committee evaluates the qualifications, performance and independence of the Company’s independent auditor and determines whether to re-engage the current independent auditor. In doing so, the Audit Committee considers the quality and efficiency of the services provided by the auditors, the auditors’ (global) capabilities and the auditors’ technical expertise and knowledge of the Company’s operations and industry. Based on this evaluation, the Audit Committee has retained Deloitte & Touche LLP as the Company’s Independent Auditor for fiscal 2018. The members of the Audit Committee and the Board believe that, due to Deloitte & Touche’s knowledge of the Company and of the industries in which the Company operates, it is in the best interests of the Company and its stockholders to retain Deloitte to serve as the Company’s independent auditor during 2018.

 

During the years ended December 31, 2017 and 2016 and for the period from January 1, 2018 to April 11, 2018, neither the Company nor anyone on its behalf has consulted with Deloitte & Touche LLP with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and neither a written report nor oral advice was provided to the Company that Deloitte & Touche LLP concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a “reportable event” (as defined in Item 304(a)(1)(v) of Regulation S-K).

 

 The reports of BDO USA, LLP on the Company’s consolidated financial statements for the years ended December 31, 2017 and 2016 did not contain an adverse opinion or a disclaimer of an opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.

 

During the years ended December 31, 2017 and 2016 and for the period from January 1, 2018 to April 11, 2018, there were no disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) with BDO USA, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO USA, LLP, would have caused BDO USA, LLP to make reference to the subject matter of the disagreements in its reports on the consolidated financial statements for such years.

 

 During the years ended December 31, 2017 and 2016 and for the period from January 1, 2018 to April 11, 2018, there were no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K.

 

11

 

Principal Accountant Fees and Services

 

The following table sets forth all fees accrued or paid to BDO USA, LLP, our independent registered public accountants, for fiscal years ended December 31, 2017 and 2016.

 

   

2017

   

2016

 

Audit Fees (1)

  $ 805,502     $ 640,685  

Audit-Related Fees

  $ 0     $ 0  

Tax Fees

  $ 0     $ 0  

All Other Fees

  $ 0     $ 0  

Total

  $ 805,502     $ 640,685  

 

 

(1)

Audit Fees consist of fees for professional services rendered in connection with the audit of our annual consolidated financial statements and review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the independent registered public accountants in connection with statutory and regulatory filings or engagements for those fiscal years.

 

Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

 

The Audit Committee pre-approves audit, audit-related, tax, and all other services provided by our independent registered public accountants, Deloitte & Touche LLP and will not approve services that are impermissible under applicable laws and regulations. The pre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision of that member to pre-approve specific services must be reported to the full Audit Committee at its next scheduled meeting. In the fiscal years ended December 31, 2017 and 2016, all fees identified above under the captions “Audit Fees” that were billed by BDO USA, LLP were approved by the Audit Committee in accordance with SEC requirements.

 

In the fiscal year ended December 31, 2017, there were no other professional services provided by BDO USA, LLP, other than those listed above, that would have required our Audit Committee to consider their compatibility with maintaining the independence of BDO USA, LLP.

 

Ratification of Deloitte & Touche LLP

 

Although ratification is not required, the appointment of Deloitte & Touche LLP as the Company’s independent auditors for fiscal year 2018 is being submitted for ratification at the Annual Meeting because the Board believes doing so is a good corporate governance practice. Furthermore, the Audit Committee will take stockholders’ opinions regarding the appointment of Deloitte & Touche LLP into consideration in future deliberations. If Deloitte & Touche LLP’s appointment is not ratified at the Annual Meeting, the Audit Committee will consider the engagement of other independent auditors. The Audit Committee may terminate Deloitte & Touche LLP’s engagement as the Company’s independent accountants without the approval of the Company’s stockholders whenever the Audit Committee deems appropriate.

 

 

 

THE BOARD OF DIRECTORS unanimously RECOMMENDS that
stockholders VOTE “FOR” RATIFICATION
OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY’S
INDEPENDENT REGISTERED PUBLIC accountING FIRM FOR
THE YEAR ENDING DECEMBER 31, 2018

 

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PROPOSAL NO. 3

non-binding ADVISORY vote ON EXECUTIVE COMPENSATION

 

The Compensation Discussion and Analysis beginning on page of this Proxy Statement describes the Company’s executive compensation program and the compensation decisions made by the Compensation Committee for our fiscal year ended December 31, 2017, with respect to the executive officers named in the Summary Compensation Table on page 32. The Board of Directors is asking our stockholders to cast a non-binding advisory vote to approve the following resolution:

 

“RESOLVED, that the stockholders of Energy Recovery, Inc. approve, on an advisory basis, the compensation of the executive officers named in the Summary Compensation Table for 2017, as disclosed in this Proxy Statement pursuant to the compensation disclosure rules of the SEC (which disclosure includes the Compensation Discussion and Analysis, the compensation tables, and the related footnotes and narratives accompanying the tables).”

 

The Board is asking our stockholders to vote “FOR” this proposal because it believes that the policies and practices described in the Compensation Discussion and Analysis section of this Proxy Statement are necessary to achieve the Company’s primary objective of the executive compensation program, that of attracting, retaining, and motivating the talent we need to meet and/or exceed the strategic, operational, and financial goals of the Company. Additionally, we want to reward superior performance and align the long term interests of our executives with our stockholders.

 

This proposal, commonly known as a “Say on Pay” proposal, gives you, as a stockholder, the opportunity to express your views on our executive compensation programs and policies and the compensation paid to the executive officers named in the Summary Compensation Table.

 

The Company’s current policy is to hold a Say on Pay vote each year. We expect to hold another advisory vote with respect to executive compensation at the annual meeting of stockholders to be held in 2019.

 

Although your vote on this proposal is advisory and non-binding, the Compensation Committee values the views of our stockholders and will take into account the outcome of the vote when considering future compensation decisions for our named executive officers. We are providing this advisory vote pursuant to Section 14A of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

 

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL, ON AN ADVISORY BASIS, OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THE COMPENSATION DISCUSSION AND ANALYSIS, THE ACCOMPANYING COMPENSATION TABLES AND THE RELATED NARRATIVE DISCLOSURE INCLUDED IN THIS PROXY STATEMENT.

 

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BOARD AND CORPORATE GOVERNANCE MATTERS

 

Board of Directors

 

Our business and affairs are managed under the direction of our Board of Directors. The number of directors is fixed by our Board of Directors, subject to the terms of our Charter and the Bylaws. Our Board of Directors currently consists of seven directors, all of whom qualify as “independent” under the listing standards of The NASDAQ Stock Market. As previously announced in our Current Report on Form 8-K, filed on February 27, 2018, the Board accepted the resignation of Mr. Joel Gay from the Board of Directors effective on February 25, 2018.

 

In accordance with our Charter and the Bylaws, our Board of Directors is divided into three classes with staggered three year terms. Prior to the Annual Meeting, the Board consisted of:

 

         

Committee Memberships

 

Director

 

Class I

 

Class II

 

Class III

 

 

Audit

 

Compensation

Nominating &

Corporate Governance

Mr. Alexander J. Buehler

   

X

 

Chairman

Member

 

Mr. Olav Fjell

X

     

Member

 

Member

Mr. Sherif Foda

 

X

     

Member

Member

Mr. Arve Hanstveit

 

X

   

Member

Chairman

 

Mr. Ole Peter Lorentzen

X

       

Member

Chairman

Mr. Robert Yu Lang Mao

   

X

 

Member

   

Mr. Hans Peter Michelet

 

X

       

Member

 

Effective immediately following the Annual Meeting, our directors will be divided among the three classes as follows:

 

 

Class I directors – Messrs. Fjell and Lorentzen’s terms will expire at the Annual Meeting, and they are standing for election at the Annual Meeting for terms that will expire at the annual meeting of stockholders to be held in 2021;

 

 

Class II directors – Messrs. Foda, Hanstveit and Michelet’s terms will expire at the annual meeting of stockholders to be held in 2019; and

 

 

Class III directors – Messrs. Buehler and Mao’s terms will expire at the annual meeting of stockholders to be held in 2020.

 

The division of our Board of Directors into three classes with staggered three year terms may delay or prevent a change of our management or a change of control. Under Delaware law, our directors may be removed for cause by the affirmative vote of the holders of a majority of our outstanding voting stock. Directors may not be removed by our stockholders without cause.

 

Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of the directors.

 

Director Independence

 

During 2017 and the first two months of 2018, the Board of Directors evaluated all business and charitable relationships between the Company and the Company’s non-employee directors and all other relevant facts and circumstances. Based on information provided by each director concerning his background, employment, and affiliations, including family relationships, our Board of Directors has determined that none of Messrs. Buehler, Fjell, Foda, Hanstveit, Lorentzen, Mao and Michelet have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the SEC, and the listing standards of The NASDAQ Stock Market (the “Applicable Rules”). In making these determinations, our Board of Directors considered the current and prior relationships that each director has with our Company and all other facts and circumstances our Board of Directors deemed relevant in determining their independence.

 

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The Board of Directors also has determined that each director is a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code, as amended.

 

Factors considered by our Board in determining if a non-employee director will not be deemed “independent,” including without limitation, the following: if (a) the director is, or in the past three years has been, an employee of the Company; (b) the director or a member of the director’s immediate family is, or in the past three years has been, an executive officer of the Company; (c) the director or a member of the director’s immediate family has, in the past three years, received more than $120,000 per year in direct compensation from the Company (other than for service as a director or, for the immediate family member, as a non-executive employee); (d) the director is an employee, or the director or a member of the director’s immediate family is employed as a partner, of the Company’s independent registered public accountants, or the director has an immediate family member who is a current employee of such firm and works in any capacity on the Company’s audit, or the director or an immediate family member was within the last three years a partner or employee of such firm and personally worked on the Company’s audit within that time; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where an Energy Recovery executive officer at the same time serves or served on the compensation committee; or (f) the director is an employee, or a member of the director’s immediate family is an executive officer, of a company that makes payments to, or receives payments from, the Company in an amount which, in any twelve-month period during the past three years, exceeds the greater of $200,000 or two percent of the consolidated gross revenues of the company receiving the payment.

 

Relationships Among Directors or Executive Officers

 

There are no family relationships among any of the directors or executive officers of the Company.

 

Board Leadership and Risk Oversight

 

The offices of Chairman and Chief Executive Officer at our Company are held by different individuals. Mr. Michelet is currently Chairman of the Board and has served as our Board Chairman since September 2004. Mr. Chris Gannon was appointed as President and Chief Executive Officer in February 2018. Previously, Mr. Joel Gay served as the Company’s President and Chief Executive Officer from April 2015 to February 2018. The Company believes that having the roles of Chief Executive Officer and Chairman of the Board filled by different individuals enhances our internal system of checks and balances and the Board’s oversight role. The practice also enables the Chief Executive Officer to focus on the Company’s operations. Nevertheless, the Board believes it is appropriate to retain the discretion and flexibility to change the structure from time to time as needed to provide appropriate leadership for the Company. At this time, the Board believes that it has achieved the best Board leadership structure for the Company by separating the roles of Chairman and Chief Executive Officer.

 

Mr. Michelet, as Chairman, presides at all meetings of the Board, including executive sessions of the Board and the independent directors, facilitates discussions among independent directors on key issues and concerns outside of Board meetings, serves as a liaison between the Chief Executive Officer and the other directors, reviews information to be sent to the Board, collaborates with the Chief Executive Officer and other members of Company management to set meeting agendas and Board information, assists the chairs of the committees of the Board as requested, and performs such other functions and responsibilities as requested by the Board or the independent directors from time to time. In performing the duties described above, the Chairman is expected to consult with, and does consult with, the chairs of the appropriate Board committees.

 

The goal of the Company’s risk management process is to understand and manage risk; management is responsible for identifying and managing the risks, while directors provide oversight to management in this process. Management identifies the significant risks facing the Company and the approaches to mitigate such risk. In addition to its general oversight of management, the Board of Directors is responsible for a number of specific functions, including assessing major risks facing the Company and reviewing options for their mitigation.

 

Our Board of Directors has three standing independent committees: Audit, Nominating and Corporate Governance and Compensation. Our Audit Committee is primarily responsible for overseeing the Company’s risk management processes on behalf of the Board. The Audit Committee charter provides that the Audit Committee should discuss and consider the process by which senior management of the Company and the relevant departments assess and manage the Company’s exposure to risk, and discuss the Company’s major financial risk exposure and the steps management has taken to monitor, control, and report such exposures. In addition, the Audit Committee reports to the Board of Directors, which also considers the Company’s risk profile. The Audit Committee and the Board of Directors obtain input from management regarding the most significant risks facing the Company and the Company’s risk management strategy.

 

15

 

The Audit Committee and the Board ensure that the risks undertaken are consistent with the Board’s tolerance for risk. While the Board is responsible for setting, monitoring, and maintaining the Company’s risk management policies and practices, the Company’s executive officers and members of our management team are responsible for implementing and overseeing our day-to-day risk management processes.

 

In addition to the oversight provided by our full Board of Directors, Audit Committee, executive officers and the members of our management team, our independent directors hold regularly scheduled executive sessions as often as they deem appropriate, but in any event at least four times each year. These executive sessions provide an additional avenue through which we monitor the Company’s risk exposure and policies regarding risk management.

 

Committees and Meetings of the Board of Directors

 

During the year ended December 31, 2017, the Board met twenty-three times. The Board has three standing committees: the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee. During the year ended December 31, 2017, no director attended fewer than 75% of all the meetings of the Board or its committees on which he or she served after becoming a member, with the exception of Mr. Trempont, who attended 0 meetings in 2017. Mr. Trempont had provided notice to the board early in 2017 of his intention to resign from the Board. The Company encourages, but does not require, its directors to attend the annual meeting of stockholders. In 2017, all of our directors attended our annual meeting except Mr. Trempont.

 

Committee Membership

 

The members of each of our standing committees as of December 31, 2017 are identified below.

 

Audit Committee*

Compensation Committee

Nominating and Corporate

Governance Committee

Alex Buehler (chair)

Arve Hanstveit (chair)

Ole Peter Lorentzen (chair)

Olav Fjell

Alex Buehler

Olav Fjell

Arve Hanstveit

Sherif Foda

Sherif Foda

Robert Yu Lang Mao

Ole Peter Lorentzen

Hans Peter Michelet

* Mr. Trempont was a director and the Chairman of the Audit Committee up to the 2017 Annual Meeting.

 

 

 

The Audit Committee

 

The Audit Committee held five meetings in the year ended December 31, 2017. The Audit Committee is responsible for assisting the full Board in fulfilling its oversight responsibilities relating to:

 

 

overseeing the accounting and financial reporting processes and audits of our financial statements;

 

 

selecting and hiring our independent registered public accounting firm and approving the audit and non-audit services to be performed by our independent registered public accounting firm;

 

 

assisting the Board in monitoring the integrity of our financial statements, our internal accounting and financial controls, our compliance with legal and regulatory requirements, and the qualifications, independence, and performance of our independent registered public accountants;

 

 

providing to the Board information and materials to make the Board aware of significant financial and audit-related matters that require attention; and

 

 

reviewing and discussing with management and our independent registered public accounting firm, our annual and quarterly financial statements and annual and quarterly reports on Forms 10-K and 10-Q.

 

16

 

The Board has determined that all members of the Audit Committee are independent directors as defined in the listing rules of NASDAQ and SEC rules and regulations. The Board has further determined that Mr. Buehler is an “audit committee financial expert” as defined by SEC rules. The Board has adopted and approved a charter for the Audit Committee, a copy of which can be viewed on the Company’s website at www.energyrecovery.com under the Investor Relations tab.

 

The Compensation Committee

 

The Compensation Committee held eight meetings in the year ended December 31, 2017. The Compensation Committee is responsible for, among other things:

 

 

reviewing and approving, with respect to our Chief Executive Officer and other executive officers, annual base salaries, annual incentive bonuses, equity compensation, employment agreements, severance arrangements, change of control agreements/provisions, and any other benefits, compensation, or arrangements;

 

 

administering our Equity Incentive Plan and other employee benefit plans as may be adopted by us from time to time; and

 

 

recommending inclusion of the Compensation Discussion and Analysis in the Proxy Statement and our Annual Report on Form 10-K.

 

The Board has determined that all members of the Compensation Committee are independent directors as defined in the listing rules of NASDAQ and SEC rules and regulations. The Board has adopted and approved a charter for the Compensation Committee, a copy of which can be viewed on the Company’s website at www.energyrecovery.com under the Investor Relations tab.

 

The Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee held three meetings in the year ended December 31, 2017. The Nominating and Corporate Governance Committee is responsible for:

 

 

assisting in identifying prospective director nominees and recommending to the Board nominees for each annual meeting of stockholders;

 

 

evaluating the performance of current members of the Board;

 

 

developing principles of corporate governance and recommending them to the Board;

 

 

recommending to the Board persons to be members of each committee; and

 

 

overseeing the evaluation of the Board and management.

 

The Nominating and Corporate Governance Committee operates under a written charter setting forth the functions and responsibilities of the Committee. A copy of the charter can be viewed on the Company’s website at www.energyrecovery.com under the Investor Relations tab. The Board has determined that all members of the Nominating and Corporate Governance Committee are independent directors as defined in the listing rules of NASDAQ and SEC rules and regulations.

 

The Nominating and Corporate Governance Committee considers and makes recommendations to the Board regarding any stockholder recommendations for candidates to serve on the Board. Our Bylaws contain provisions that address the process by which a stockholder may nominate an individual to stand for election to the Board. In order to nominate a candidate for director, a stockholder must give timely notice in writing to our Secretary and otherwise comply with the provisions of our Bylaws. To be timely, a stockholder’s notice to our Secretary must be delivered to or mailed and received at our principal executive offices, in the case of an annual meeting, not later than the close of business on the 90th day, nor earlier than the close of business on the 120th day, prior to the anniversary date on which we first mailed our Proxy Statement to stockholders in connection with the immediately preceding annual meeting. If no annual meeting was held in the previous year or the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder to be timely must be so received not later than the close of business the 10th day following the day on which such notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. In the case of a special meeting of stockholders called for the purpose of electing directors, notice must be delivered to or mailed and received not later than the close of business on the 10th day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever occurs first.

 

17

 

Stockholder nominations must also include the information required by our Bylaws. Under the Bylaws, information as to each person whom the stockholder proposes to nominate for election as a director must include (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the corporation that are owned beneficially or of record by the person, (iv) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (v) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise required, in each case pursuant SEC regulations. The stockholder giving notice must also provide certain other information required under our Bylaws.

 

A stockholder who wishes to nominate a candidate to serve on the Board should carefully review the applicable provisions of our Bylaws. Any such nomination must be made in accordance with the procedures outlined in, and include the information required by, the Bylaws. The nomination must be addressed to 1717 Doolittle Drive, San Leandro, California 94577 Attn: Secretary. You can obtain a copy of our Bylaws by writing to the Secretary at this address.

 

While the Nominating and Corporate Governance Committee does not have a written policy regarding diversity in identifying nominees for directors, the committee takes diversity into account when looking for best available candidates to serve on the Board. In the past, when new directors have been added to our Board, the Board or Nominating and Corporate Governance Committee has endeavored to select director candidates who have business, scientific, or regulatory specializations; technical skills; or other backgrounds that increased the range of experience and diversity of perspectives within our Board in ways that pertain to our current and future business goals. The Committee also considers diversity in terms of gender, ethnic background, and national origin.

 

There are no differences in the manner in which the Nominating and Corporate Governance Committee evaluates nominees for director based on whether the nominee is recommended by a stockholder or by the Nominating and Corporate Governance Committee itself.

 

In reviewing potential candidates for the Board, the Nominating and Corporate Governance Committee considers numerous factors including:

 

 

whether or not the person has any relationships that might impair his or her independence, such as any business, financial, or family relationships with the Company, its management, its stockholders, or their affiliates;

 

 

whether or not the person serves on boards of, or is otherwise affiliated with, competing companies;

 

 

whether or not the person is willing to serve as, and willing and able to commit the time necessary for the performance of the duties of, a director of the Company; and

 

 

the contribution that the person can make to the Board and the Company, with consideration given to the person’s experience in the fields of energy, technology, and manufacturing as well as leadership or entrepreneurial experience in business or education.

 

Of greatest importance is the individual’s integrity and ability to bring to the Company experience and knowledge in areas related to the Company’s current and future business. The Board intends to continue using these criteria to evaluate candidates for election to the Board.

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Compensation Committee was at any time during fiscal year 2017 or at any other time, an officer or employee of the Company, or had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K. None of our current executive officers serve on the Compensation Committee or the Board of Directors of another entity whose executive officer(s) serve(s) on the Company’s Compensation Committee or Board of Directors.

 

18

 

Communication between Stockholders and Directors

 

Our Board currently does not have a formal process for stockholders to send communications to the Board. The Company, however, makes every effort to ensure that the views of stockholders are heard by the Board or individual directors and that the Company responds to stockholders on a timely basis. The Board does not recommend that formal communication procedures be adopted at this time because it believes that informal communications are sufficient to convey questions, comments, and observations that could be useful to the Board. Stockholders wishing to formally communicate with the Board may send communications directly to Secretary, Energy Recovery, Inc., 1717 Doolittle Drive, San Leandro, California 94577.

 

Director Compensation

 

Directors who are non-employees of the Company received the following fees for their services on the Board during the year ending December 31, 2017:

 

 

$50,000 annual retainer paid in quarterly installments for services as a member of the Board; or

 

 

$200,000 annual retainer paid in monthly installments for services as Chairman of the Board.

 

Additionally, directors receive:

 

 

$15,000 annual retainer paid in quarterly installments for services as Chairman of the Audit Committee;

 

 

$10,000 annual retainer paid in quarterly installments for services as Chairman of the Compensation Committee; and

 

 

$5,000 annual retainer paid in quarterly installments for services as Chairman of the Nominating and Corporate Governance Committee.

 

Our non-employee directors also receive:

 

 

an annual grant of stock options of common stock valued (based on market prices on the date of grant) at $85,000, with 100% vesting on the first anniversary of the vesting commencement date.

 

In June 2017, we granted to each continuing non-employee director, options to purchase 16,726 shares of our common stock. The options have a one year vesting period and become fully vested in June 2018, subject to the director providing service to the Board through such date.

 

Director Compensation for the Year Ended December 31, 2017

 

The table below summarizes the compensation paid to non-employee directors for the year ended December 31, 2017. Directors who are also our employees receive no additional compensation for their service as a director. During the fiscal year ended December 31, 2017, one director, Mr. Gay, our former President and Chief Executive Officer was an employee, and his compensation is discussed in “Executive Compensation.”

 

Director

 

Fees

Earned and

Paid in

Cash

   

Option

Awards (1)

   

Total

 

Mr. Alexander J. Buehler(2)

  $ 57,056     $ 85,002     $ 142,058  

Mr. Sherif Foda

  $ 50,000     $ 85,002     $ 135,002  

Mr. Olav Fjell

  $ 50,000     $ 85,002     $ 135,002  

Mr. Arve Hanstveit (3)

  $ 60,000     $ 85,002     $ 145,002  

Mr. Ole Peter Lorentzen(4)

  $ 52,625     $ 85,002     $ 137,627  

Mr. Robert Yu Lang Mao(5)

  $ 50,858     $ 85,002     $ 135,860  

Mr. Hans Peter Michelet (6)

  $ 224,582     $ 85,002     $ 309,584  

Mr. Dominique Trempont (7)

  $ 29,875     $ 0     $ 29,875  

 

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(1)

The amount in the Option Awards column sets forth the fair value on the grant date of the options awards granted in 2017 as calculated in accordance with FASB ASC Topic 718 without regard to estimated forfeitures. The method and assumptions used to calculate the fair value on the grant date of our equity awards is discussed in Note 11 of our Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ending December 31, 2017. As of December 31, 2017, the number of shares underlying unvested stock options held by each of the directors was: Mr. Buehler, 16,726; Mr. Fjell, 16,726; Mr. Foda 16,726; Mr. Hanstveit, 16,726; Mr. Lorentzen, 16,726; Mr. Mao, 16,726; Mr. Michelet, 16,726; and Mr. Trempont, 0.

 

 

(2)

Mr. Buehler is a director and the Chairman of the Audit Committee since July 12, 2017.

 

 

(3)

Mr. Hanstveit is a director and the Chairman of the Compensation Committee.

 

 

(4)

Mr. Lorentzen is a director and the Chairman of the Nomination and Corporate Governance Committee since June 22, 2017.

 

 

(5)

Mr. Mao is a director and was the Chairman of the Audit Committee from June 22, 2017 to July 12, 2017.

 

 

(6)

Mr. Michelet is a director and the Chairman of the Board of Directors. He was the Chairman of the Nominating and Corporate Governance Committee through June 22, 2017.

 

 

(7)

Mr. Trempont was a director and the Chairman of the Audit Committee up to the 2017 Annual Meeting. Mr. Trempont did not stand for re-election and ceased being a board member on June 22, 2017.

 

Our non-employee directors are also reimbursed for travel, lodging and other reasonable expenses incurred in connection with their attendance at Board of Directors or committee meetings.

 

Stock Ownership Guidelines

 

The Board believes that our non-employee directors and executive officers should own and hold shares of our common stock to further align their interests with the long term interests of stockholders and further promote our commitment to sound corporate governance. Toward this end, in April 2016, the Board adopted guidelines with respect to ownership levels of the Company’s common stock of our CEO, other executive officers, and members of our Board. The guidelines state that our CEO, other executive officers, and each director must beneficially own Common Stock having a value equal to:

 

 

For our CEO, three times his annual base salary;

 

 

For our other executive officers, one time his or her annual base salary; and

 

 

For each non-employee director, three times the amount of the annual cash retainer paid to directors for general service on the Board.

 

The guidelines were established to promote a long-term perspective in managing the Company and align the interests of our stockholders, executives, and directors.

 

For purposes of determining ownership under these guidelines we include shares of common stock actually owned by the covered individual or family members, certain indirect forms of ownership, such as stock held in a grantor trust for the benefit of the covered individual, as well as the net exercise or “spread” value of vested stock options. Unvested options or restricted stock units (“RSUs”) and the unvested portion of any performance-based restricted stock or other equity-based award are not included. Directors and executive officers were given a period of three years from the adoption of the original guidelines to meet these ownership requirements while newly appointed directors or executive officers are given a period of five years from their date of appointment to meet these requirements. Covered individuals are required to hold 25% of the net shares acquired from all equity awards after deducting shares sold to cover the exercise price and/or taxes until the applicable guideline is reached. As of April 20, 2018, all of our directors and executive officers were either exceeding the minimum stock ownership requirements or were on track to comply in the relevant timeframe.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of April 20, 2018 for (i) each person or group of affiliated persons who is known by the Company to beneficially own more than 5% of the Company’s common stock, (ii) each of the Company’s directors, (iii) each of the officers appearing in the “Summary Compensation Table” on Page 32 and (iv) all directors and executive officers as a group.

 

We have determined beneficial ownership in accordance with the rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares that they beneficially own, subject to community property laws where applicable. To our knowledge, no person or entity except as set forth below, is the beneficial owner of more than 5% of the voting power of our common stock as of the close of business on April 20, 2018. The address of each executive officer and director is c/o Energy Recovery, Inc., 1717 Doolittle Drive, San Leandro, CA 94577.

 

   

Shares
Beneficially
Owned
(1)

   

Percent of
Class
(2)

 

5% or Greater Common Stockholders:

               
                 

Ludvig Lorentzen AS (3)

Postboks A, Bygdoy, 0211

Oslo, Norway

    8,592,228       16.0 %

Arvarius AS c/o Marius Skaugen (4)

Parkv.57 c/o B. Skaugen AS 0256

Oslo, Norway

    7,532,490       14.0 %

Sundt AS (5)

Dronningen 1, 2087

Oslo, Norway

    3,016,474       5.6 %

Directors, Named Executive Officers, and Current Group:

               

Ole Peter Lorentzen (3)

    8,592,228       16.0 %

Arve Hanstveit (6)

    1,547,687       2.9 %

Dominique Trempont (7)

    533,637       1.0 %

Hans Peter Michelet (8)

    481,887       0.9 %

Robert Yu Lang Mao (9)

    374,248       0.7 %

Chris Gannon (10)

    261,774       0.5 %

Nocair Bensalah(11)

    251,432       0.5 %

Alexander J. Buehler (12)

    161,894       0.3 %

Rodney Clemente (13)

    148,837       0.3 %

Eric Siebert (14)

    141,811       0.3 %

Olav Fjell (15)

    103,445       0.2 %

Sherif Foda (16)

    24,084       0.0 %

Joel Gay (17)

    190,162       0.4 %

All named executive officers and directors as a group (13 persons) (18)

    12,813,126       23.8 %

 

*Less than .1%

 

 

(1)

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options and warrants held by that person that are currently exercisable, or exercisable within 60 days after April 20, 2018, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of each other person.

 

 

(2)

Percent of class is based on the number of shares of Common Stock outstanding as of April 20, 2018, the Record Date, which were 53,651,381 shares.

 

 

(3)

Based on a Schedule 13D/A and a Form 4 jointly-filed by Ole Peter Lorentzen and Ludvig Lorentzen AS with the SEC on January 9, 2015 and March 16, 2015, respectively, which reported 7,700,000 shares beneficially owned by Ludvig Lorentzen AS and 8,592,228 shares beneficially owned by its controlling shareholder, Mr. Ole Peter Lorentzen, who is also a Director of the Company. Shares beneficially owned by Mr. Lorentzen include the 7,700,000 shares beneficially owned by Ludvig Lorentzen AS and shares held by Mr. Lorentzen in other accounts. Each reported shared voting and dispositive power over the shares respectively reported for that beneficial owner. The shares reported also include options to purchase 101,894 shares of common stock that are exercisable within 60 days of April 20, 2018.

 

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(4)

Based on a Schedule 13G/A and a Form 4 filed with the SEC on March 19, 2010 and April 30, 2010, respectively, which together showed 7,641,103 shares beneficially owned by Arvarius AS and 7,641,103 shares beneficially owned by Mr. Skaugen, the controlling stockholder of Arvarius. Each reported shared voting and dispositive power over the shares respectively reported for that beneficial owner. The shares reported by Arvarius included 800,000 shares that could be acquired under exercisable warrants. Subsequent to the foregoing reports, warrants to purchase 200,000 shares were exercised in December 2013 for 180,276 shares, the remaining warrants to purchase 19,724 shares of this exercise were cancelled and considered payment for the exercise. Warrants to purchase 400,000 shares were exercised in July 2014 for 311,111 shares, the remaining warrants to purchase 88,889 shares of this exercise were cancelled and considered payment for the exercise. Warrants to purchase 200,000 shares were exercised in July 2015.

 

 

(5)

Based on a Schedule 13G filed with the SEC on February 24, 2016, which reported 3,016,474 shares beneficially owned by Sundt AS, CGS Holdings AS, Helene Sundt AS, Christian Gruner Sundt, Else Helene Sundt, Leiv Askvig, and Jacob Asif Iqbal having shared voting power and shared dispositive power of 3,016,474 shares.

 

 

(6)

Consists of 1,095,800 shares held by Mr. Hanstveit; 120,000 shares held by Mr. Hanstveit’s daughters; and options to purchase 331,887 shares of common stock that are exercisable within 60 days of April 20, 2018. Mr. Hanstveit has shared voting and investment power over the shares that are owned by his daughters.

 

 

(7)

Consists of 533,637 shares held by Mr. Trempont.

 

 

(8)

Consists of options to purchase 481,887 shares of common stock that are exercisable within 60 days of April 20, 2018.

 

 

(9)

Consists of 142,361 shares held by Mr. Mao as trustee of The R. Mao Trust and options to purchase 231,887 shares of common stock that are exercisable within 60 days of April 20, 2018.

 

 

(10)

Consists of 21,381 shares held by Mr. Gannon, 824 restricted stock units that will vest, and options to purchase 239,569 shares of common stock that may be exercised within 60 days of April 20, 2018.

 

 

(11)

Consists of 8,780 shares held by Mr. Bensalah, 824 restricted stock units that will vest, and options to purchase 241,828 shares of common stock that may be exercised within 60 days of April 20, 2018.

 

 

(12)

Consist of 60,000 shares held by Mr. Buehler and options to purchase 101,894 shares of common stock that may be exercised within 60 days of April 20, 2018.

 

 

(13)

Consists of 7,338 shares held by Mr. Clemente, 659 restricted stock units that will vest, and options to purchase 140,840 shares of common stock that may be exercised within 60 days of April 20, 2018.

 

 

(14)

Consists of 38,918 shares held by Mr. Siebert, 824 restricted stock units that will vest, and options to purchase 102,069 shares of common stock that may be exercised within 60 days of April 20, 2018.

 

 

(15)

Consists of 18,000 shares held by Mr. Fjell and options to purchase 85,445 shares of common stock that may be exercised within 60 days of April 20, 2018.

 

 

(16)

Consists of options to purchase 24,084 shares of common stock that may be exercised within 60 days of April 20, 2018.

 

 

(17)

Consists of 190,162 shares held by Mr. Gay.

 

  (18) Consists of 10,502,962 shares held by 5 executive officers and 8 directors as a group, 57,000 restricted stock units that will vest, and options to purchase 2,249,679 shares of common stock that may be exercised within 60 days of April 20, 2018.

 

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EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

This Compensation Discussion and Analysis describes our executive compensation philosophy and programs, compensation decisions made under those programs, and the factors considered in making those decisions for our “named executive officers,” who, for 2017, were:

 

Joel Gay

President and Chief Executive Officer

Chris Gannon

Chief Financial Officer

Eric Siebert

Vice President of Strategy and Emerging Market Sales

Nocair Bensalah

Vice President of Operations

Rodney Clemente

Vice-President of Global Desalination Operations

 

Mr. Gay, the former President and Chief Executive Officer of the Company resigned from the Company on February 24, 2018, which was accepted by the Board of Directors on February 25, 2018. Mr. Chris Gannon was appointed as the interim President and Chief Executive Officer on February 25, 2018.

 

Mr. Gannon has also been the Chief Financial Officer of the Company since June 1, 2015. Mr. Clemente has been the Vice President of Global Desalination Operations since April 29, 2015. Mr. Bensalah has been serving in his present position of Vice President of Operations since January 1, 2015. Prior to that he served as the Vice President of Manufacturing. Mr. Siebert has been the Vice President of Strategy and Emerging Market Sales since June 8, 2015.

 

The Compensation Committee of the Board of Directors has principal responsibility for establishing, implementing, and monitoring adherence to our compensation philosophy and objectives. The Compensation Committee’s duties include evaluating the performance and advising the Board on the compensation of our Chief Executive Officer, recommending director compensation, and setting the compensation of our other executive officers, as well as performing oversight of our compensation arrangements, plans, policies, and programs for employees in general.

 

2017 Corporate Performance Highlights

 

We are an energy solutions provider to industrial fluid flow markets worldwide. Our fiscal year 2017 corporate performance highlights include the following:

 

 

Total revenue of $63.2 million, an increase of 15% year-over-year; highest revenue in Company history

 

Product gross margin of 67.2%, an increase of 310 basis points year-over-year; highest product gross margin in Company history

 

Operating cash flow of $2.9 million; 3rd consecutive year of positive operating cash flow

 

Total share buyback of $4.3 million

 

Net income of $12.6 million, or $0.22 per diluted share; 2nd consecutive year of profitability

 

Completed a full-scale private testing of the VorTeq second generation system with most successful test results to-date

 

Launched MTeqTM pumping solution for mud pumping process in Oil and Gas drilling applications

 

Launched a collaborative partnership with Düchting Pumpen to provide all-encompassing energy recovery solutions for desalination customers

 

Compensation Philosophy and Objectives

 

The primary objective of our executive compensation program is to attract, retain, and motivate the talent we need to meet and/or exceed the strategic, operational, and financial goals of the Company. Additionally, we want to reward superior performance and align the long term interests of our executives with our stockholders. The guiding principles of our compensation program involve:

 

 

incentivizing our key executives to exceed strategic, operational, and financial goals;

 

 

attracting and retaining mission critical executive talent;

 

23

 

 

aligning outcomes and rewards with stockholder expectations; and

 

 

rewarding superior performance.

 

The Compensation Committee annually reviews the executive compensation program to ensure an appropriate alignment between our compensation policies and programs and our business needs and the interests of our stockholders. Our executive compensation programs are reviewed to ensure they achieve a balance between rewarding performance and retaining key people while accommodating a continuing effort to manage the Company’s share utilization rate to minimize the dilutive effects of equity awards to the Company’s stockholders.

 

A significant part of our executive compensation philosophy policy is designed to link executive compensation to our performance through at-risk compensation opportunities, providing significant reward to executives based on our success. As such, the Compensation Committee believes that our executive officers’ total compensation should be reflective of our Company’s performance. Accordingly, the majority of our executive officers’ compensation is composed of performance-based bonus opportunities and equity awards, which derive their value based on both stock-based performance and Company financial and operational performance. As a result, much of our executive officers’ target total direct compensation opportunity is “at risk.” There is no assurance that the grant date fair values reported for these equity awards will be reflective of their actual economic value or that comparable amounts will ever be realized by the executive officers.

 

Executives at Energy Recovery understand the importance of meeting objectives. In 2017, the Board of Directors established six major objectives for the Chief Executive Officer’s under the Company’s Annual Incentive Plan (“AIP”), our cash-based incentive program for eligible employees. These objectives were to: (i) meet or exceed our annual adjusted operating income target; (ii) complete and deliver Gen-II VorTeqTM system design; (iii) consummate an early adoption partnership for the Company’s MTeqTM system; (iv) achieve proof of concept for an additional PX technology derivative; (v) secure channel partnership for IsoBoost and IsoGen products for gas processing and/or pipeline applications; and (vi) secure a maiden energy services agreement. In addition, the Chief Executive Officer establishes individual objectives for the other executive officers that are generally derived from or related to the Company objectives described above. Each executive officer receives an annual performance review from our Chief Executive Officer (with review and discussion with the Compensation Committee) to evaluate his or her performance on both a qualitative and quantitative basis in connection with his or her individual objectives. Our Compensation Committee, however, ultimately determines the payout of cash incentives for all of our executive officers. For 2017, the Compensation Committee funded the overall AIP at 100% based on its review of Company performance including against the objectives described above. For a more detailed discussion of the AIP, please refer to “Annual Cash Incentive Compensation,” discussed below.

 

Additionally, in 2017, the Company granted its named executive officers a combination of stock options and restricted stock units (“RSUs”). This approach is intended to align management’s long-term goals and realizable pay outcomes with those of our stockholders. The stock options provide no value to our executives if our share price does not increase above the exercise price (set based on the fair market value of our common stock at grant) following the date of grant. RSUs also serve as a meaningful and durable retention tool even in periods of volatile stock price performance and are a component of our compensation program that the Compensation Committee believes is necessary in order to retain our executive officers and be competitive with compensation packages offered by comparable companies. In addition, our 2017 long-term incentive awards vest over four years, reinforcing the long term focus and the performance dynamic of our executive compensation program. For a more detailed discussion of the 2016 Incentive Plan, please refer to “Equity-Based Incentive Compensation”.

 

Pay Best Practices

 

Our compensation best practices include:

 

 

Substantial Portion of Compensation is At-Risk: Up to approximately 75% and 64% of the pay mix for our Chief Executive Officer and current named executive officers, respectively, for 2017 were variable and/or performance-based.

 

 

Long-Term Vesting: Our option and restricted stock unit awards have multi-year vesting periods to reward long-term performance and deter inappropriate risk taking.

 

24

 

 

Stock Ownership Guidelines: We have stock ownership requirements for our directors and executive officers; our Chief Executive Officer and executive officers must hold three-times and one-times, his or her base salary in company stock, respectively; and our directors must hold three-times his or her annual cash retainer.

 

 

No Repricing: Our stock options cannot be repriced, reset or exchanged for cash or other equity awards if under water without stockholder approval.

 

 

Double Trigger Change in Control: Our Change in Control Severance Plan requires a double trigger (i.e., change in control plus qualifying termination) to receive severance benefits and accelerated vesting of equity awards under a change in control.

 

 

At-Will Employment of Executive Officers: All of our executive officers, including our Chief Executive Officer and our Chief Financial Officer, are employed by us on an “at will” basis with no employment contracts. We do not provide guaranteed annual bonus or equity award rights. Compensation is reviewed and approved by the Compensation Committee in its sole discretion each year.

 

 

Independent Compensation Committee: The Compensation Committee consists entirely of independent directors who select and utilize an independent outside compensation consultant.

 

 

Independent Compensation Consultant: The Compensation Committee’s independent compensation consultant, Compensia, is retained directly by the Compensation Committee and performs no other consulting or other services for the Company.

 

 

Risk Assessment: The Compensation Committee performs an annual review of the risks related to our compensation program

 

 

No Gross-Ups or Excessive Perquisites: We do not provide for tax gross-ups in connection with any “golden parachute” excise taxes. We do not provide excessive benefits or perquisites for our executive officers outside the scope of what we provide generally for all employees.

 

 

No Excessive Severance: Our executive officers are not entitled to change in control cash severance payments in excess of one times their annual base salary plus target bonus.

 

 

Standard Retirement Plan Benefits: We do not maintain a defined benefit pension plan or retirement plan for our executive officers other than a 401(k) plan, which provides for broad-based employee participation in the United States.

 

Executive Compensation Process

 

The Compensation Committee is responsible for establishing and implementing executive compensation policies and programs in a manner consistent with our compensation objectives and principles.

 

Compensation Committee and Board of Directors. Historically, the Compensation Committee has determined annual compensation and granted annual equity awards at one or more meetings held during the first quarter of the year. However, at various meetings throughout the year, the Compensation Committee also considers matters related to individual compensation, such as compensation for new executive hires, as well as high-level strategic issues, such as the efficacy of the Company’s compensation strategy, potential modifications to that strategy, and new market trends, plans, or approaches to compensation in the Company’s industries.

 

Role of Executive Officers. The Compensation Committee meets regularly in executive meetings. Our Chief Executive Officer and Vice President of Human Resources, along with legal counsel as appropriate, work together to design and develop compensation programs for our Compensation Committee’s consideration, and ultimate approval, recommend changes to existing compensation programs, recommend performance targets to be achieved under those programs, and implement the decisions of the Compensation Committee. These individuals also provide information to our independent compensation consultant so that it can perform its duties for the Compensation Committee.

 

At the beginning of each year, our Chief Executive Officer provides recommendations to the Compensation Committee on the compensation levels of named executive officers other than his own, as well as his review of each other named executive officer’s performance and contributions during the previous year. When appropriate, members of our management team, including our Chief Executive Officer and Vice President of Human Resources, attend portions of the Compensation Committee meetings to provide information and answer questions. No named executive officer voted in the final determinations regarding the structure or amount of any component of his compensation package.

 

25

 

Our Compensation Committee is responsible for making final decisions on compensation for our executive officers. For all executive officers, as part of its deliberations, the Compensation Committee may review and consider, as appropriate, one or more of the following: (i) analysis of historical Company executive compensation levels and current company-wide compensation levels, (ii) trends in compensation paid to similarly situated executives at our peer companies, (iii) an executive officer’s tenure, past performance and expected contribution to future results, (iv) criticality of the executive position (both on an absolute basis and relative to other roles within the organization), (v) our Chief Executive Officer’s recommendations based on his direct knowledge of each executive officer’s performance and contributions during the previous year as well as expected contributions in the coming year, and (vi) compensation market data developed by a compensation consultant.

 

The Compensation Committee has not established any formal policies or guidelines for allocating compensation between current and long-term incentive compensation, or between cash and non-cash compensation. The Compensation Committee considers relevant market data, such as the compensation practices of our peer group discussed below under “Competitive Positioning”, as well as key qualitative factors when determining each executive’s recommended pay level. In general, however, the Compensation Committee emphasizes equity compensation over cash compensation to promote long-term thinking, strategy, and growth. In determining the amount and mix of compensation elements and whether each element provides the correct incentives and rewards for performance consistent with our short and long-term goals and objectives, the Compensation Committee relies on its judgment about each individual rather than adopting a formulaic approach to compensatory decisions.

 

Independent Compensation Consultant for Compensation Committee

 

The Compensation Committee has the authority under its charter to engage the services of outside advisors, experts, and others to assist it. Accordingly, the Compensation Committee retained Compensia, a national compensation consulting firm, to advise on matters related to the compensation of its executive officers, including the Chief Executive Officer. For 2017, Compensia advised the Compensation Committee on best practices to attract, retain, and incentivize our executives, assisted in the design of our compensation plan, and derived the peer group against which the Company’s overall compensation structure and levels are compared.

 

Based on the consideration of the various factors as set forth in the rules of the SEC and the listing standards of the NASDAQ Stock Market, the Compensation Committee has determined that its relationship with Compensia and the work of Compensia on behalf of the Compensation Committee has not raised any conflict of interest.

 

Consideration of Say on Pay Results

 

We conducted our advisory vote on executive compensation at our annual meeting of stockholders held in 2017. Although this vote was not binding on the Board of Directors or us, we believe that it is important for our stockholders to have an opportunity to express their views regarding our executive compensation as disclosed in our Proxy Statement. The Board and our Compensation Committee value stockholders’ opinions, and, to the extent there is any significant vote against the compensation of our named executive officers, the Compensation Committee will evaluate whether any additional actions including potential changes to pay levels or structures are warranted.

 

At our 2017 Annual Meeting, we received strong stockholder support for our “say on pay” proposal as 85.6% of the votes cast voted in favor of our “say on pay” proposal. We believe these results continue to demonstrate that our stockholders are aligned with our approach to executive compensation. As a result, for 2017, the Compensation Committee decided to retain the core components of our executive compensation program and apply the same general principles and philosophy as in the prior fiscal year with respect to its executive compensation decisions. We will continue to evolve our compensation process and look for ways to enhance our ability to attract, retain, and motivate the talent we need to achieve or exceed our corporate objectives for 2018 and beyond.

 

We intend to continue to monitor stockholder feedback and expand our efforts to obtain feedback from our stockholders. Our goal in soliciting feedback is to (1) better understand our stockholders’ views on executive compensation, (2) be responsive to our stockholders’ views expressed in a say on pay vote, and (3) understand whether potential changes to our compensation programs and governance policies would address concerns expressed by our stockholders. We intend to hold a “say on pay” advisory vote at each annual meeting.

 

26

 

Competitive Positioning

 

In 2015, the Compensation Committee began the process of formally reviewing competitive market compensation data and directed Compensia to develop a peer group of companies against which Energy Recovery’s overall compensation may be compared. While we have historically believed that we have a unique footprint that makes such comparisons extremely difficult, based on the advice of our advisors, we are attempting to find meaningful comparisons. Our peer group consists of companies in industrial machinery, clean technology, and broader technology industries that are comparable to us in terms of revenue, market capitalization, headcount, and location, where possible. Our peers were relatively similar to the Company in terms of revenue and market cap and had median revenue of approximately $181M and a median market cap of approximately $660M at the time the group was updated in December 2016 in advance of our 2017 executive officer compensation assessment.

 

As part of this process, the following peer group companies were identified and used by Compensia in its 2017 compensation assessment:

 

Applied Micro Circuits

Badger Meter

CEVA

ExOne Co

Fiotek Industries

Form Factor

Impinj

MaxLinear

Mercury Systems

Mesa Laboratories

Nanometrics

Omega Flex

PDF Solutions

Plug Power

Raven Industries

Sun Hydraulics

Ultratech

Vicor

 

 

Base Salaries of Named Executive Officers

 

Base salaries are designed to provide our executives with a stable source of income commensurate with their responsibility, experience, and performance. The Compensation Committee begins with an analysis of base pay relative to the market and our peer group. The Compensation Committee makes adjustments based on vertical variables such as pay parity relative to other executive officers, experience and internal accountability and does not target any particular percentile or pay ranking. The Compensation Committee reviews base salaries annually and solicits input from the Chief Executive Officer for non-CEO base salaries. The following table describes the changes that were made to the base salary of the named executive officers based on review of the factors noted above. Specifically, the Compensation Committee increased the CEO’s base salary in 2017 in part to bring the CEO’s target total cash to approximate the peer median for his position given his efforts in prior years and the expectation of his increased duties and responsibilities in 2017 and beyond. Non-CEO executive base salaries were increased by 2% to account for inflation, other than Mr. Clemente, whose 2017 base salary was increased in connection with his relocation to California.

 

Named Executive Officers

2017 Base Salary

2016 Base Salary

Joel Gay

$500,000

$420,000

Chris Gannon

$332,928

$326,400

Eric Siebert

$260,100

$255,000

Nocair Bensalah

$260,100

$255,000

Rodney Clemente

$260,100

$214,017

 

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Annual Cash Incentive Compensation

 

The Annual Incentive Plan, or AIP, is our annual cash incentive plan and is designed to encourage the performance and retention of eligible employees in recognition of individual achievement that contributes to the strategic and financial success of the Company.

 

The AIP is intended to incentivize short-term performance consistent with Company strategy and the achievement of key financial metrics. Payments under the AIP to a participant are based on a formula that takes into account both the level of achievement of Company performance goals for the year and the level of achievement of individual performance objectives. The AIP includes the following performance characteristics:

 

 

Full funding of a targeted annual bonus pool (the “Bonus Pool”) requires the Company to achieve its approved budget and profitability levels under the plan, referred to as the “Performance Target”;

 

 

For performance below Performance Target, the Company may fund the Bonus Pool in a fixed amount established by the Compensation Committee for allocation among certain limited participants who exhibit extraordinary performance;

 

 

For performance between the minimum performance threshold and the Performance Target, the Company will apply a linear function, detailed in the AIP, to determine funding of the Bonus Pool;

 

 

The amount to be paid to participants in the AIP if individual performance objectives established under the AIP are met is based on a percentage of base salary; and

 

 

Bonuses in the AIP cannot exceed 100% of target even if the Performance Target is exceeded.

 

For 2017, the Board of Directors had enumerated six major objectives for the Chief Executive Officer and the Company, which are set forth in the table below. In addition, the Chief Executive Officer had enumerated specific performance objectives for each other named executive officer in the context of the Company’s business plan and his own objectives for such officers. These Chief Executive Officer and Company objectives are reflected in the table below.

 

 

2017 Corporate Objectives

Weighting

Achievement

1

Meet or exceed budgeted operating income

25%

100%

 

2

Complete and deliver Gen-II VorTeq system design

20%

100%

 

3

Consummate an early adoption partnership for the Company’s MTeq system

25%

100%

 

4

Achieve proof of concept for an additional PX technology derivative

20%

100%

 

 

5

Secure channel partnership for IsoBoost and IsoGen products for gas processing and/or pipeline applications

5%

100%

 

6

Secure maiden energy services agreement

5%

0%

 

Total

100%

95%

 

28

 

Upon a review of the AIP objectives and other financial metrics, including the Company’s overall financial performance for 2017, the Compensation Committee recommended that the Board fund the AIP at the full 100% allocation ratio level. The Compensation Committee also approved the AIP allocation levels for each of the Company’s executive officers, including the named executive officers, as set forth in the table below, based in part on the CEO’s recommendation and reconciliation of each named executive officer’s individual accomplishment of their performance objectives. Importantly, the Compensation Committee did not apply any upward discretion with respect to bonus payouts to any named executive officers.

 

Named Executive Officer

 

2017
AIP Target (1)

(%)

   

2017
AIP Target

($)

   

2017
Actual AIP

Paid (1)
(%)

   

2017
Actual AIP

Paid
($)

 

Joel Gay

    100%       $500,000       95%       $475,000  

Chris Gannon

    60%       $199,757       57%       $190,868  

Eric Siebert

    60%       $156,060       54%       $140,454  

Nocair Bensalah

    40%       $104,040       36%       $93,636  

Rodney Clemente

    60%       $148,295       60%       $148,295  

 

 

(1)

Percentage of annual base salary.

 

Equity-Based Incentive Compensation

 

We granted equity-based awards, including stock options and RSUs, to eligible named executive officers and other employees pursuant to our 2016 Incentive Plan. As with other elements, the grant date fair value received through various stock-based awards is included in our annual compensation review process. We periodically collect and review competitive data from the peer group that includes data with respect to the use of, and value received through, equity incentives. Individual awards are made based on our assessment of this market data along with individual performance, contributions, and future potential.

 

In 2017, the Company granted stock options and RSUs to executives and other key employees to provide long-term incentives to align management with long-term stockholder interest intended to increase stockholder value. Further, stock options and RSUs are used to remain competitive in regard to retention and recruitment of key talent. The Compensation Committee believes that with management having a stake in the long-term success of the Company, the likelihood of enhancing stockholder value increases.

 

2017 Equity-Based Incentive Awards

 

On February, 2017, as part of an annual stock option grant program for employees, the Compensation Committee authorized the grant of options and RSUs to purchase the Company’s common stock to the following named executive officers:

 

Named Executive Officer

Option

Awards (#)

Value
($)

RSUs
(#)

Value
($)

Joel Gay

122,810

$749,844 

25,252

$249,995 

Chris Gannon

25,843

$162,479 

15,947

$162,500 

Eric Siebert

25,843

$162,479 

15,947

$162,500

Nocair Bensalah

25,843

$162,479 

15,947

$162,500 

Rodney Clemente

21,867

$137,482 

13,494

$137,504 

 

29

 

The vesting schedule for the option awards provides that 25% of the options vest on the one-year anniversary of the vesting commencement date, and thereafter, 1/36th of the remaining options vest at the end of each month of active service. The vesting schedule for the RSU awards provides that 25% of the RSU awards vest on each of the first, second, third and fourth anniversary of the vesting commencement date. Our Compensation Committee determined these grants primarily based on an assessment of: (i) our Chief Executive Officer’s recommendations tied to his review of each executive officer’s performance and contributions during the previous year (other than his own) as well as expected contributions in fiscal year 2017, (ii) the Compensation Committee’s review of each executive officer’s historical equity compensation levels and retention hold at the Company, and (iii) the Compensation Committee’s review of applicable competitive market compensation data (including our peer practices) and our company-wide compensation levels, including the aggregate equity budget and available share pool for fiscal year 2017.

 

Benefits

 

In 2017, our named executive officers were eligible to participate in our standard benefits programs on the same basis provided to all of our other U.S. employees, including medical, dental, and vision insurance; short- and long-term disability insurance; and health and dependent care flexible spending accounts. All named executive officers and other executives are also offered special life, long-term disability, and accidental death and dismemberment insurance benefits.

 

We also maintain a tax-qualified 401(k) plan, which provides for broad-based employee participation in the United States. We do not provide defined benefit pension plans or defined contribution retirement plans to our named executive officers other than the 401(k) plan.

 

Change in Control Severance Plan

 

In August 2009, the Company’s Board of Directors adopted a Change in Control Severance Plan for key employees. In March 2012, the Board adopted a revised Change in Control Severance Plan (the “CIC Plan”) for highly paid employees. On December 31, 2012, and on each anniversary thereafter, the CIC Plan will be extended automatically for an additional year unless the Compensation Committee of the Board of Directors delivers written notice, at least six months prior to the end of each such term, to each participant that the CIC Plan will not be extended. Accordingly, the CIC Plan was extended through December 31, 2017. Each of the named executive officers currently serving participates in the CIC Plan described below.

 

The CIC Plan is summarized below under the caption “Potential Payments Upon Termination or Change of Control” following the compensation tables. Designed as a retention tool, the CIC Plan protects participating executives from economic harm in the event that their employment is actually or constructively terminated after a change in control of the Company. Under this “double trigger” approach, participating executives are eligible for severance and other benefits under the CIC Plan if they are terminated without “Cause” or leave for “Good Reason,” as those terms are defined below, within 18 months after a change in control of the Company.

 

We believe these change of control severance benefits are an essential element of our executive compensation program and assist us in recruiting and retaining talented individuals. By establishing these change in control severance benefits, we believe we can mitigate the distraction and loss of executive officers that may occur in connection with a rumored or actual change in control and protect stockholder interests while a transaction is under consideration or pending.

 

Severance and Termination Compensation

 

We do not currently have individual employment agreements with our named executive officers. Each of the named executive officers has severance and/or termination arrangements that are detailed in their respective offer letters. Severance-related terms for our named executive officers are summarized in the section entitled “Employment Arrangements with Named Executive Officers”. Because it may be difficult for our executive officers to find comparable employment following a termination without cause, these severance benefits are intended to ease the consequences to an executive officer of an unexpected termination of employment. We also believe that having such arrangements in place can help us attract and retain key employees in a marketplace where these types of arrangements are commonly offered by our peer companies. In February 2018, Mr. Gay, the former President and Chief Executive Officer of the Company resigned from the Company. In recognition of his service to the Company, the Compensation Committee extended the vesting of his unvested options and RSUs through February 25, 2019 and the period during which Mr. Gay can exercise any vested option through the same date in consideration for a release of claims against the Company, an agreement to provide certain assistance to the Company in the future and complying with certain restrictive covenants.

 

30

 

Tax Deductibility

 

Section 162(m) of the Internal Revenue Code (the “Code”) generally disallows a tax deduction to public corporations for compensation in excess of $1 million paid for any fiscal year to certain executive officers. Until recently, compensation in excess of $1million may be deducted if, among other things, it qualifies as “performance-based compensation” within the meaning of Section 162(m). The exemption from Section 162(m)’s deduction limit for performance-based compensation has been repealed, effective for taxable years beginning after December 31, 2017, such that compensation paid to our covered executive officers in excess of $1 million will not be deductible unless it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017 that have not been subsequently materially modified. Our Compensation Committee may consider the impact of Code Section 162(m) when designing our cash and equity bonus programs, but may elect to provide compensation that is not fully deductible as a result of Code Section 162(m) if it determines that the program is in our best interests. Our bonus program for 2017 was not designed to provide for performance-based compensation that was exempt under 162(m).

 

Compensation Policies and Practices as They Relate to Risk Management

 

Our Compensation Committee has reviewed our compensation programs for our employees and believes that our compensation programs are structured in a manner that does not create risks that are reasonably likely to have a material adverse effect on the Company. The Compensation Committee considered, among other factors, the allocation of compensation among annual base salary, AIP and long-term equity awards.

 

 

 

Report of the Compensation Committee

 

This report is not deemed to be soliciting material filed with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically incorporates it by reference into a document filed with the SEC.

 

The Compensation Committee reviewed and discussed the Compensation Discussion and Analysis (“CD&A”) set forth above with the Company’s management. Based on the review and discussions, the Compensation Committee recommended to the Company’s Board of Directors that the CD&A be included in this Proxy Statement.

 

MEMBERS OF THE COMPENSATION COMMITTEE

 

Arve Hanstveit, Chairman of the Compensation Committee

Sherif Foda

Alexander Buehler

Ole Peter Lorentzen

 

31

 

Summary Compensation Table

 

The table below summarizes certain compensation information with respect to the named executive officers for the applicable fiscal years ending December 31, 2017; December 31, 2016; and December 31, 2015. All amounts are in dollars.

 

Name

Year

 

Salary (1)

   

Bonus (2)

   

 

 

Stock
Award
(3)

   

Option
Awards
(4)

   

Non-Equity

Incentive Plan

Compensation

(5)

   

All
Other
Compensation

(6)

   

Total

 
                                                           

Joel Gay(7)

2017

  $ 500,000     $     $ 249,995     $ 749,844     $ 475,000     $ 3,112     $ 1,977,951  

President and Chief

2016

  $ 420,000     $     $ 404,436     $ 405,422     $ 420,000     $ 1,007     $ 1,650,865  

Executive Officer

2015

  $ 395,896     $ 150,000     $     $ 406,433     $ 350,000     $ 554     $ 1,302,883  
                                                           

Chris Gannon(8)

2017

  $ 332,928     $     $ 162,479     $ 162,500     $ 190,868     $ 12,560     $ 861,335  

Chief Financial Officer

2016

  $ 326,400     $     $ 168,517     $ 168,927     $ 195,840     $ 64,007     $ 923,691  
 

2015

  $ 172,308     $ 45,000             $ 582,823     $ 192,000     $ 5,410     $ 997,541  
                                                           

Eric Siebert

2017

  $ 260,100     $     $ 162,479     $ 162,500     $ 140,454     $ 9,958     $ 735,491  

Vice President of

2016

  $ 255,000     $     $ 168,517     $ 168,927     $ 153,000     $ 9,230     $ 754,674  

Corporate Strategy

                                                         
                                                           

Nocair Bensalah

2017

  $ 260,100     $     $ 162,479     $ 162,500     $ 93,636     $ 12,818     $ 691,533  

Vice President

2016

  $ 255,000     $     $ 168,517     $ 168,927     $ 93,075     $ 10,007     $ 695,526  

Operations

2015

  $ 240,000     $ 45,000     $     $ 176,392     $ 96,000     $ 9,698     $ 567,090  
                                                           

Rodney Clemente.

2017

  $ 247,159     $     $ 137,482     $ 137,504     $ 148,295     $ 56,257     $ 726,697  

Vice President Global

2016

  $ 214,017     $     $ 134,812     $ 135,141     $ 128,410     $ 8,839     $ 621,219  

Desalination Operations

                                                         

 

(1)

The 2015 annual base salary for Mr. Gannon represents the number of months of service to the Company during the year beginning in June 2015 (7 months). The 2017 annual base salary for Mr. Clemente represents the total combined salary earned by Mr. Clemente who began 2017 at a base salary of $218,297, which was increased to $260,100 in May of 2017.

 

(2)

In light of the transformative nature of the licensing agreement with Schlumberger Technology Corporation, the Compensation Committee determined that a special incentive payment should be paid to those employees responsible for finalizing and executing the license agreement with Schlumberger Technology Corporation, a subsidiary of Schlumberger Limited.

 

(3)

The amounts in the “Stock Awards” column set forth the grant date fair value of RSU awards as calculated in accordance with FASB ASC Topic 718 without regard to estimated forfeitures. The grant date fair value of each award is measured based on the closing price of the Company's common stock on the date of grant, unless there is no closing price on the date of grant, in which case it is based on the closing price on the trading day last preceding the date of grant.

 

(4)

The amounts in the “Option Awards” column set forth the grant date fair value of stock options granted in the years indicated as calculated in accordance with FASB ASC Topic 718 without regard to estimated forfeitures. The methodology and assumptions used to calculate the grant date fair value are discussed in Note 11 of the notes to our financial statements included in our Annual Report on Form 10-K.

 

(5)

Non-Equity Incentive Plan Compensation is also referred to as cash incentive bonuses. The amounts for 2017 were earned but paid in 2018, the 2016 amounts were earned but paid in 2017, and the 2015 amounts were earned but paid in 2016.

 

(6)

“All Other Compensation” includes the following components (in dollars):

 

Name

Year

 


Insurance
Premium
s

   

401(k)
Match

   

Other (a)

   

Total

 
                                   

Joel Gay

2017

    $3,1122       $—       $—       $3,112  
 

2016

    $1,007       $—       $—       $1,007  
 

2015

    $554       $—       $—       $554  
                                   

Chris Gannon

2017

    $3,560       $9,000       $—       $12,560  
 

2016

    $1,007       $9,000       $54,000       $64,007  
 

2015

    $315       $5,095       $—       $5,410  
                                   

Eric Siebert

2017

    $2,173       $7,785       $—       $9,958  
 

2016

    $1,007       $8,223       $—       $9,230  
                                   

Nocair Bensalah

2017

    $3,819       $9,000       $—       $12,819  
 

2016

    $1,007       $9,000       $—       $10,007  
 

2015

    $698       $9,000       $—       $9,698  
                                   

Rodney Clemente.

2017

    $2,711       $9,000       $44,546       $56,257  
 

2016

    $890       $7,949       $—       $8,839  
 

(a)

Other Compensation in 2016 for Mr. Gannon includes payment of relocation expenses. Other Compensation in 2017 for Mr. Clemente includes payment of relocation expenses.

 

32

 

(7)

Mr. Gay was appointed President and Chief Executive Officer on April 24, 2015. Mr. Gay resigned from the Company in February 2018.

 

(8)

Mr. Gannon was appointed Chief Financial Officer effective June 1, 2015 and was appointed the interim President and Chief Executive Officer in February 2018.

 

ADDITIONAL INFORMATION REGARDING EXECTIVE COMPENSATION

 

Grants of Plan-Based Awards in 2017 

The following table sets forth information concerning non-equity and equity incentive plan awards to the named executive officers during 2017. The non-equity incentive plan consists of the 2017 cash incentive plan described in the “Compensation Discussion and Analysis” section above. The actual amounts realized in accordance with the non-equity incentive plan are reported in the “Summary Compensation Table” under the column entitled “Non-Equity Incentive Plan Compensation.” The table also depicts information with respect to stock option awards granted by the Company during 2017.

 

33

 

           

Estimated future payouts under non-

equity incentive plan awards

   

Estimated future payouts under

equity incentive plan awards

                                 

Name

 

Grant Date

   

Threshold
($)

   

Target
($)

   

Maximum
($)

   

Threshold
(#)

   

Target
(#)

   

Maximum
(#)

   

All other

stock

awards:

Number

of shares

of stock

or units

(#)

   

All other

option

awards:

Number of securities

underlying

options (#)

   

Exercise

or base

price of

option

awards

($/Sh)

   

Grant date

fair value of

stock and

option

awards

 

Joel Gay

              $ 500,000                                                  
   

2/10/2017

                                                  122,810     $ 9.90     $ 750,001  
   

2/10/2017

                                            25,252             $ 9.90     $ 249,995  
                                                                                         

Chris Gannon

              $ 199,757                                                  
   

2/2/2017

                                                  25,843     $ 10.19     $ 162,479  
   

2/2/2017

                                            15,947             $ 10.19     $ 162,500  
                                                                                         

Eric Siebert

              $ 156,060                                                  
   

2/2/2017

                                                  25,843     $ 10.19     $ 162,479  
   

2/2/2017

                                            15,947             $ 10.19     $ 162,500  
                                                                                         

Nocair Bensalah

              $ 104,040                                                  
   

2/2/2017

                                                  25,843     $ 10.19     $ 162,479  
   

2/2/2017

                                            15,947             $ 10.19     $ 162,500  
                                                                                         

Rodney Clemente

              $ 148,295                                                  
   

2/2/2017

                                                  21,867     $ 10.19     $ 137,482  
   

2/2/2017

                                            13,494             $ 10.19     $ 137,504  

 

 

 

(1)

In 2017, under our non-equity incentive plan, Mr. Gay was eligible to earn a cash award in an amount not to exceed 100% of his annual base salary; Mr. Gannon’s was eligible to earn a cash award in an amount not to exceed 60% of his annual base salary; Mr. Siebert was eligible to earn a cash award in an amount not to exceed 60% of his annual base salary; Mr. Bensalah was eligible to earn a cash award in an amount not to exceed 40% of his annual base salary; and Mr. Clemente was eligible to earn a cash award in an amount not to exceed 60% of his annual base salary. See the section entitled “Annual Cash Incentive Compensation” table for more information regarding 2017 cash awards.

 

(2)

Amounts reflect the aggregate grant date fair value of RSU awards calculated in accordance with FASB ASC Topic 718 without regard to estimated forfeitures. The grant date fair value of each award is measured based on the closing price of the Company’s common stock on the date of grant, unless there is no closing price on the date of grant, in which case it is based on the closing price on the trading day last preceding the date of grant. See the “Outstanding Equity Awards as of December 31, 2017” table for information regarding the vesting schedule of such RSU awards.

 

(3)

Amounts reflect the aggregate grant date fair value of option awards granted in 2017, calculated in accordance with FASB ASC Topic 718 without regard to estimated forfeitures. See Note 11 of the notes to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of assumptions made in determining the grant date fair value of our option awards. See the “Outstanding Equity Awards as of December 31, 2017” table for information regarding the vesting schedule of such option awards.

 

34

 

Outstanding Equity Awards as of December 31, 2017

 

The following table presents certain information concerning equity awards held by our named executive officers as of December 31, 2017.

 

    Option Awards(1)     Stock Awards  

Name

 

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable

 

Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable

 

Option Exercise

Price ($)

 

Option

Expiration Date

 

Number of

shares or units

of stock that

have not vested

(#)

 

Market value

of shares or

units of stock

that have not

vested ($)

Joel Gay

    39,375 (2)      2,625 (2)    $ 6.00    

03/12/2024

                 
      87,500 (3)      12,500 (3)    $ 4.91    

07/03/2024

                 
      87,500 (4)      12,500 (4)    $ 3.31    

10/01/2024

                 
      211,408 (5)      96,095 (5)    $ 2.75    

03/10/2025

                 
      34,449 (6)      44,292 (6)    $ 8.52    

03/08/2026

                 
            122,810 (7)    $ 9.90    

02/10/2027

                 
                              26,702 (8)    $ 233,643 (8) 
                              25,252 (9)    $ 220,955 (9) 
                                                 

Chris Gannon

    125,000 (10)      75,000 (10)    $ 2.61    

06/08/2025

                 
      50,000 (11)      50,000 (11)    $ 6.88    

12/08/2025

                 
      14,353 (6)      18,456 (6)    $ 8.52    

03/08/2026

                 
            25,843 (12)    $ 10.19    

02/02/2027

                 
                              11,126 (8)    $ 97,353 (8) 
                              15,947 (9)    $ 220,955 (9) 
                                                 

Eric Siebert

    62,500 (10)      37,500 (10)    $ 2.61    

06/08/2025

                 
      14,353 (6)      18,456 (6)    $ 8.52    

03/08/2026

                 
            25,843 (12)    $ 10.19    

02/02/2027

                 
                              11,126 (8)    $ 97,353 (8) 
                              15,947 (9)    $ 220,955 (9) 
                                                 

Nocair Bensalah

    39,695 (13)          $ 2.59    

01/04/2022

                 
      24,631 (14)          $ 3.92    

03/14/2023

                 
      39,375 (2)      2,625 (2)    $ 6.00    

03/12/2024

                 
      91,751 (5)      41,705 (5)    $ 2.75    

03/10/2025

                 
      14,353 (6)      18,456 (6)    $ 8.52    

03/08/2026

                 
            25,843 (12)    $ 10.19    

02/02/2027

                 
                              11,126 (8)    $ 97,353 (8) 
                              15,947 (9)    $ 220,955 (9) 
                                                 

Rodney Clemente

    10,000 (15)          $ 8.50    

07/01/2018

                 
      8,625 (16)          $ 5.25    

09/04/2019

                 
      36,946 (13)          $ 3.92    

03/14/2023

                 
      39,375 (2)      2,625 (2)    $ 6.00    

03/12/2024

                 
      15,682 (5)      13,838 (5)    $ 2.75    

03/10/2025

                 
      11,483 (6)      14,764 (6)    $ 8.52    

03/08/2026

                 
            21,867 (12)    $ 10.19    

02/02/2027

                 
                              8,901 (8)    $ 77,884 (8) 
                              13,494 (9)    $ 118,072 (9) 

 

 

(1)

Includes unvested options for shares, subject to time vesting, granted under the 2008 Equity Incentive Plan and the 2016 Incentive Plan.

 

 

(2)

These options were granted under the 2008 Equity Incentive Plan on March 12, 2014, with 25% vesting on March 11, 2015, and 1/36th of the remaining options vesting each month thereafter. They become fully vested on March 11, 2018

 

 

(3)

These options were granted under the 2008 Equity Incentive Plan on July 3, 2014, with 25% vesting on June 27, 2015, and 1/36th of the remaining options vesting each month thereafter. They become fully vested on July 26, 2018.

 

35

 

 

(4)

These options were granted under the 2008 Equity Incentive Plan on October 1, 2014, with 25% vesting on June 27, 2015, and 1/36th of the remaining options vesting each month thereafter. They become fully vested on July 26, 2018.

 

 

(5)

These options were granted under the 2008 Equity Incentive Plan on March 10, 2015, with 25% vesting on March 9, 2016, and 1/36th of the remaining options vesting each month thereafter. They become fully vested on March 9, 2019.

 

 

(6)

These options were granted under the 2008 Equity Incentive Plan on March 8, 2016, with 25% will vesting March 7, 2017, and 1/36th of the remaining options vesting month thereafter. They become fully vested on March 7, 2020.

 

 

(7)

These options were granted under the 2016 Incentive Plan on February 10, 2017, with 25% vesting on February 10, 2018, and 1/36th of the remaining options vesting each month thereafter. They become fully vested on February 10, 2021.

 

 

(8)

These restricted stock awards were granted under the 2008 Equity Incentive Plan on March 8, 2016, with 25% vesting March 7, 2017, and 1/36th of the remaining awards vesting each month thereafter. They become fully vested on March 7, 2020.

 

 

(9)

These restricted stock awards were granted under the 2016 Incentive Plan on February 2, 2017, with 25% vesting on each of February 2, 2018, February 2, 2019, February 2, 2020 and February 2, 2021. They become fully vested on February 1, 2021.

 

 

(10)

These options were granted under the 2008 Equity Incentive Plan on June 8, 2015, with 25% vesting on June 7, 2016, and 1/36th of the remaining options vesting each month thereafter. They become fully vesting on June 7, 2019.

 

 

(11)

These options were granted under the 2008 Equity Incentive Plan on December 8, 2015, with 25% vesting on December 7, 2016, and 1/36th of the remaining options vest each month thereafter. They become fully vested on December 7, 2019.

 

 

(12)

These options were granted under the 2016 Incentive Plan on February 2, 2017, with 25% vesting on February 2, 2018, and 1/36th of the remaining options vesting each month thereafter. They become fully vested on February 2, 2021.

 

 

(13)

These options were granted under the 2008 Equity Incentive Plan on January 4, 2012, with 25% vesting on January 3, 2013, and 1/36th of the remaining options vesting each month thereafter. They become fully vested on January 3, 2016.

 

 

(14)

These options were granted under the 2008 Equity Incentive Plan on March 14, 2013, with 25% vesting on March 13, 2014, and 1/36th of the remaining options vesting each month thereafter. They become fully vested on March 13, 2017.

 

 

(15)

These options were granted under the 2008 Equity Incentive Plan on July 1, 2008, with 25% vesting on June 30, 2009, and 1/36th of the remaining options vest each month thereafter. They become fully vested on June 30, 2012.

 

 

(16)

These options were granted under the 2008 Equity Incentive Plan on September 4, 2009, with 25% vested on September 3, 2010, and 1/36th of the remaining options vesting each month thereafter. They become fully vested on September 3, 2013.

 

 

Option Exercises and Stock Vested in 2017

 

The table below provides supplemental information relating to the value realized upon the vesting of restricted stock units during fiscal year 2017 for each named executive officer based on the closing share price of the Company’s common stock on the Nasdaq Stock Market on the applicable vesting date.

 

   

Option Awards

   

Stock Awards

 
   

Number of

shares

acquired

on exercise

(#)

   

Value

realized on

exercise

($)

   

Number of

shares

acquired

on vesting(1)

(#)

   

Valued

realized on

vesting

($)

 

Joel Gay

                20,767       $174,247  

Chris Gannon

                8,653       72,602  

Eric Siebert

                8,653       72,602  

Nocair Bensalah

                8,653       72,602  

Rodney Clemente

                6,922       58,079  

 

 

(1)

Reflects RSUs vested under the terms of the 2008 Equity Incentive Plan.

 

Potential Payments Upon Termination or Change of Control

 

Change in Control Plan

 

We adopted the CIC Plan in March 2012 to provide change in control severance benefits for certain designated key employees. Each of the named executive officers currently serving participates in the CIC Plan described below.

 

36

 

The CIC Plan became effective on March 5, 2012. On December 31, and on each anniversary thereafter, the CIC Plan is extended automatically for an additional year unless the Compensation Committee of the Company’s Board of Directors delivers written notice, at least six months prior to the end of each such term, to each participant that the CIC Plan will not be extended. As a result, on December 31, 2017, the CIC Plan was automatically extended through December 31, 2018.

 

The Compensation Committee is authorized by the CIC Plan to designate any full-time employee of the Company as a participant. The participants include the Company’s executive officers and other designated key employees.

 

A participant is entitled to severance benefits under the CIC Plan if a change of control occurs and the acquiring company terminates the participant’s employment without cause, or the participant terminates his or her employment with good reason, in either case within 18 months after a change in control (including, but not limited to, an acquisition of a controlling interest in the Company by a third party). The CIC Plan sets forth definitions of cause, good reason, and change in control, which are described in full at the end of this summary.

 

The severance benefits, conditioned on the participant’s signing a release in favor of the Company and complying with certain other covenants under the CIC Plan, include the following (in addition to then earned and unpaid amounts owed less deductions required or permitted by law):

 

 

A lump-sum payment equal to (i) 12 months of regular base pay plus (ii) 100% of the participant’s target annual bonus for the fiscal year in which the change in control occurs;

 

 

Immediate vesting of all unvested equity compensation held by the participant as of the date of termination (and for this purpose, all performance criteria, if any, underlying unvested awards are deemed to be satisfied at 100% of target) (as described further below);

 

 

The Company’s regular payment of the monthly premium under COBRA, if the participant timely elects to continue medical, dental, and vision benefits under COBRA, for up to 12 months after employment termination (but not continuing after the participant becomes eligible for these benefits with another employer); and

 

 

Payment by the Company of up to $10,000 for reasonable costs of outplacement services.

 

The CIC Plan also provides that if a change in control occurs and a participant’s equity compensation is not converted, assumed, or replaced by a successor entity with an equivalent award, then immediately prior to the change in control, the participant’s equity compensation shall become fully exercisable and vested and all forfeiture restrictions on such equity compensation shall immediately lapse. In the case of equity compensation, the amount of which is based on the satisfaction of performance criteria, all performance criteria will be deemed satisfied at target. The conversion, assumption, or replacement of an equity award for another equity award of stock that is not publicly traded shall not be considered an equivalent award for purposes of the CIC Plan.

 

In no event is the Company obligated to gross up any payment or benefit to a participant to avoid the effects of the “parachute rules” of Sections 280G and 4999 of the Code. Benefits to a participant, however, may be reduced if the reduction would result in the participant receiving a greater payment on an after-tax basis due to the application of those sections of the tax law (such provision, a “better after-tax” provision). Additionally, payments may be conditioned or delayed as needed to be exempt from or comply with Section 409A of the Code relating to “nonqualified deferred compensation.”

 

The CIC Plan also obligates the Company to make all payments to a Participant required by applicable law upon employment termination such as earned but unpaid salary and bonus (without regard to a release or other covenants of the participant in the CIC Plan and subject to deductions required or permitted by applicable law).

 

Key Defined Terms of the Change in Control Plan

 

“Cause” means in the context of employment termination:

 

 

(i)

any act by participant in the course of employment or participant’s performance of any act which, if participant were prosecuted, would constitute a felony;

 

37

 

 

(ii)

participant’s failure to carry out his or her material duties, after not less than thirty (30) days prior written notice of such failure, and which failure is unrelated to an illness or disability of not greater than twelve (12) work weeks;

 

 

(iii)

participant’s dishonesty towards or fraud upon the Company which is injurious to the Company;

 

 

(iv)

participant’s violation of confidentiality obligations to the Company or misappropriation of Company assets; or

 

 

(iv)

participant’s death or disability, as defined in the Company long-term disability plan in which the participant participates, or if the participant does not participate in such a plan, the principal long-term disability plan that covers the Company’s senior-level executives.

 

“Change in Control” means:

 

 

(i)

an acquisition of 50% or more of the outstanding common stock or voting securities of the Company by any person or entity, other than the Company, a Company employee benefit plan, or a corporation controlled by the Company’s stockholders;

 

 

(ii)

changes in the composition of the Board over a rolling twelve-month period, which changes result in less than a majority of the directors consisting of Incumbent Directors. “Incumbent Directors” include directors who are or were either (x) members of the Board as of the effective date, as defined in the CIC Plan or (y) elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination. Incumbent Directors do not include any individual not otherwise an Incumbent Director whose election or nomination resulted from an actual or threatened proxy contest (relating to the election of directors to the Board); or

 

 

(iii)

consummation of a