OCEAN POWER TECHNOLOGIES, INC. The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. Some of the information contained in this management's discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business, pending and threatened litigation and our liquidity includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section of our Annual Report on Form 10-K for the year endedApril 30, 2019 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. References to a fiscal year in this Form 10-Q refer to the year endedApril 30 of that year (e.g., fiscal 2019 refers to the year endedApril 30 ,
2019). Overview
Nearly 70% of the earth's surface is covered by water, and over 40% of the world's population lives within approximately 150 miles of a coast. Thousands of information gathering and/or power systems are deployed in the oceans today to increase our understanding of weather, climate change, biological processes, and marine mammal patterns as well as supporting exploration, security and defense and operations for industries such as oil and gas. Most of these systems are powered by battery, solar, wind, fuel cell, or fossil fuel generators that may be unreliable and expensive to operate while they also may be limited in their ability to deliver ample electric power. These current systems often necessitate significant tradeoffs in sensor accuracy, data processing and communications bandwidth and frequency in order to operate given limited available power. More persistent power systems requiring less maintenance, such as our systems, may have the ability to save costs over these current systems. Equally important are increases in available power which may allow for better sensors, faster data sampling and higher frequency communication intervals up to real-time which could improve scientific and economic returns. Founded in 1984 and headquartered inMonroe Township, New Jersey , we believe we are the leader in ocean wave power conversion technology. Our PB3 is our first fully commercial product which generates electricity by harnessing the renewable energy of ocean waves. In addition to our PB3, we continue to develop our PowerBuoy® product line based on modular, ocean-going buoys, which we have been periodically ocean testing since 1997. InNovember 2018 , the Company announced additional complementary products, the hybrid PowerBuoy® and subsea battery solutions which leverage our existing expertise in offshore power systems while expanding our product line beyond our flagship PB3 offering. The PB3 generates power for use in remote offshore locations, independent of a conventional power grid. It features a unique onboard power take-off ("PTO") system, which incorporates both energy storage and energy management and control systems. The PB3 generates a nominal name-plated capacity rating of up to 3 kilowatts ("kW") of peak power during recharging of the onboard batteries. Power generation is deployment-site dependent whereby average power generated can increase substantially at very active sites. Our standard energy storage system ("ESS") has an energy capacity of up to a nominal 150 kilowatt-hours ("kWh") to meet specific application requirements. We believe there is a substantial addressable market for the current capabilities of our PB3, which we believe could be utilized in a variety of applications. In addition to leveraging earlier design aspects of our autonomous PowerBuoy®, the PB3 has undergone extensive factory and in-ocean design validation testing. Currently, our engineering efforts are continuing to expand the PowerBuoy® capability with simplified deployment and mooring options and working together with our customer base to ensure flexible systems integration and to optimize energy output. Our marketing efforts are focused on applications in remote offshore locations that require reliable and persistent power and communications, either by supplying electric power to payloads that are integrated directly in or on our PowerBuoy® or located in its vicinity, such as on the seabed and in the water column. Based on our market research and publicly available data, we believe that numerous markets have a direct need for our PowerBuoys® including oil and gas, defense and security, science and research, and communications. Depending on payload power requirements, sensor types and other considerations, we have found that our PowerBuoy® could satisfy several application requirements within these markets. We believe that the PB3 persistently generates sufficient power to meet the requirements of many potential customer applications within our target markets. Since fiscal 2002, government agencies have accounted for a significant portion of our revenues. These revenues were largely for the support of our development efforts relating to our technology. Today our goal is to generate the majority of our revenue from the sale or lease of our products, and sales of services to support our business operations. As we continue to develop and commercialize our products, we expect to have a net loss of cash from operating activities unless and until we achieve positive cash flow from the commercialization of our products and services. During fiscal 2019 and the first six months of fiscal year 2020, we continued work on projects with the Premier Oil ("PMO"), Eni S.p.A. ("Eni"), theU.S. Navy Small Business Innovation Research ("U.S. SBIR") program, and a leading oil & gas operator. In fiscal year 2020, the Company's sold its first PowerBuoy® to EGP. 24 Product Development
The development of our technology has been funded by capital we raised, by development engineering contracts we received starting in fiscal 1995 with agencies like theDepartment of Energy ("DOE"), theU.S. Navy , theDepartment of Homeland Security , and revenue generating projects with MES, Eni and Premier Oil. Through these projects, we also continued development of our PowerBuoy® technologies. We are continuing to focus on marketing and developing our PowerBuoy® products and services for use in unmanned autonomous power applications and communications solutions. In addition to the PB3 commercial activities, a concerted effort has been underway which is focused on proactively implementing additional features driven by extensive and direct discussions with potential users, customers, marketing partners, and end users in our target markets. Such features include:
? Enhancement and cost-out of our current PB3 PowerBuoy® product and supporting
systems through customary product life cycle management.
? The design and development of a single point mooring umbilical solution that
not only allows for quick deployment of the PowerBuoy® but also enables
delivery of power and communication capabilities to customer payloads which
are external to the PowerBuoy®, and which may reside in the water column, on
the seabed, or both.
? The design, development and implementation of an advanced buoy controller that
reduces controller power consumption and cost by 90% each, improves buoy
reliability, and supports high computational speeds needed for the PowerBuoy®
monitoring and control.
Additionally, and building upon our initial success in implementing an auto-ballast system in our PB3, we further enhanced this feature in order to achieve faster and more cost effective PB3 deployments and retrievals.
As previously stated, the PB3 has achieved commercial status through a series of design iterations which focused on improving its reliability and survivability in the ocean environment. Though the PB3 will continue to undergo further enhancements through customary product life cycle management, we believe the PB3 has achieved a maturity level for immediate commercial use. We believe that the PB3 will generate and store sufficient power to address various application requirements in our target markets. Our product development and engineering efforts are focused, in part, on increasing the energy output and efficiency of our PowerBuoys®. If we are able to do so, we believe the PowerBuoy® would be useful as part of broader solutions where cost savings and additional power are required by our potential customers, and would also offer enabling capabilities which may not have been previously available to customers. We continue to explore opportunities in these target markets. We believe that by demonstrating the capability of our PowerBuoy® in oil & gas and telecommunications applications, we can advance our product and services and gain further adoption from our target markets. We continue to improve design and manufacturing to enhance our ability to reduce solution costs, improve customer value, displace incumbent solutions, and become the preferred power source for new and existing applications in our target markets. We are utilizing our experience with multiple commercial PowerBuoy® deployments globally to continually improve our solutions so that we have higher energy efficiency, additional mooring capability, platform flexibility and high reliability. For example, the redesigned PB3 leverages our knowledge base from past designs to incorporate new design features which we believe will improve its reliability and efficiency.
In
? Hybrid PowerBuoy® - The Company is in the process of creating a hybrid
PowerBuoy® that will be a smaller liquid-fueled surface buoy, compared to the
wave power generating PB3 PowerBuoy®, capable of providing reliable power in
remote offshore locations. This product is to be highly complementary to the
PB3 PowerBuoy® by providing the Company the opportunity to address a broader
spectrum of customer deployment needs, including low-wave environments, with
the potential for greater Company integration within each customer project. It
is primarily intended for shorter term deployment applications such as electric
remotely operated vehicles ("eROV's") and autonomous underwater vehicles
("AUV's") inspections and short-term maintenance, topside surveillance and
communications, and subsea equipment and controls. The hybrid PowerBuoy® is
anticipated to be a lightweight, quickly deployable and cost-effective
solution. The design is also anticipated to have a high payload capacity for
communications and surveillance, with the capability of being tethered to
subsea payloads and battery packs, or with a conventional anchor mooring
system. The Company is designing the hybrid PowerBuoy® with a
to outperform traditional diesel buoys, which we believe have more frequent
service and refueling intervals. We believe the hybrid PowerBuoy® will be able
to operate in an environmentally safer manner using more robust fuels, while
operating over a wider temperature range and more broad ocean wave conditions
than existing diesel buoys. 25
? Subsea battery systems - The Company is in the process of creating a sea floor
energy storage solution for remote offshore operations. These subsea battery
systems will contain lithium ion batteries, which provide high power density,
to supply power that can enable subsea equipment, sensors, communications,
AUV's and eROV's recharge. The Company's PB3 PowerBuoy® is complimentary to
subsea battery systems by providing a means for recharging during longer term
deployments, or the subsea battery systems can be used independently for
shorter term deployments. Ideal for many remote offshore customer
applications, these subsea battery systems are anticipated to be high
performance, cost-efficient, and quickly deployable. Given the Company's
expertise in offshore energy storage systems from existing PB3 PowerBuoy®
technology, the subsea battery solutions will provide an opportunity for the
Company to differentiate through technical, cost and delivery leadership.
? Support services - The Company offers customers a comprehensive range of
support services that meet their specific needs. These support services
include innovation services, remote monitoring, extended service agreements,
customization and pre-packaged payload options, engineering-design-testing
services, mooring design, and marine services. These same support services
will be extended to the new subsea battery solution and hybrid PowerBuoy®
products.
Commercial Activities
We continue to seek new strategic relationships, and further develop our existing partnerships, with other companies that have developed or are developing in-ocean applications requiring a persistent source of power that is also capable of real time data collection, processing and communication, to address potential customer needs.
The table below shows the percentage of the Company's revenues derived from customers whose revenues accounted for at least 10% of the Company's consolidated revenues for at least one of the periods indicated:
Three months ended October 31, Six months ended October 31,
2019 2018 2019 2018
Eni S.p.A. 23 % 84 % 19 % 72 %
Premier Oil UK Limited 13 % 0 % 30 % 15 %
EGP 47 % 16 % 24 % 13 %
U.S. Navy 10 % 0 % 17 % 0 %
Other 7 % 0 % 10 % 0 %
100 % 100 % 100 % 100 %
In order to achieve success in commercializing our products, we must expand our customer base and obtain commercial contracts to lease or sell our PowerBuoy® and related services to customers. Our potential customer base for our PowerBuoys® includes various public and private entities, and agencies that require remote offshore power. To date, substantially all of our revenue producing contracts have been with a small number of customers under contracts to fund a portion of the costs of our operational efforts to develop and improve our technology, validate our product through ocean and laboratory testing, and business development activities with potential commercial customers. Our goal in the future is that an increased portion of our revenues will be from the lease or sale of our products and related maintenance and other services. 26 Customers
? In
which include the sale of a PB3 PowerBuoy® and the development and supply of a
turn-key integrated
deployment off the coast of
feasibility study of the PowerBuoy® as an offshore autonomous platform hosting
oceanographic sensor systems conducted in September 2018 .
? In April 2019 , we entered into an agreement with a leading oil and gas
operator to conduct a detailed feasibility study of using the Company's
technology to monitor subsea wells.
? In
the first phase of a project to design and develop a buoy mooring system which
incorporates fiber optics for the transmission of subsea sensor data to
airplanes, ships, and satellites.
? In August 2018 , we entered into an agreement with EGP to evaluate a PB3
deployment along the coast of
the PowerBuoy® as an offshore autonomous platform hosting oceanographic sensor
systems.
? In
three months and a maximum of twelve months) of a PB3 to be deployed in one of
PMO's offshore fields in the
? In
minimum 24-month contract that includes an 18-month PB3 lease and associated
project management.
? In
out the first phase of a project which focuses on the initial concept design
and development of a mass-on-spring PTO-based PowerBuoy® leveraging a number
of OPT patents covering such a technology. If successful, this device is
expected to be able to respond to the unique set of requirements expected in
various military marine applications. We completed the Phase 2 BASE Effort
work under the contract which focused on the initial concept design and
development of a mass-on-spring PTO-based PowerBuoy®.
? We have worked with MES (from 2010 to current) to develop several PowerBuoy®
projects in
to reimburse us for specific costs associated with research, development and
deployment of our PowerBuoy® product. In
of intent with MES to conduct funded pre-work tasks and to negotiate a
definitive agreement that would allow for the lease of the PB3 for a project
off the coast of
review. Stage-gate reviews are used in product development to gather key
information needed to advance the project to the next gate or decision point.
This process is a generally accepted industry practice and has been utilized
by other customers such as the
million was negotiated and finalized with MES in
engineering and logistics support, and the lease of our PB3 for a 7-month
period, its ocean deployment, associated data collection and monitoring of its
performance. Upon the completion of the engineering pre-work and a successful
stage gate review, the PB3 was shipped to
Island from April to
and the PB3 was shipped back to New Jersey .
Partnerships
? In
commercial market solutions that offer a step-change in innovation and market
value against conventional methodologies, specifically through development and
marketing of a combined Hybrid Autonomous Underwater Vehicle (HAUV) charging
station which will be able to utilize the PowerBuoy® system for topside
charging and communications.
? In
in the global oil and gas and renewable markets.
? In
Marketing Agreement with
a preliminary focus on AUV and eROV charging and communications systems.
? In
long-term supply agreement with NEC Energy Solutions ("NEC ES"), a pioneer and
global leader in utility scale energy storage. Under the terms of the supply
agreement, NEC ES will be a supplier of lithium ion batteries for our subsea
battery systems.
? In
conjunction with ocean life monitoring sensors to collect ocean mammal
migration data. The MOA includes the exploration and assessment of the use of
the PB3 as an integration platform to provide power and communications to
sensors that monitor marine life migrations. An initial effort consisting of a
battery powered sensor mounted to the PB3-A1 was deployed off of the coast of
New Jersey which sought to establish a baseline acoustic survey. The deployment proceeded for approximately three months and met all project objectives.
? In 2016, we entered into a cooperative research and development agreement
("CRADA") with the National Data Buoy Center ("NDBC") to conduct ocean
demonstrations of its innovative Self-Contained Ocean Observing Payload
("SCOOP") monitoring system integrated into our PB3-A1 PowerBuoy®. NDBC
operates a large network of buoys and stations which provide critical
meteorological and oceanic observations that are utilized by government,
industry, and academia throughout the world. Under the CRADA, an initial ocean
demonstration was to be conducted off the coast of
the SCOOP onto our PB3 PowerBuoy® and in
the coast of
ocean conditions, as well as system performance and maintenance data
collection, were carried out. The SCOOP was powered by the PB3 and provided
metocean data to OPT and to NDBC. The deployment proceeded for approximately
three months and met all project objectives.
27
Business Strategy
We continue to commercialize our PB3 for use in remote offshore power and real-time data communications applications, and in order to achieve this goal, we are pursuing the following business objectives:
? Sell and/or lease PB3 PowerBuoy® as part of solution offerings. We believe our
PB3 PowerBuoys® are well suited to enable many unmanned, autonomous (non-grid
connected) offshore solutions, such as topside and subsea surveillance and
communications, subsea equipment monitoring, early warning systems platform
and subsea power and buffering, and weather and climate data collection. We
have investigated and realized market demand for some of these solutions
leveraging both PowerBuoy® sales and leases within our selected markets, and
we intend to continue to sell and lease PowerBuoys® to these markets as part
of these broader solutions. Additionally, we intend to provide services
associated with our solution offerings such as paid engineering studies,
value-added engineering, maintenance, remote monitoring and diagnostics,
application engineering, planning, training, project management, and marine
and logistics support required for our solution life-cycles. We continue to
increase our commercial capabilities through new hires in sales and
application support, and through engagement of expert market consultants in
various geographies.
? Expand product offering by adding new complimentary products that are cost
efficient and designed for shorter and faster deployments, which will create a
system solutions approach for our customers. We are currently developing two
new complementary products to our PB3, the hybrid PowerBuoy® and subsea
battery solutions. These products build on our existing expertise in offshore
power systems and are targeted for a near term deployment. The hybrid
PowerBuoy® is to be highly complementary to the PB3 by providing the Company
the opportunity to address a broader spectrum of customer deployment needs,
including low-wave environments, with the potential for greater Company
integration within each customer project. The hybrid PowerBuoy® is primarily
intended for shorter term deployment applications such as eROV and AUV
inspections and short-term maintenance, topside surveillance and
communications, and subsea equipment and controls. The subsea battery
solutions are expected to offer the possibility of creating a sea floor energy
storage solution for remote offshore operations. These subsea battery systems
will contain lithium ion batteries, which provide high power density to supply
power that can enable subsea equipment, sensors, communications, AUVs and eROV
recharge. Ideal for many remote offshore customer applications, these subsea
battery systems are anticipated to be high performance, cost-efficient, and
quickly deployable.
? Concentrate sales and marketing efforts in specific geographic markets. We are
currently focusing our marketing efforts on parts of
opportunities, political and economic stability, and high levels of
industrialization and economic development.
? Expand our relationships in key market areas through strategic partnerships
and collaborations. We believe that strategic partners are an important part
of commercializing a new product. Partnerships and collaborations can be used
to improve the development of overall integrated solutions, create new market
channels, expand commercial know-how and geographic footprint, and bolster our
product delivery capabilities. We believe that offering a turn-key solution,
and not just power, is key to securing long term success.
? Commercial collaborations. We believe that an important element of ourbusiness strategy is to collaborate with other organizations to leverage our
combined expertise, market presence and access, and core competences across
key markets. We have formed such a relationship with several well-known
groups, including Modus, Saab, NEC ES,
to seek other opportunities to collaborate with application experts from
within our selected markets.
? Outsourcing of fabrication, deployment and service support. We outsource all
fabrication, anchoring, mooring, cabling supply, and in most cases deployment
of our PowerBuoy® in order to minimize our capital requirements as we scale
our business. Our PTO is a proprietary subsystem and is assembled and tested
at our facility. We believe this distributed manufacturing and assembly
approach enables us to focus on our core competencies to ensure a
cost-effective product by leveraging a larger more established supply base. We
also continue to seek strategic partnerships with regard to servicing of our
PB3.
28
? PB3 cost reduction and PowerBuoy® product development. Our engineering efforts
are focused on customer application development for PB3 sales, cost reduction
of our PB3 and improving the energy output, reliability, maintenance interval
and expected operating life of our PowerBuoys®. We continue to optimize
manufacturability of our designs with a focus on cost competitiveness, and we
believe we will be able to address new and different applications by
developing new products that increase energy output.
Capital Raises
On August 13, 2018 , the Company entered into a common stock purchase agreement
with Aspire Capital Fund, LLC ("Aspire Capital ") which provided that, subject to
certain terms, conditions and limitations, Aspire Capital was committed to
purchase up to an aggregate of $10.0 million of shares of the Company's common
stock over a 30-month period that does not exceed 19.99% of the outstanding
common stock on the date of the agreement. The number of shares the Company
could issue within the 19.99% limit is 183,591 shares. Shareholder approval was
not needed since the number of common stock offered for sale in the common stock
purchase agreement did not exceed 19.99% of the outstanding common stock on the
date of the agreement. In consideration for entering into the agreement, the
Company issued to Aspire Capital 21,429 shares of our common stock as a
commitment fee. As of October 31, 2019 , the Company has sold 162,162 shares of
common stock with an aggregate market value of $949,259 at an average price of
$5.85 per share pursuant to this common stock purchase agreement. The Company
has issued all the shares available for sale under the common stock purchase
agreement. The agreement was cancelled on October 24, 2019 .
On October 24, 2019 , the Company entered into a new common stock purchase
agreement with Aspire Capital which provides that, subject to certain terms,
conditions and limitations, Aspire Capital is committed to purchase up to an
aggregate of $10.0 million of shares of the Company's common stock over a
30-month period that does not exceed 19.99% of the outstanding common stock on
the date of the agreement. The number of shares the Company can issue within the
19.99% limit is 1,219,010 shares. Shareholder approval is needed for sale of
common stock over the 19.99% limit of the outstanding common stock on the date
of the agreement. The Company has included a proposal in its proxy statement
asking shareholders at the 2019 annual meeting of stockholders, being held on
December 20, 2019 , to approve an additional 5,400,000 shares to be added to the
common stock purchase agreement. In consideration for entering into the
agreement, the Company issued to Aspire Capital 194,805 shares of our common
stock as a commitment fee. As of October 31, 2019 , the Company has not sold any
shares of common stock under the agreement.
On January 7, 2019 , the Company entered into the 2019 ATM Facility with AGP
under which the Company may issue and sell to or through AGP, acting as agent
and/or principal, shares of the Company's common stock having an aggregate
offering price of up to $25 million . As of October 31, 2019 , under the 2019 ATM
Facility, the Company issued and sold 671,039 shares of its common stock with an
aggregate market value of $1.8 million at an average price of $2.69 per share
and paid AGP a sales commission of approximately $59,000 related to those
shares.
On April 8, 2019 , the Company sold 1,542,000 shares of common stock, which
includes the sale of 642,000 shares of the Company's common stock sold by the
Company pursuant to the exercise, in full, of the over-allotment option by the
underwriters in a public offering. As part of the public offering, the Company
also sold prefunded warrants to purchase up to 3,385,680 shares of common stock
and common warrants to purchase up to 4,927,680 shares of our common stock. The
net proceeds to the Company from the offering were approximately $15.7 million ,
after deducting underwriter fees and offering expenses payable by the Company.
The sale of additional equity or convertible securities could result in dilution
to our stockholders. If additional funds are raised through the issuance of debt
securities or preferred stock, these securities could have rights senior to
those associated with our common stock and could contain covenants that would
restrict our operations. We do not have any committed sources of debt or equity
financing and we cannot assure you that financing will be available in amounts
or on terms acceptable to us when needed, or at all. If we are unable to obtain
required financing when needed, we may be required to reduce the scope of our
operations, including our planned product development and marketing efforts,
which could materially and adversely affect our financial condition and
operating results. If we are unable to secure additional financing, we may be
forced to cease our operations.
Backlog
As ofOctober 31, 2019 , the Company's backlog was$2.4 million . As ofApril 30, 2019 , backlog was$0.9 million . Our backlog can include unfilled firm orders for our products and services from commercial or governmental customers. If any of our contracts were to be terminated, our backlog would be reduced by the expected value of the remaining terms of such contract. The amount of contract backlog is not necessarily indicative of future revenue because modifications to, or terminations of present contracts and production delays can provide additional revenue or reduce anticipated revenue. A substantial portion of our revenue has been for the support of our product development efforts. These revenues are recognized using the percentage-of-completion method, and changes in estimates from time to time may have a significant effect on revenue and backlog. Our backlog is also typically subject to large variations from time to time due to the timing of new awards. 29 Going Concern The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced substantial and recurring losses from operations, which losses have caused an accumulated deficit of$216.0 million atOctober 31, 2019 . Based on the Company's cash, cash equivalents and restricted cash balances as ofOctober 31, 2019 , the Company believes that it will be able to finance its capital requirements and operations into the quarter endingJuly 31, 2020 . Among other things, the Company is currently evaluating a variety of different financing alternatives and we expect to continue to fund our business with sales of our securities and through generating revenue with customers. The report of our independent registered public accounting firm on our consolidated financial statements filed with our Annual Report on Form 10-K for the year endedApril 30, 2019 , contains an explanatory paragraph regarding our ability to continue as a going concern, based on, among other factors, that our ability to continue as a going concern is dependent upon our ability to raise additional external capital and increase revenues. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We cannot assure you that we will be successful in our efforts to generate revenues, become profitable, raise additional outside capital or to continue as a going concern. If we are not successful in our efforts to raise additional capital sufficient to support our operations, we would be forced to cease operations, in which event investors would lose their entire investment in our company.
Critical Accounting Policies and Estimates
To understand our financial statements, it is important to understand our critical accounting policies and estimates. We prepare our financial statements in accordance with GAAP. The preparation of financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
For a discussion of our critical accounting estimates, see the section entitled
Item 7.- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report on Form 10-K for the year ended
Recently Issued Accounting Standards
See Note 2 of the Notes to Consolidated Financial Statements.
Financial Operations Overview
The following describes certain line items in our statement of operations and some of the factors that affect our operating results.
Revenues A performance obligation is the unit of account for revenue recognition. The Company assesses the goods or services promised in a contract with a customer and identifies as a performance obligation either: a) a good or service (or a bundle of goods or services) that is distinct; or b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. A contract may contain a single or multiple performance obligations. For contracts with multiple performance obligations, the Company allocates the contracted transaction price to each performance obligation based upon the relative standalone selling price, which represents the price the Company would sell a promised good or service separately to a customer. The Company determines the standalone selling price based upon the facts and circumstances of each obligated good or service. The majority of the Company's contracts have no observable standalone selling price since the associated products and services are customized to customer specifications. As such, the standalone selling price generally reflects the Company's forecast of the total cost to satisfy the performance obligation plus an appropriate profit margin. The nature of the Company's contracts may give rise to several types of variable consideration, including unpriced change orders and liquidated damages and penalties. Variable consideration can also arise from modifications to the scope of services. Variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur once the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, performance and any other information (historical, current, and forecasted) that is reasonably
available to us. 30 The Company recognizes revenue when or as it satisfies a performance obligation by transferring a good or service to a customer, either (1) at a point in time or (2) over time. A good or service is transferred when or as the customer obtains control of it. The evaluation of whether control of each performance obligation is transferred at a point in time or over time is made at contract inception. Input measures such as costs incurred or time elapsed are utilized to assess progress against specific contractual performance obligations for the Company's services. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the services to be provided. For the Company, the input method using costs incurred or time elapsed best represents the measure of progress against the performance obligations incorporated within the contractual agreements. When the Company's estimate of total costs to be incurred to satisfy the performance obligations exceed revenue, the Company recognizes the loss immediately. The Company's contracts are either cost plus or fixed price contracts. Under cost plus contracts, customers are billed for actual expenses incurred plus an agreed-upon fee. Under cost plus contracts, a profit or loss on a project is recognized depending on whether actual costs are more or less than the agreed upon amount. The Company has two types of fixed price contracts, firm fixed price and cost-sharing. Under firm fixed price contracts, the Company receives an agreed-upon amount for providing products and services specified in the contract, a profit or loss is recognized depending on whether actual costs are more or less than the agreed upon amount. Under cost-sharing contracts, the fixed amount agreed upon with the customer is only intended to fund a portion of the costs on a specific project. Under cost sharing contracts, an amount corresponding to the revenue is recorded in cost of revenues, resulting in gross profit on these contracts of zero. The Company's share of the costs is recorded as product development expense. The Company reports its disaggregation of revenue by contract type since this method best represents the Company's business. For each of the six-month periods endedOctober 31, 2019 and 2018, all of the Company's contracts were classified as firm fixed price.
The following table provides information regarding the breakdown of our revenues
by customer for the three and six months ended
Three months ended October 31 ,
Six months ended
2019 2018 2019 2018
(in thousands)
Eni S.p.A. $ 47 $ 118 $ 76 $ 123
Premier Oil UK Limited 26 - 121 26
EGP 96 23 96 23
U.S. Navy 20 - 72 -
Other 15 - 41 -
$ 204 $ 141 $ 406 $ 172
We currently focus our sales and marketing efforts on parts of North America ,
Europe , South America and Asia . The following table shows the percentage of our
revenues by geographical location of our customers for the six months ended
October 31, 2019 and 2018.
Six months ended Ocotber 31,
Customer Location 2019 2018
Europe 59 % 100 %
South America 24 % 0 %
United States 17 % 0 %
100 % 100 %
31
Cost of revenues
Our cost of revenues consists primarily of incurred material, labor and
manufacturing overhead expenses, such as engineering expense, equipment
depreciation and maintenance and facility related expenses, and includes the
cost of PowerBuoy® parts and services supplied by third-party suppliers. Cost of
revenues also includes PowerBuoy® system delivery and deployment expenses and
may include anticipated losses at completion on certain contracts.
Our ability to generate a gross profit will depend on the nature of future
contracts, our success at generating revenues through sales or leases of our
PowerBuoy® systems, the nature of our contracts generating revenues to fund our
product development efforts, and our ability to manage costs incurred on fixed
price commercial contracts.
Engineering and product development costs
Our engineering and product development costs consist of salaries and other personnel-related costs and the costs of products, materials and outside services used in our product development and unfunded research activities. Our product development costs relate primarily to our efforts to increase the power output and reliability of our PowerBuoy® system, and to the development of new products, product applications and complementary technologies. We expense all of our engineering and product development costs as incurred.
Selling, general and administrative costs
Our selling, general and administrative costs consist primarily of professional fees, salaries and other personnel-related costs for employees and consultants engaged in sales and marketing and support of our PowerBuoy® systems and costs for executive, accounting and administrative personnel, professional fees and other general corporate expenses.
Fair Value of Financial Instruments
The fair value of our financial instruments reflects the amounts that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value of our warrant liabilities is subject to remeasurement each financial statement reporting period, as such, changes in this fair value are reflected in the statement
of operations. Our financial instruments not required to be adjusted to fair value on a recurring basis consist principally of cash, cash equivalents, and restricted cash, accounts receivable, accounts payable, and accrued expenses. We believe the carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to their relatively
short maturities. Interest income, net
Interest income, net consists of interest received on cash, cash equivalents and money market fund and interest expense paid on certain obligations to third parties.
Foreign exchange gain (loss) We transact business in various countries and have exposure to fluctuations in foreign currency exchange rates. Foreign exchange gains and losses arise in the translation of foreign-denominated assets and liabilities, which may result in realized and unrealized gains or losses from exchange rate fluctuations. Since we conduct our business in US dollars and our functional currency is the US dollar, our main foreign exchange exposure, if any, results from changes in the exchange rate between the US dollar and the British pound sterling, the Euro and the Australian dollar.
We maintain cash accounts that are denominated in British pounds sterling, Euros and Australian dollars. These foreign-denominated accounts had a balance of$0.6 million as ofOctober 31, 2019 and$0.9 million as ofOctober 31, 2018 , compared to our total cash, cash equivalents and restricted cash balances of$11.4 million as ofOctober 31, 2019 and$4.6 million as ofOctober 31, 2018 . These foreign currency balances are translated each month and to our functional currency, the US dollar, and any resulting gain or loss is recognized in our results of operations. In addition, a portion of our operations is conducted through our subsidiaries in countries other thanthe United States , specificallyOcean Power Technologies Ltd. in theUnited Kingdom , the functional currency of which is the British pound sterling, andOcean Power Technologies (Australasia) Pty Ltd. inAustralia , the functional currency of which is the Australian dollar. Both of these subsidiaries have foreign exchange exposure that results from changes in the exchange rate between their functional currency and other foreign currencies in which they conduct business. 32 We currently do not hedge our exchange rate exposure. However, we assess the anticipated foreign currency working capital requirements and capital asset acquisitions of our foreign operations and attempt to maintain a portion of our cash and cash equivalents denominated in foreign currencies sufficient to satisfy these anticipated requirements. We also assess the need and cost to utilize financial instruments to hedge currency exposures on an ongoing basis and may hedge against exchange rate exposure in the future. Results of Operations
This section should be read in conjunction with the discussion below under "Liquidity and Capital Resources."
Three months ended
The following table contains selected statement of operations information, which serves as the basis of the discussion of our results of operations for the three months endedOctober 31, 2019 and 2018. % change Three months ended October 31, 2019 period to 2019 2018 2018 period (in thousands) Revenues $ 204 $ 141 45 % Cost of revenues 288 637 -55 % Gross loss (84 ) (496 ) Operating expenses: Engineering and product development costs 1,309 1,574 -17 % Selling, general and administrative costs 1,838 1,849 -1 % Total operating expenses 3,147 3,423 Operating loss (3,231 ) (3,919 ) Gain due to the change in fair value of warrant liabilities - 51 -100 % Interest income, net 32 7 357 % Foreign exchange gain/(loss) 10 (29 ) -134 % Net loss$ (3,189 ) $ (3,890 ) -18 % Revenues Revenues were$0.2 million in the three months endedOctober 31, 2019 , an increase of$0.1 million as compared to the three months endedOctober 31, 2018 . The increase in revenue was the result of the new contracts with EGP, PMO andU.S. Navy . Cost of revenues Cost of revenues were$0.3 million in the three months endedOctober 31, 2019 , a decrease of$0.3 million compared to the three months endedOctober 31, 2018 . Cost of revenues for the three months endedOctober 31, 2018 included higher spending on our Eni project and a reserve for loss on contracts of$0.2 million .
Engineering and product development costs
Engineering and product development costs for the three months endedOctober 31, 2019 and 2018 were$1.3 million and$1.6 million , respectively. The decrease is the result of lower spending on buoy builds of$0.7 million mostly offset by higher spending on new product development in the current year period as compared to the same period in fiscal 2018.
Selling, general and administrative costs
Selling, general and administrative costs for the three months endedOctober 31, 2019 and 2018 were$1.8 million and$1.8 million , respectively. Increased personnel costs of$0.1 million were offset by lower spending on investor relations and professional fees of$0.1 million , keeping spending relatively flat as compared to the same period in fiscal 2018. 33
Gain due to the change in fair value of warrant liabilities
The change in fair value of warrant liabilities during the three months endedOctober 31, 2019 was an unrealized gain of zero versus an unrealized gain of$51,000 for the three months endedOctober 31, 2018 . The change between periods is due primarily to a lower stock price during the three months endedOctober 31, 2019 . Interest income, net Interest income, net during the three months endedOctober 31, 2019 was$32,000 , compared to$7,000 during the three months endedOctober 31, 2018 . The increase of$25,000 is due to higher cash balances in the three months endedOctober 31, 2019 as compared to the three months endedOctober 31, 2018 .
Foreign exchange gain/(loss)
Foreign exchange gain during the three months endedOctober 31, 2019 was$10,000 compared to a loss of$29,000 during the three months endedOctober 31, 2018 . The difference was attributable primarily to the relative change in value of the British pound sterling, Euro and Australian dollar compared to the US dollar during the two periods.
Six months ended
The following table contains selected statement of operations information, which serves as the basis of the discussion of our results of operations for the six months endedOctober 31, 2019 and 2018. % change Six months ended October 31, 2019 period to 2019 2018 2018 period (in thousands) Revenues $ 406 $ 172 136 % Cost of revenues 655 780 -16 % Gross loss (249 ) (608 ) Operating expenses: Engineering and product development costs 2,507 2,722 -8 % Selling, general and administrative costs 3,534 3,902 -9 % Total operating expenses 6,041 6,624 Operating loss (6,290 ) (7,232 ) Gain due to the change in fair value of warrant liabilities 6 136 -96 % Interest income, net 74 21 252 % Foreign exchange loss (4 ) (55 ) -93 % Net loss$ (6,214 ) $ (7,130 ) -13 % Revenues
Revenues were
Cost of revenues Cost of revenues were$0.7 million in the six months endedOctober 31, 2019 , a decrease of$0.1 million compared to the six months endedOctober 31, 2018 . This is a result of decreased costs associated with lower spending on our EGP and PMO projects offset by spending on new projects as compared to the same period
in fiscal 2018.
Engineering and product development costs
Engineering and product development costs for the six months endedOctober 31, 2019 and 2018 were$2.5 million and$2.7 million , respectively. The decrease is a result of lower spending on buoy builds of$0.5 million mostly offset by higher spending on new product development in the current year period as compared to the same period in fiscal 2018. 34
Selling, general and administrative costs
Selling, general and administrative costs for the six months endedOctober 31, 2019 and 2018 were$3.5 million and$3.9 million , respectively. The decrease of$0.4 million was mostly due to lower spending on professional fees of$0.3 million and lower personnel costs of$0.1 million as compared to the same period in fiscal 2018.
Gain due to the change in fair value of warrant liabilities
The change in fair value of warrant liabilities during the six months endedOctober 31, 2019 was an unrealized gain of$6,000 versus an unrealized gain of$136,000 for the six months endedOctober 31, 2018 . The change between periods is due primarily to a lower stock price during the six months ended October
31, 2019. Interest income, net Interest income, net during the six months endedOctober 31, 2019 was$74,000 as compared to$21,000 during the six months endedOctober 31, 2018 . The increase of$53,000 is due to higher cash balances in the six months endedOctober 31, 2019 as compared to the six months endedOctober 31, 2018 . Foreign exchange gain/(loss) Foreign exchange loss during the six months endedOctober 31, 2019 was$4,000 compared to a loss of$55,000 during the six months endedOctober 31, 2018 . The difference was attributable primarily to the relative change in value of the British pound sterling, Euro and Australian dollar compared to the US dollar during the two periods.
Liquidity and Capital Resources
Since our inception, the cash flows from customer revenues have not been
sufficient to fund our operations and provide the capital resources for the
planned growth of our business. For the two years ended
Net cash used in operating activities
Net cash flows used in operating activities during the six months endedOctober 31, 2019 were$6.4 million , a decrease of$1.2 million compared to$7.6 million during the six months endedOctober 31, 2018 . The decrease was primarily due to lower net loss of$0.9 million and the six months endedOctober 31, 2018 included a deferred credit payment of$0.6 million .
Net cash used in investing activities
Net cash used in investing activities during the six months endedOctober 31, 2019 was$41,000 , an increase of$14,000 compared to net cash used by investing activities during the six months endedOctober 31, 2018 . The increase in net cash used in investing activities was due to the net change in market securities and lower spending on the purchase of computers, equipment and furniture.
Net cash provided by financing activities
Net cash provided by financing activities during the six months endedOctober 31, 2019 was$0.7 million compared to net cash provided by financing activities during the six months endedOctober 31, 2018 of$0.1 million . Increase in net cash provided by financing activities during the six months endedOctober 31, 2019 includes more proceeds from capital raises of$0.7 million .
Effect of exchange rates on cash and cash equivalents
The effect of exchange rates on cash and cash equivalents was a decrease of$5,000 in the six months endedOctober 31, 2019 and a decrease of$75,000 in the six months ended forOctober 31, 2018 . The effect of exchange rates on cash and cash equivalents results primarily from gains or losses on consolidation of foreign subsidiaries and foreign denominated cash and cash equivalents. 35 Liquidity Outlook
Our financial statements have been prepared assuming we will continue as a going concern. We have experienced substantial and recurring losses from operations, which have contributed to an accumulated deficit of$216.0 million atOctober 31, 2019 . As ofOctober 31, 2019 , we had approximately$11.4 million in cash, cash equivalents and restricted cash on hand. The Company generated revenues of$0.4 million and$0.2 during the six months endedOctober 31, 2019 and 2018, respectively. Based on the Company's cash, cash equivalents and restricted cash balances as ofOctober 31, 2019 , the Company believes that it will be able to finance its capital requirements and operations into the quarter endedJuly 31, 2020 . Among other things, the Company is currently evaluating a variety of different financing alternatives and we expect to continue to fund our business with sales of our securities and through generating revenue with customers. These conditions raise substantial doubt about our ability to continue as a going concern. We expect to devote substantial resources to continue our development efforts for our PowerBuoys® and to expand our sales, marketing and manufacturing programs associated with the planned commercialization of the PowerBuoys®. Our future capital requirements will depend on a number of factors, including but not limited to: ? our ability to commercialize our PowerBuoys®, and achieve and sustain profitability; ? our continued development of our proprietary technologies, and expected
continued use of cash from operating activities unless or until we achieve
positive cash flow from the commercialization of our products and services;
? our ability to obtain additional funding, as and if needed which will be
subject to a number of factors, including market conditions, and our operating
performance;
? our estimates regarding expenses, future revenues and capital requirements;
? the adequacy of our cash balances and our need for additional financings;
? our ability to develop and manufacture a commercially viable PowerBuoy®
product;
? our ability to successfully develop and market and develop new products, such
as a hybrid PowerBuoy® or subsea battery solutions;
? our ability to identify and penetrate markets for our PowerBuoys® and our wave
energy technology;
? the power output, survivability and reliability of our PowerBuoys®;
? our ability to implement our commercialization strategy as planned, or at all;
? our relationships with our strategic partners may not be successful and we may
not be successful in establishing additional relationships;
? our ability to maintain the listing of our common stock on the
Market;
? our ability to raise capital through our current equity facilities;
? the impact of pending and threatened litigation on our business, financial
condition and liquidity;
? changes in current legislation, regulations and economic conditions that
affect the demand for renewable energy;
? our ability to compete effectively in our target markets;
? our limited operating history and history of operating losses;
? our sales and marketing capabilities and strategy in
internationally; and
? our ability to protect our intellectual property portfolio.
Our business is capital intensive and to date, we have been funding our business
principally through sales of our securities, and we expect to continue to fund
our business with sales of our securities and, to a limited extent, with our
revenues until, if ever, we generate sufficient cash flow to internally fund our
business. This is largely a result of the high product development costs
associated with our product development. We anticipate that our operating
expenses will be approximately $14.4 million in fiscal 2020 including
engineering and product development spending of more than $7.4 million . We may
choose to reduce our operating expenses through personnel reductions, and
reductions in our research and development and other operating costs during the
remainder of fiscal year 2020, if we are not successful in our efforts to raise
additional capital. We cannot assure you that we will be able to increase our
revenues and cash flow to a level which would support our operations and provide
sufficient funds to pay our obligations for the foreseeable future. Further, we
cannot assure you that we will be able to secure additional financing or raise
additional capital or, if we are successful in our efforts to raise additional
capital, of the terms and conditions upon which any such financing would be
extended. If we are unable to raise additional capital when needed or generate
positive cash flow, it is unlikely that we will be able to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
36
If our common stock is delisted from Nasdaq, our ability to raise capital
through public offerings of our securities and to finance our operations could
be adversely affected. See additional risk factors under "Part II, Item 1A -
Risk Factors". We also believe that delisting would likely result in decreased
liquidity and/or increased volatility in our common stock and could harm our
business and future prospects. In addition, we believe that, if our common stock
is delisted, our stockholders would likely find it more difficult to obtain
accurate quotations as to the price of the common stock and it may be more
difficult for stockholders to buy or sell our common stock at competitive market
prices, or at all.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet financing activities.
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