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
ended
Business Update Regarding COVID-19
As a result of the COVID-19 pandemic, in
The current COVID-19 pandemic has presented substantial health and economic
risks, uncertainties and challenges to our business, the global economy and
financial markets. It is not currently possible to predict how long the pandemic
will last or the time it will take for economies to return to prior levels. The
extent to which COVID-19 impacts our business, operations, financial results and
financial condition, and those of our suppliers and customers will depend on
future developments which are highly uncertain and cannot be predicted with
certainty or clarity, including the duration and continuing severity of the
outbreak and additional government actions to contain COVID-19. The volatility
caused in the stock markets by the pandemic may make it difficult for the
Company to raise capital. In
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As a result of the COVID-19 pandemic, on
The SBA allows loan forgiveness for eligible costs incurred and paid which
include a) payroll costs, b) interest on any real or personal property mortgage
prior to
On
Overview
We believe that we are a marine power solutions provider. We control the design, manufacture, sales, installation, operations and maintenance of our products while working closely with partners that provide payloads, integration services, and marine installation capabilities. We believe our solutions provide distributed offshore power which is persistent and reliable power along with communications for remote surface and subsea applications. Our mission and purpose is to utilize our proprietary, state-of-the-art technologies to reduce the global carbon footprint by providing renewable solutions for reliable electrical power and, in so doing, drive demand for our products and services.
We also continue to develop and commercialize our proprietary systems that generate electricity by harnessing the renewable energy of ocean waves for our PB3 PowerBuoy®, and solar power for our newest product, the hybrid PowerBuoy. The PB3 PowerBuoy® uses proprietary technologies that convert the kinetic energy created by the heaving motion of ocean waves into electricity. Based on feedback from our current customers, discussions with potential future customers in the offshore oil and gas, defense and security, science and research, and communications, as well as government applications in fishery protection, together with our market research and publicly available data, we believe that numerous markets have a direct need for our solutions. While our recent projects have been in the oil and gas industry, we believe there is an increasing need for our products and solutions in areas such as fishery protection, offshore windfarm support, marine surveillance, and ocean-based science and research applications. We believe that having demonstrated the capability of our solutions, we can advance our product and services and gain further adoption from our target markets. Our marketing efforts are focused on offshore locations that require a cost-efficient solution for renewable, reliable and persistent power and communications, either by supplying electric power to payloads that are integrated directly with our product or located in its vicinity, such as on the seabed and in the water column. We believe we are the leader in offshore autonomous ocean wave power conversion technology which provides renewable power for offshore operations that were previously difficult to decarbonize.
Our achievements during fiscal 2020 and the first three months of fiscal 2021
included the Company's first commercial sale of a PB3 to Enel Green Power
("EGP"). We continued work on our Eni S.p.A. ("Eni") project and completed work
for Premier Oil ("PMO"),
24
We were incorporated in
Our Products PB3 PowerBuoy®
The PB3 generates electricity by harnessing the renewable energy of ocean waves. In addition to our PB3, we continue to develop our PowerBuoy® product line, including the hybrid PowerBuoy®, as well as our surface surveillance solution and the subsea battery.
The PB3 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 a nominal 3 kilowatts 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 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.
The PB3 is designed to generate power for use independent of the power grid in remote offshore locations. The hull consists of a main spar structure loosely moored to the seabed and surrounded by a floating annular-structure that can freely move up and down in response to the passage of the waves. The PTO system includes a mechanical actuating system, an electric generator, a power electronics system, our control system, and our ESS which are sealed within the hull. As ocean waves pass the PB3, the mechanical stroke action created by the rising and falling of the waves is converted into rotational mechanical energy by the PTO, which in turn, drives the electric generator. The power electronics system then conditions the electrical output which is collected within an ESS. The operation of the PB3 is controlled by our customized, proprietary control system.
The control system uses sensors and an onboard computer to continuously monitor the PB3 subsystems. We believe that this ability to optimize and manage the electric power output of the PB3 is a significant advantage of our technology. In the event of large storm waves, the control system automatically locks the PB3 and electricity generation is suspended. However, the load center (either the on-board payload or one in the vicinity of the PB3 may continue to receive power from the ESS. When wave heights return to normal operating conditions, the control system automatically unlocks the PB3 and electricity generation and ESS replenishment recommences. This safety feature helps to prevent the PB3 from being damaged by storms.
The PB3 can be transported over land to the deployment port using conventional transportation methods. Once at port, the PB3 can be lifted into the water or onboard a vessel using a readily available crane of appropriate capacity. The PB3 may then be towed to site using a standard vessel (if the location is within an appropriate distance from the port), or the PB3 may be carried aboard a vessel to its offshore location and craned into the water at site. The PB3 is then attached to the mooring system, which is installed during a separate operation, after which a brief commissioning process places the PB3 into operation.
We believe that using wave energy for electricity generation has the following potential benefits, compared to existing incumbent solutions.
? Scalability within a small site area. Due to the dense energy in ocean waves,
we believe that the electricity may be aggregated to supply electricity to
larger payloads as a result of multiple PB3 which are placed in an array,
occupying a relatively small area. We believe the array of a larger number of
PB3 could offer end users a variety of advantages in availability, reliability
and scalability.
? Predictability. The generation of power from wave energy can be forecasted
several days in advance. Available wave energy can be calculated with a high
degree of accuracy based on satellite images and meteorological data, even when
the wave field is hundreds of miles away and days from reaching a PB3.
Therefore, we believe end-users relying on PB3 for power may be able to
proactively plan their logistics, payload scheduling and other operational
activities based on such data,
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? Constant source of energy. The annual occurrence of waves at certain specific
sites can be relatively constant and defined with relatively high accuracy.
Based on our studies and analyses of various sites of interest, we believe that
we will be able to deploy our PB3 in locations where the waves could produce
usable electricity for the majority of the year.
Based on our market research and publicly available data, including but not
limited to the
hybrid PowerBuoy®
The Company has created a hybrid PowerBuoy® that is a solar powered and
liquid-fueled surface buoy, compared to the wave power generating PB3. The
hybrid is powered primarily by solar panels with a liquid-fueled
The towable, boat-shaped hull design of the hybrid is appropriate for deployment around the world. Power is generated independent of wave activity, making it a solution for providing power through extreme weather and in heaving seas, or in calm, low wave environments and is complimentary to the PB3.
As with the PB3, the control system uses sensors and an onboard computer to continuously monitor the hybrid subsystems. We believe that this ability to optimize and manage the electric power output of the hybrid is a significant advantage of our technology. In the event of extended cloudy periods, the control system automatically switches electricity generation from the solar panels to the backup engine. However, the load center (either the on-board payload or one in the vicinity of the hybrid may continue to receive power from the on-board energy storage system ("ESS"). When more suitable solar power generation conditions return, the control system automatically stops the backup up engine and ESS replenishment recommences by way of solar electricity generation.
The hybrid is designed for use with a single point umbilical and mooring but can be adapted for a 3-point mooring installation for use as a temporary replacement for PB3 installations during planned maintenance or repairs.
The hybrid can be transported over land to the deployment port using conventional transportation methods. Once at port, the hybrid can be lifted into the water or onboard a vessel using a readily available crane of appropriate capacity. The hybrid may then be towed to site using a standard vessel (if the location is within an appropriate distance from the port), or the hybrid may be carried aboard a vessel to its offshore location and craned into the water at site. The hybrid is then attached to the single point mooring system, which is installed during a separate operation, after which a brief commissioning process places the hybrid into operation.
The hybrid is configured with a nominal 30 kilowatt-hours of battery energy
storage and approximately 1 megawatt-hour of stored energy in the propane
system. While the batteries are primarily charged through solar power
generation, the propane powered
26 Subsea Battery
We have developed a subsea battery that is complementary to both of our PowerBuoy® products and can be deployed together with our PowerBuoys® or on its own. It offers customers the option of placing additional modular and expandable energy storage on the seabed near existing or to be installed subsea equipment. Our lithium ion subsea batteries supply power that can enable subsea equipment, sensors, communications and AUV and eROV recharge. Our PowerBuoys® are complimentary to the subsea batteries by providing a means for recharging during longer term deployments, or the batteries can be used independently for shorter term deployments. Ideal for many remote offshore customer applications, these subsea batteries are anticipated to be high performance, cost-efficient, and quickly deployable.
The subsea battery has been designed to provide continuous and/or short-term power supply from its integrated energy storage system, enabling us to supply into a range of industries and applications, from backup power to critical subsea infrastructure to continuous operation of subsea equipment, such as electric valves. The base design of the subsea battery has a nominal 100 kilowatt-hours of energy storage. The subsea battery can be transported over land to the deployment port using conventional transportation methods. Once at port, the subsea battery can be lifted onboard a vessel using a readily available crane of appropriate capacity. The battery can then be carried aboard a vessel to its offshore location and craned into the water at site. It comes installed on a ready deployable subsea skid suitable for installation on the seabed. The battery is then connected to the other components on the seabed with the use of ROVs or divers.
We believe that the growing demand for electrification of subsea infrastructure, and an increased switch to autonomous and renewable solution, offers multiple opportunities for deploying subsea battery powered solutions over the next few years.
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, and services supporting 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 our revenues derived from customers whose revenues accounted for at least 10% of our consolidated revenues for at least one of the periods indicated:
Three months ended July 31,
2020 2019
Eni S.p.A. 17 % 14 %
Premier Oil UK Limited 16 % 47 %
EGP 67 % 0 %
U.S. Navy 0 % 26 %
Other 0 % 13 %
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 products, solutions and related services to customers. Our potential customer base for our products and solutions 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.
Customers ? InMarch 2020 , Eni exercised their option from theMarch 2018 contract to extend their lease of the PB3 for an additional 18 months. The initial provision inMarch 2018 agreement provided for a minimum 24-month contract that included an 18-month PB3 lease and associated project management. 27 ? InSeptember 2019 , we entered into two contracts with subsidiaries of EGP which include the sale of a PB3 PowerBuoy® and the development and supply of a turn-key integratedOpen Sea Lab that will be the Company's first deployment off the coast ofChile . InApril 2020 , the Company declared force majeure and delayed the deployment of its PB3 PowerBouy® inChile from April, 2020 to September, 2020 due to travel restrictions imposed by theU.S. andChile in response to COVID-19 pandemic. The contract is a result of a detailed feasibility study of the PowerBuoy® as an offshore autonomous platform hosting oceanographic sensor systems conducted inSeptember 2018 . ? InApril 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. ? InFebruary 2019 , we entered into a contract with theU.S. Navy to carry out 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. ? InJune 2018 , we entered into a contract with PMO for the lease of a PB3 to be deployed in one of PMO's offshore fields in theNorth Sea . InMarch 2020 , after the several months at sea the PB3 was decommissioned and returned toNew Jersey for evaluation and refurbishment to prepare for another deployment. Partnerships ? InJune 2020 , we signed a memorandum of understanding withMackay Marine , a division ofMackay Communications, Inc. , to further optimize our Marine Surveillance System payload for both the PB3 and hybrid PowerBuoy®.Mackay Marine manufacturers and supplies a wide variety of technically advanced equipment for commercial, military, and personal marine applications. ? InFebruary 2020 , we signed a letter of intent withTaiwan -basedBAP Precision, Inc. ("BAP") to provide PowerBuoy® joint surveillance solutions for government agency contract pursuits for policing territorial waters. ? InMay 2019 , we signed a memorandum of understanding withModus Seabed Intervention Ltd. ("Modus"). for the purpose of developing and delivering 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. ? InApril 2019 , we signed a memorandum of understanding withActeon Field Life Service Ltd. ("Acteon") to develop, explore and exploit mutual opportunities in the global oil and gas and renewable markets. ? InJanuary 2019 , we entered into aJoint System Solution Development and Marketing Agreement withSaab Seaeye Ltd. ("Saab"). The agreement anticipates a preliminary focus on AUV and eROV charging and communications systems. Business Strategy
Since 2015, we have brought the PB3 from initial concept to a full-scale design.
We have performed multiple prototype iterations. During this time, we have
conducted a number of in-ocean tests in combination with our facility-based
accelerated life testing to prepare for low rate initial production. In 2019, we
completed the design of our hybrid PowerBuoy®. In
In fiscal 2020, we have continued progress in marketing our PB3. We have made progress in transitioning from R&D to a commercialization focus with SELL, BUILD, SHIP as our motto and we intend to build on our success by implementing processes and solutions that cover the entire life cycle, from demand generation to close of contract, and from channel strategies to customer care.
A majority of the Company's opportunities with potential customers have been for
projects in
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Many proposal requests are for projects where one of our PowerBuoys® products, either the PB3, the hybrid, or our subsea battery solution is part of a larger solution demonstration, and typically include the potential lease or sale of one or more PowerBuoys®, as well as required services and maintenance support. A majority of hybrid inquiries are for shorter term deployments and in calmer waters. Historically, demonstration projects have been a necessary step toward broad solution deployment and revenues associated with specific applications. A proposal phase typically lasts from three months to more than one year. During the demonstration project specification, negotiation and evaluation period, we are often subject to the prospective customer's vendor qualification process, which entails substantial due diligence of our company and capabilities and may include negotiation of standard terms and conditions. Many proposals contain provisions which would mandate the sale or lease of our PowerBuoy® product upon successful conclusion of the demonstration project.
We believe this is an accurate depiction of the overall sales cycle for new technology in each of our target markets, including our PowerBuoy® products. Cycle times for each step of the sales cycle will vary depending on several customer factors, including, but not limited to, technical evaluation, project priorities, project funding approval process, and alignment of new technology integration with the customer's broader operational strategy. We believe that potential demand, vis-à-vis specific application proposal requests, is indicative of significant progress in our commercialization strategy. We believe in the potential for growth as a result of our positioning for higher volume production of our products and solutions and their initial indications of demand for our PowerBuoy® products in multiple customer applications.
We continue to commercialize our products and solutions 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:
? Integrated turn-key solutions sales or leases incorporating our products and
services. We believe our PB3, hybrid PowerBuoys® and our subsea battery
solutions 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® and subsea battery sales and leases within our
selected markets, and we intend to sell and lease our products to these
markets as part of these broader integrated 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-cycle. We also intend to pursue turn-key projects where we take on a
prime contractor role to capture broader revenue opportunities while ensuring
that solutions effectively address customer needs. 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 customer system solution offerings through new complimentary products
that enable shorter and more cost-efficient deployments. We completed the
design and construction of the hybrid PowerBuoy® in 2020. This product builds
on our existing expertise in offshore power systems. The hybrid PowerBuoy® is
a solar powered buoy with a liquid-fueled Stirling engine as backup. The
hybrid 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 system
integration within each customer project. The hybrid 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 Company has also developed a subsea battery system
that is complimentary to the Company's PowerBuoy® products. The subsea battery
system offers the possibility of creating a sea floor energy storage solution
for remote offshore operations. These subsea battery systems contain lithium
ion batteries, which provide high power density to supply power to subsea
equipment, sensors, communications, and recharging of AUVs and eROV. 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 North and South America ,
Europe , Asia and Western Africa . We believe that each of these areas has
demand for our solutions, sizable end market 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. We have formed such
a relationship with several well-known groups, including Mackay, BAP, Modus,
Saab and Acteon . We continue to seek other opportunities to collaborate with
application experts from within our selected markets.
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? 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
products and solutions.
? Cost reduction and PowerBuoy® solution development. Our engineering efforts
are mainly focused on addressing customer solutions; PowerBuoy® sales;
reducing costs associated with production, installation and product life-cycle
costs; and improving the energy output, reliability, maintenance interval and
expected operating life of our products and solutions. We continue to optimize
manufacturability of our designs with a focus on cost competitiveness, and we
believe we will be able to address new applications by developing new payloads
and solutions that address customer needs.
Capital Raises
On
On
On
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 of
30
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 is 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.
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
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 ended
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.
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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.
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 three-month periods ended
The following table provides information regarding the breakdown of our revenues
by customer for the three months ended
Three months ended July 31,
2020 2019
(in thousands)
Eni S.p.A. $ 28 $ 29
Premier Oil UK Limited 27 95
EGP 114 -
U.S. Navy - 52
Other - 26
$ 169 $ 202
We currently focus our sales and marketing efforts on parts of
32
Three months ended July 31,
Customer Location 2020 2019
Europe 33 % 74 %
South America 67 % 0 %
North America 0 % 26 %
100 % 100 %
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 equipment to customize the products supplied by third-party suppliers. Cost of revenues also includes product 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 products, 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 products and costs for executive, accounting and administrative personnel, professional fees and other general corporate expenses.
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
In addition, a portion of our operations is conducted through our subsidiaries
in countries other than
33
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 ended
% change
Three months ended July 31, 2020 period to
2020 2019 2019 period
(in thousands)
Revenues $ 169 $ 202 -16 %
Cost of revenues 334 367 -9 %
Gross loss (165 ) (165 )
Operating expenses:
Engineering and product development
costs 1,252 1,198 5 %
Selling, general and administrative
costs 1,987 1,697 17 %
Total operating expenses 3,239 2,895
Operating loss (3,404 ) (3,060 )
Gain due to the change in fair value
of warrant liabilities - 6 -100 %
Interest income, net 11 42 -74 %
Foreign exchange gain/(loss) 8 (13 ) -162 %
Net loss $ (3,385 ) $ (3,025 ) 12 %
Revenues
Revenues were
Cost of revenues
Cost of revenues were
Engineering and product development costs
Engineering and product development costs for the three months ended
34
Selling, general and administrative costs
Selling, general and administrative costs for the three months ended
Gain due to the change in fair value of warrant liabilities
The change in fair value of warrant liabilities during the three months ended
Interest income, net
Interest income, net during the three months ended
Foreign exchange gain/(loss)
Foreign exchange gain during the three months ended
Liquidity and Capital Resources
Our cash requirements relate primarily to working capital needed to operate and
grow our business including funding operating expenses. We have experienced and
continue to experience negative cash flows from operations and net losses. The
Company incurred net losses of
Net cash used in operating activities
During the three months ended
Net cash used in investing activities
Net cash used in investing activities during the three months ended
Net cash provided by financing activities
Net cash provided by financing activities during the three months ended
Effect of exchange rates on cash and cash equivalents
The effect of exchange rates on cash and cash equivalents was an increase of
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
35
We expect to devote substantial resources to continue our development efforts of our products and to expand our sales, marketing and manufacturing programs associated with the continued commercialization of the PowerBuoys®. Our future capital requirements will depend on a number of factors, including but not limited to:
? The impact of COVID-19 pandemic on our business, operations, custoemrs,
suppliers and manufacturers;
? our ability to commercialize our products, 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 commercially viable products;
? our ability to successfully develop and market new products, such as subsea
battery solutions;
? that we will be successful in our efforts to commercialize our products or the
timetable upon which commercialization can be achieved, if at all;
? our ability to identify and penetrate markets for our products and solutions;
? our ability to implement our commercialization strategy as planned, or at all;
? our ability to improve the power output, survivability and reliability of our
products;
? our relationships with our strategic partners may not be successful and we may
not be successful in establishing additional relationships;
? the reliability of our technology and our products;
? our ability to maintain the listing of our common stock on the Nasdaq Capital
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 the United States and
internationally; and
? our ability to protect our intellectual property portfolio.
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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
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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