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 is 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
Overview
We are a marine power equipment, data solutions and consulting services provider. We control the design, manufacture, sales, installation, operations and maintenance of our solutions and services while working closely with commercial, technical, and other development partners that provide software, controls, mechatronics, sensors, integration services, and marine installation services. We believe our renewable autonomous ocean solutions deliver power and data collection, analysis and communication in remote ocean environments, allowing users to generate actionable intelligence and control certain equipment. Our mission and purpose are to provide intelligent maritime solutions and services that enable safer and more productive ocean operations for the defense and security, offshore oil and gas, science and research, and offshore wind markets. We achieve this through our proprietary, state-of-the-art technologies that are at the core of our clean and renewable energy platforms upon which we offer our solutions and services.
We continue to develop and commercialize our proprietary systems that generate electricity by harnessing the renewable energy of ocean waves for our PowerBuoy® ("PB3"), and solar power for our hybrid PowerBuoy® (the "hybrid"). The PB3 uses proprietary technologies that convert the kinetic energy created by the heaving motion of ocean waves into electricity. Our strategy includes developing complete solutions and services, including cloud-based delivery systems for ocean data and predictive analytics to provide actionable intelligence for our clients. Based on feedback from our current customers, discussions with potential customers in the defense and security, offshore oil and gas, science and research, and offshore wind markets, as well as government applications in fishery protection and marine protected areas, together with our market research and publicly available data, we believe that numerous markets have a direct need for our solutions. Our recent projects have been in the offshore oil and gas and science and research industries. We believe there is an increasing need for our products and services in areas such as fishery protection, offshore windfarm support, and maritime domain awareness 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 logistically problematic and difficult to decarbonize.
We were incorporated under the laws of the
22
Our Power as a Service solutions deliver value to customers by utilizing our
managed power platforms, such as the PB3 PowerBuoy® or hybrid PowerBuoy®, and
subsea battery for topside and subsea power applications. Our focus for this
solution is on bringing autonomous clean power to our customers wherever it is
required. On our project with Eni S.p.A. ("Eni"), we utilized our PB3
PowerBuoy®, which operated in the
Our Data as a Service solution is an evolution of the work we did for Harbour
Energy (formerly known as
Our Strategic Consulting Services, materially strengthened by the acquired 3Dent team, focus on delivering value to our customers in the areas of ocean engineering, structural and dynamic analysis, Front End Engineering and Design ("FEED") studies, and motion simulation. These services can be delivered as part of our broader Power and/or Data as a Service solution utilizing our solutions or on a standalone basis. In the near term, we are focusing on increasing our market share in the floating offshore wind market and the broader floating foundation design market, as well as our business with offshore oil and gas customers.
Throughout fiscal 2021 we delivered several transactions and projects laying the
foundation for our growth in fiscal 2022. We have identified, and are pursuing,
several new applications for our PowerBuoys® in the areas of defense, security
and maritime domain awareness solutions. In
In
In
Business Update Regarding COVID-19
The COVID-19 pandemic presented substantial health and economic risks,
uncertainties and challenges to our business, the global economy and financial
markets. In
On
23
The Company filed its loan forgiveness application at the end of
Our Solutions and Power Generating Platform Services
PB3 PowerBuoy®
The PB3 generates electricity by harnessing the renewable energy of ocean waves. 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 3 kilowatts ("kW") of peak power during recharging of the onboard batteries. Power generation is deployment-site dependent. Our standard energy storage system ("ESS") has an energy capacity of up to a nominal 150 kW-hours to meet specific application requirements.
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 electrical generator, a power electronics system, our control system, and our ESS which is 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 a 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 larger payloads, as
a result, for example, of multiple PB3s which are placed in an array, occupying
a relatively small area. We believe the array of a larger number of PB3s 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.
? Constant source of energy. The annual occurrence of waves at specific sites can
be relatively persistent 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 most of the year.
Based on our market research and publicly available data, including but not
limited to the
24 hybrid PowerBuoy®
The Company has product launched a hybrid PowerBuoy® ("hPB") that is a solar
powered surface buoy, compared to the wave power generating PB3. The hybrid
PowerBuoy® is powered primarily through solar panels with an efficient and clean
burning external combustion
The towable, boat-shaped hull design of the hybrid is appropriate for deployment throughout the world. Power is generated independent of wave activity, making it a good solution for providing power in relatively calm, low wave environments with high solar intensity 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 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 is fitted with additional stabilizing outriggers, and then 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 a 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 kW-hours of battery energy storage
and approximately 1 megawatt-hour ("MWh") of stored energy in the propane
system. While the batteries are primarily charged through solar power
generation, the propane powered
During the first quarter of fiscal 2022, we commenced efforts to upgrade the current version of the hPB to host our MDA-S (as defined below) offering by adding further stabilizing features.
Subsea Battery
We have product launched a subsea battery that is complementary to both the PB3 and hybrid 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 PB3 and hybrid 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.
25
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 kW-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 subsea battery can be integrated into other subsea equipment on land prior to deployment. The battery is then connected to the other components on the seabed with the use of an eROV.
Maritime Domain Awareness Solution ("MDA-S")
We intend our MDA-S payload to consist of a high-definition radar, gyro-stabilized high-definition optical and thermal imaging cameras, vessel automatic identification system ("AIS") detection, and integrated command and control software and as customer needs dictate. Capabilities include 24/7 vessel tracking, automatic radar plotting, automated vessel warnings, and high-definition optical and thermal video surveillance capable of providing evidentiary backup of activity to aid in prosecution.
We intend data from our MDA-S will be processed onboard our buoys using edge computing, developed together with our software partners, transmitted to shore-based command stations via cyber-secure Wi-Fi, cellular, and/or satellite systems, depending upon location, and then further processed in our cloud-based analytics platform. Surveillance data can be integrated with readily available marine monitoring software or with our own MDA software solution developed together with leading partners in the technology industry to provide command and control features of a multi-buoy surveillance network. The data can also be integrated with satellite, weather, bathymetric, and other data feeds to form a detailed surface and subsea picture of a monitored area.
A single MDA-S, PB3 PowerBuoy®, can monitor vessel traffic, with or without AIS turned on, across an area approximately 1,300 square nautical miles of ocean territory on a permanent or temporary basis, with the ability to link multiple surveillance assets together over large ocean areas giving end-users visibility into potentially damaging environmental or illegal activities. Customized solutions are also available including the addition of subsea sensors to monitor for acoustic signatures, including tsunami, and water quality.
The development of our MDA-S is underway, and we intend to launch the first offshore demonstrations of the newly developed system during the second and third quarters of fiscal 2022.
Strategic Consulting Services
In addition to work being performed by OPT for the DeepStar project, through our technology subsidiary, 3Dent, we also offer a full range of high-level offshore engineering, including providing consulting engineering and design services to offshore wind developers, offshore construction companies, drilling contractors, major oil companies, service companies, shipyards, and engineering firms. 3Dent's team of dedicated consultants/designers has expertise in structural engineering, hydrodynamics and naval architecture. Among its services is a focus on addressing the issues current or would-be owners of offshore floaters, jackups, and lift boats have with their fleet. 3Dent's services include simulation engineering, software engineering, concept design and motion analysis.
26 Commercial Activities
We continue to seek new strategic relationships and further develop our existing partnerships. We collaborate with 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 July 31,
2021 2020
Eni S.p.A. 0 % 17 %
Harbour (p/k/a Premier Oil ) 0 % 16 %
EGP 55 % 67 %
Valaris 33 % 0 %
Other (no customer over 10%) 12 % 0 %
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 solutions and services to customers. Our potential customer base for our 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 as well as consultative and other services.
Current and Recent Customers
? In
Energy ("DOE")
the development of the next generation of our wave energy conversion systems.
In
contract and initiated the 9-month project which will begin in the second
quarter of fiscal 2022.
? Throughout the first quarter of fiscal 2022, our strategic consulting services,
continued to generate revenues from prior and new customers of approximately
? In
which the Company will provide engineering and technical services for a new
project under the DeepStar Global Technology Consortium Program. This project
showcased our Power as a Service solution among well-known operators in the
industry.
? In
feasibility study for the evaluation of a PB3 power and 5G communications
solution in support of the
study was completed and the Company is currently in active discussions with the
power solution.
? In
extend their lease of the PB3 for an additional 18 months. The initial
provision in
included an 18-month PB3 lease and associated project management. In November
2020, Eni retrieved the PB3 and returned it to shore due to a mooring issue.
The PB3 has since been returned to our headquarters in
currently being refurbished to be redeployed.
? In
which included the sale of a PB3 and the development and supply of a turn-key
integrated
deployment off the coast of
was declared in
Company began the deployment process and placed the PB3 in the water. Final
deployment installation activities are anticipated in late 2021.
? In
PB3 to be deployed in one of Harbour Energy's offshore fields in the
During its deployment, the PB3 provided unmanned EZM service. In early March
2020 the Company and Harbour Energy retrieved the PB3. This PB3 has since been
returned to our headquarters in
to be redeployed. We continue to have active discussions to engage with Harbor
Energy on the next phase of this project.
27 Partnerships
We believe that our solutions are best developed, sold, deployed, and maintained
together with subject matter experts in their respective fields. This enables
OPT to protect, maintain, and evolve our power platforms and integrate them with
surface and subsea payloads. OPT has previously entered into partnerships
focused on including, but not limited to, deployment and installations, sourcing
of surface payloads, and integration with autonomous vehicles. To further
develop the MDA-S, we recently entered into strategic software and robotics
partnerships with two software companies,
Fathom5 will be designing and building a customized industrial analytics platform to support OPT's MDA-S. The Fathom5 customized platform will integrate sensor technologies, combine data feeds, and provide a flexible plug-in analytic capability to apply artificial intelligence and machine learning to sensor feeds. Fathom5 is also building the user interface that will allow remote operators to control the MDA-S payload and view sensor data in real time.
Furthermore, we are in active discussions with larger systems integrators to develop partnerships focused on selling our platforms and solutions as part of larger projects.
Business Strategy
During fiscal 2021 and the first quarter of fiscal 2022, we advanced our marketing programs, products, and solutions. We have made progress in transitioning from R&D to commercialization and we intend to build on these efforts 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.
Most of the Company's opportunities with potential customers have been for
projects in
Many proposal requests are for projects where one of our PowerBuoy® products, either the PB3, the hybrid, or our subsea battery is part of a larger solution deployment, 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 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 the 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 products and solutions. 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 the resulting evidence of potential demand, vis-à-vis specific application proposal requests, is indicative of progress in our commercialization strategy. We believe that we have the potential for growth as a result of our positioning for higher volume production of our PowerBuoy® products and the initial indications of demand for our PowerBuoy® products in multiple customer applications.
The Company is pursuing a long-term growth strategy to expand its market value proposition while building the Company's revenue base. This strategy includes partnerships with leading companies in adjacent and complementary markets. We continue to commercialize our PowerBuoy® products 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 and our subsea battery solutions, as well
as our MDA-S, are well suited to enable many uncrewed, 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 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 diagnostic, application
engineering, planning, training, project management, and marine and logistics
support required for our solution life cycle. 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.
28
? Expand customer system solution offerings through new complimentary products
that enable shorter and more cost-efficient deployments. The hybrid is 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 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
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
the recharging of AUVs and eROVs. Ideal for many remote offshore customer
applications, these subsea battery systems are anticipated to be safe, high
performance, cost-efficient, and quickly deployable.
? Concentrate sales and marketing efforts in global markets. We are currently
focusing our marketing efforts globally. 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. In fiscal 2021, we opened an office in
support our customers and strengthen our dialogue with our solution partners.
? Expand our relationships in key market areas through strategic partnerships and
collaborations. We believe that strategic partners are an important part of
commercializing new products. 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 have formed such a relationship with several
well-known groups, and we continue to seek other opportunities to collaborate
with application experts from within our selected markets. These partnerships
have helped us source services, such as installation expertise, and products,
such as MDA enabling equipment, to meet our development and customer
obligations. Since our acquisition of 3Dent, we have been actively pursuing
additional opportunities to bring in-house skills, capabilities, and solutions
that are complementary to our strategy and enable us to scale more quickly.
? Partnering with fabrication, deployment and service support. In order to
minimize our capital requirements as we scale our business, we intend to
optimize and utilize state of the art fabrication, anchoring, mooring, cabling
supply, and in some cases, deployment of our products and solutions. Our PTO is
a proprietary subsystem that is assembled and tested at our facility. We
believe this distributed manufacturing and assembly approach enables us to
focus on our core competencies and ensure a cost-effective product by
leveraging a larger more established supply base. We continue to seek strategic
partnerships regarding servicing of our products and solutions.
? Cost reduction and PowerBuoy® solution development. Our engineering efforts are
mainly focused on addressing customer solutions; product and solution sales;
reducing production, installation, and product life-cycle costs; and improving
the energy output, reliability, maintenance interval and expected operating
life of our products. We continue to optimize the manufacturing 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.
Through our 3Dent subsidiary, we plan to expand our customer base and increase our revenue base, by providing consulting engineering and design services to offshore wind developers, offshore construction companies, drilling contractors, major oil companies, service companies, and engineering firms.
Liquidity
During the first three months ending
29 Capital Raises
At the Market Offering Agreements
On
On
Equity Line Common Stock Purchase Agreements
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. The Company has obtained equity financing through its
At the Market Offering Agreement with AGP and the
Backlog
As of
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 input method used to measure completion over time of customer contracts, 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.
30
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
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
In
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
considerations, 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. There was no variable consideration as of
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.
31
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 the three-month periods ended
As of
The Company also enters into lease arrangements for its PB3 with certain customers. Revenue related to multiple-element arrangements is allocated to lease and non-lease elements based on their relative standalone selling prices or expected cost plus a margin approach. Lease elements generally include a PB3 and components, while non-lease elements generally include engineering, monitoring and support services. In the lease arrangement, the customer is provided an option to extend the lease term or purchase the leased PB3 at some point during and/or at the end of the lease term.
The Company classifies leases as either operating or financing in accordance with the authoritative accounting guidance contained within ASC Topic 842, "Leases". At inception of the contract, the Company evaluates the lease against the lease classification criteria within ASC Topic 842. If the direct financing or sales-type classification criteria are met, then the lease is accounted for as a finance lease. All others are treated as an operating lease.
The Company recognizes revenue from operating lease arrangements generally on a
straight-line basis over the lease term and is presented in Revenues in the
Consolidated Statement of Operations. The lease income for the three months
ended
The following table provides information regarding the breakdown of our revenues
by customer for the three months ended
Three months ended July 31,
2021 2020
(in thousands)
Eni S.p.A. $ - $ 28
Harbour (p/k/a Premier Oil ) - 27
EGP 149 114
Valaris 89 -
Other (no customer over 10%) 34 -
$ 272 $ 169
We currently focus our sales and marketing efforts globally. The following table
shows the percentage of our revenues by geographical location of our customers
for the three months ended
Three months ended July 31,
Customer Location 2021 2020
Europe 0 % 33 %
South America 55 % 67 %
North America 45 % 0 %
100 % 100 %
32
Cost of revenues
Our cost of revenues consists primarily of subcontracts, 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 PowerBuoy® 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.
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, to enhance and optimize data monitoring and controls systems, 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 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
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
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.
33 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
Three months ended July 31,
2021 2020
(in thousands)
Revenues $ 272 $ 169
Cost of revenues 423 334
Gross profit/(loss) (151 ) (165 )
Operating expenses:
Engineering and product development costs 1,971 1,252
Selling, general and administrative costs 2,909 1,987
Total operating expenses 4,880 3,239
Operating loss (5,031 ) (3,404 )
Interest income, net 20 11
Gain on extiguishment of PPP loan 891 -
Foreign exchange gain/(loss) - 8
Loss before income taxes (4,120 ) (3,385 )
Income tax benefit 1,041 -
Net loss $ (3,079 ) $ (3,385 )
Revenues
Revenues for the three months ended
Cost of revenues
Cost of revenues for the three months ended
Engineering and product development costs
Engineering and product development costs for the three months ended
Selling, general and administrative costs
Selling, general and administrative costs for the three months ended
Extinguishment of Debt
The Company filed its loan forgiveness application at the end of
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
34
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
approximately
Liquidity Outlook
Since our inception, the cash flows from customer revenues have not been
sufficient to fund our operations and provide the capital resources for our
business. For the two years ended
Our business is capital intensive, and up through
We expect to devote substantial resources to continue our development efforts for our products and to expand our sales, marketing and manufacturing programs associated with the continued commercialization of our products. Our future capital requirements will depend on a number of factors, including but not limited to:
? 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;
? the impact of COVID-19 pandemic on our business, operations, customers,
suppliers and manufacturers, and personnel;
? future acquisitions, which may use significant resources, may be unsuccessful
or may expose us to unforeseen liabilities;
? 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;
35
? 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 our wave
energy technology;
? 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 NYSE American;
? the reliability of our technology and our products;
? our ability to improve the power output, survivability and reliability of our
products;
? 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.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet financing activities.
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