Item 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 fiscal 2016 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 ended April 30 of that year (e.g., fiscal 2016 refers to the year ended April 30, 2016).
Overview
Nearly 70% of the earth’s surface is covered by water, with over 40% of the world’s population living within approximately 150 miles of a coast. Thousands of information gathering and/or power systems are deployed in the oceans today to increase understanding of weather, climate change, biological processes, and marine mammal patterns and to support exploration 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 are expensive to operate while also limited in their electric power delivery. These incumbent systems often require significant tradeoffs in sensor accuracy, data processing and communications bandwidth and frequency in order to operate with available power. More persistent power systems requiring less maintenance, like our systems, may have the ability to save costs over current operating systems. Just as importantly, increases in available power may allow for better sensors and shorter data sampling and communication intervals up to real-time which could as a result improve scientific and economic returns.
Incorporated in 1984 and headquartered in Pennington, New Jersey, we believe we are the leader in ocean wave power. We are developing and seeking to commercialize our proprietary systems that generate electricity by harnessing the renewable energy of ocean waves. Our PowerBuoys use proprietary technologies that convert the mechanical energy created by the heaving motion of ocean waves into electricity. We currently have designed and continue to develop our PowerBuoy product line which is based on modular, ocean-going buoys, which we have been periodically ocean testing since 1997.
We have designed our autonomous PowerBuoy to generate power for use in remote locations, independent of an existing power grid. Our current PowerBuoy product, the PB3, incorporates a unique power take-off (“PTO”) and onboard system for energy storage and management, and is significantly smaller than our previous iteration utility-scale PowerBuoy. We are continuing to develop and test our PowerBuoys, which we believe could be utilized in a variety of applications.
Our PB3 PowerBuoy design leverages portions of earlier features that we do not believe require further validation prior to implementation in our current products. Currently, our product development and engineering efforts are focusing primarily on developing technologies that will increase the energy output and reliability of our product through design scalability to maintain quality and speed time to our targeted markets. Our marketing and development efforts are targeting applications that require reliable, persistent, and sustainable power sources operating independently of the utility grid, either by supplying electric power to payloads that are integrated directly in our PowerBuoy or located in its vicinity including on the seabed.
Based on our market research and available public data, management believes that there is the potential for us to pursue business opportunities in multiple markets that would have a direct need for our PowerBuoys including oil and gas, ocean observing, defense and security, communications, and offshore wind. Depending on power needs, sensor types and other considerations, we believe our PowerBuoy could have the ability to satisfy several application requirements within these markets. We believe that the PB3 generates sufficient persistent power to meet the application needs of many of the potential customers within our target markets. We are continuing our development efforts to increase the energy output of the PowerBuoy to generate more power required for other applications within these 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 and development of our PowerBuoys. Our goal is that an increased portion of our revenues be from the sale or lease of our products and sales of services, as compared to revenue from grants 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 2015 and 2016, we continued work on projects with the U.S. Department of Energy (“DOE”), and Mitsui Engineering and Shipbuilding Co., Ltd. (“MES”), with whom we signed our first commercial leasing agreement in May 2016, and we continued our efforts to increase the reliability and power output of our PowerBuoys.
Product Development
The development of our technology has been funded by capital we raised and by development engineering contracts we received starting in fiscal 1995, including projects with the DOE, the U.S. Navy, the Department of Homeland Security and MES.
Through these historic projects, we also continued development of our PowerBuoy technology as well as our next generation PowerBuoy technology. We are continuing to focus on developing and commercializing our PowerBuoy products and services for use in autonomous power applications.
During fiscal 2016, we continued work under our contract with the DOE and continued to implement the strategic pivot in our business plan initiated in fiscal 2015, focusing on the autonomous applications markets. Our contract with the DOE was for development efforts that focused on further optimization of our modular PTO technology. In March 2015, we successfully completed a stage gate review during which the DOE reviewed advancements related to PTO design aspects such as reliability, cost take out, manufacturability and scalability and completed the final stage of the contract during fiscal 2016. We also deployed the PB40 PowerBuoy off the coast of New Jersey in late July 2015 and subsequently retrieved it approximately three weeks later. We were permitted to operate the PB40 at this location for a period of up to one year, but retrieved the PB40 sooner than expected to repair a component part. Although the PB40 produced power throughout its deployment period, it began reporting unexpected performance data. This performance data indicated likely failures of components associated with the float braking system which would be activated during severe storm periods in order to prevent damage to the float. As a result, we retrieved the PB40 to avoid potential physical damage to the buoy structure in the event of a severe storm. During the limited deployment period, we were able to obtain performance data, which we can use to further understand the PB40’s system performance and power generation in varying wave states to further validate some of our proprietary design and analysis tools. In addition, we were also able to use the deployment and retrieval of the PB40, 30 miles off of the coast of New Jersey, to validate our logistical processes associated with permitting, staging, towing and installation of the PB40 at its moored location. Because the PB40 is a legacy utility prototype device, we do not consider it to be a critical part of our current business plan focusing on the autonomous applications market. Based on our review to date, we currently believe that the failed components are unique to the PB40, and therefore, we do not believe that these component failures will materially impact the functionality of any of our other autonomous PowerBuoys. Costs associated with the retrieval of the PB40 buoy were reflected in our product development expenses. The PB40 was subsequently dismantled and disposed of. Upon completion of our allowed site usage period in the quarter ended July 31, 2016, estimated costs related to the retrieval of the moorings were recognized as product development expenses. We retained sections of the PB40 and intend to investigate, analyze and asses the component failures of the PB40.
We also deployed our PB3-A1 PowerBuoy off the coast of New Jersey in August 2015. The PB3-A1 contains an improved PTO system compared to the APB350 that was deployed in 2011 in connection with the U.S. Navy's LEAP Program and then redeployed in 2013 in conjunction with the U.S. Department of Homeland Security. The PB3-A1 features an advanced PTO design with a focus on improved reliability, manufacturability, and efficiency, while also driving cost effectiveness. In its final configuration, the PB3 uses a modular ESS to provide continuous power to the payload even when the PowerBuoy is not generating new power due to calm sea states. In a calm sea state (i.e., no waves to generate power), we believe the ESS will have enough storage capacity to provide up to seven days of continuous power (or longer, depending on payload, continuous power rating and on-board modular ESS configuration) to the majority of ocean sensors when starting from a fully charged state. When the PB3 is deployed in the ocean, real-time or near real-time performance and weather data is collected and transmitted to the Company’s monitoring and analysis center at its corporate headquarters in Pennington, NJ. Subsequent to its initial August deployment, the PB3-A1 was retrieved for maintenance and repairs and redeployed in October 2015. In January 2016, we again retrieved the PB3 for additional maintenance and repair. Costs related to the retrieval are reflected in our product development costs. After repair and upgrades, we redeployed the PB3-A1 in June 2016.
In March 2016, we announced a rebranding of our PowerBuoy systems as part of our commercialization efforts and to closely align our PowerBuoy products with the perceived best practices of analogous industries based on power generation and on-board energy storage capabilities. Under our new naming conventions, our current PowerBuoy is referred to as the “PB3,” corresponding to “PowerBuoy with a peak power rating of three kilowatts.” This naming convention is based upon the ideal yet achievable ocean conditions that would result in a net AC peak power delivered by the PB3 PowerBuoy to a payload over a 20-minute period after converting the incoming wave energy into useful AC electricity. References on our website, and in our SEC filings and this Quarterly Report to the “APB350” refers to earlier prototype PowerBuoys containing earlier generation PTOs and other earlier technologies.
We also are continuing to develop solutions seeking to improve our products’ durability and reliability and to reduce their cost. For example, the original APB350 utilized a rack and pinion PTO and successfully powered U.S. Navy and U.S. Homeland Security equipment off the coast of New Jersey for nearly three months. The redesigned PB3 leverages our knowledge base from that design to incorporate new design features which we believe will improve its reliability and efficiency, including a redesigned PTO and a higher efficiency and higher voltage energy storage system. In July 2016, we deployed our first commercial PB3 PowerBuoy, approximately four miles off of the coast of New Jersey. The Company currently anticipates that this deployment will be the final validation of the PB3 prior to the anticipated March 2017 start of the six-month lease of the PB3 PowerBuoy under a previously announced customer agreement.
The PB3 has undergone a design iteration from our immediate prior design focusing on improving its reliability and survivability in the anticipated operating ocean environment, and will continue to undergo further enhancements through customary product life cycle management. The PB3-A1 was an initial prototype that has now undergone in-ocean and accelerated life testing, and we believe that the PB3 will achieve a maturity level for use by early adopters in fiscal 2017, but we are in the early stages of seeking to commercialize our product and we cannot assure you that we will be successful in our efforts to do so. We believe that the PB3 will generate and store sufficient power to address some 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 and, if we are able to do so, we believe the PowerBuoy would be useful for additional applications where cost savings and additional power are required by our potential customers. We have only begun to explore opportunities in these target markets, and we have not yet developed any product offerings in these potential markets. We believe that by increasing the energy output of our PowerBuoys we may be able to address larger segments of our target markets. By improving our design and manufacturing, we also seek to reduce the cost of our PowerBuoys through further design iterations and manufacturing ramp-up. In so doing, we seek to improve customer value, displace more incumbent solutions, and become a viable power source for additional applications in our target market segments.
Commercial Activities
We are seeking to develop strategic alliances with other companies that have developed or are developing in-ocean applications requiring a persistent source of power to address identified needs of potential customers. As announced in October 2015, we signed a memorandum of understanding (“MOU”) with Gardline Environmental, Ltd. to jointly investigate innovative metocean monitoring and maritime security systems for prospective customers using both companies’ technologies. The MOU can be terminated by either party, and each party will bear its own respective costs associated with the MOU.
During the three months ended July 31, 2016, we deployed the PB3-A1 PowerBuoy and deployed the commercial PB3 PowerBuoy. The PB3-A1 included a payload from the National Data Buoy Center (“NBDC”), under a cooperative research and development agreement (“CRADA”) to conduct ocean demonstrations of its innovative Self-Contained Ocean Observing Payload (“SCOOP”) monitoring system. We integrated the SCOOP onto our PB3 PowerBuoy and, in June 2016, we deployed the system off of the coast of New Jersey. The SCOOP is powered by the PB3-A1, and is providing metocean data to us and to NDBC. We expect this deployment to continue for approximately three months before retrieval of the PB3-A1.
On May 31, 2016, we entered into a contract with MES totaling $975,587, a portion of which was performed in fiscal 2016 as agreed under a Letter of Intent signed in March 2016. The contract with MES included certain engineering and other services, and a six-month lease of our PB3 PowerBuoy, commencing in March 2017, and extending through August 2017.
During the three months ended July 31, 2016, we also entered into a memorandum of agreement (“MOA”) with the Wildlife Conservation Society (“WCS”) to explore the use of our PowerBuoys in conjunction with ocean life monitoring sensors to collect ocean mammal migration data. We also progressed discussions with our Technical Advisory Panel members and conducted business development meetings and other activities with potential customers and business partners. The WCS sensor is attached to the PB3-A1 and is being used to assess whether the PB3 could ultimately be used to provide power to WCS’ sensors, transmit data, and provide real-time data communication for acoustic monitoring of the movements of marine wildlife in certain waters. We also continued our accelerated life testing to validate the reliability, and durability of our PowerBuoys.
Capital Raise
In October 2015, we entered into an At the Market Offering Agreement (the “2015 Offering Agreement”) with Rodman & Renshaw, a unit of H. C. Wainwright & Co., LLC (“H. C. Wainwright”) under which we offered shares of our common stock, from time to time through or to the H. C. Wainwright, acting as sales agent and/or principal, (the “2015 ATM Offering”). Under the 2015 Offering Agreement, during the year ended April 30, 2016, we sold 144,571 shares of Common Stock with an aggregate market value of $293,343 under the Offering Agreement and paid the H. C. Wainwright a sales commission of approximately $4,400 related to those shares.
On June 2, 2016, we entered into a securities purchase agreement, which was amended on June 7, 2016 (as amended, the “Purchase Agreement”) with certain institutional purchasers (the “June Purchasers”). Pursuant to the terms of the June Purchase Agreement, we sold an aggregate of 417,000 shares of Common Stock together with warrants to purchase up to an aggregate of 145,952 shares of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.35 of a share of Common Stock at a combined purchase price of $4.60. The net proceeds to the Company from the offering were approximately $1.7 million, after deducting placement agent fees and estimated offering expenses payable by the Company, but excluding the proceeds, if any, from the exercise of the warrants issued in the offering. The warrants have an exercise price of $6.08 per share, will be exercisable on the date that is six months and one day from the date of issuance (“Initial Exercise Date”), and will expire five years following the Initial Exercise Date.
On July 22, 2016, we entered into the Second Amendment to the Purchase Agreement (the “Second Amended Purchase Agreement”) with certain purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended Purchase Agreement, we sold an aggregate of 595,000 shares of Common Stock together with warrants to purchase up to an aggregate of 178,500 shares of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.30 of a share of Common Stock at a combined purchase price of $6.75. The net proceeds to the Company from the offering were approximately $3.6 million, after deducting placement agent fees and estimated offering expenses payable by the Company, but excluding the proceeds, if any, from the exercise of the warrants issued in the offering. The Warrants will be exercisable immediately at an exercise price of $9.36 per share. The Warrants will expire on the fifth (5th) anniversary of the initial date of issuance.
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 July 31, 2016 our backlog was approximately $0.7 million and on April 30, 2016, our backlog was negligible.
Our backlog can include both funded amounts, which are unfilled firm orders for our products and services for which funding has been both authorized and appropriated by the customer (U.S. Congress, in the case of U.S. Government agencies), and unfunded amounts, which are unfilled firm orders for which funding has not been appropriated. 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. Our backlog was fully funded at July 31, 2016.
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.
Business Strategy
As part of our strategic pivot in operations initiated in fiscal 2015, we are currently focused on developing and commercializing our PowerBuoy products and services for use in autonomous power applications. Generally, these applications are independent of the power grid and are located in remote offshore locations. We have incorporated our prior knowledge and best practices into our product design and validation processes, some of which were gained during the development of utility scale buoys. Based on market research and available public data, we believe considerable business opportunity could exist in markets which require autonomous offshore power.
Our business strategy is to commercialize our autonomous PowerBuoy products. In order to achieve this goal, we are pursuing the following business objectives:
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Sell and/or Lease PowerBuoys.
We believe our autonomous PowerBuoy is well suited for many remote offshore applications. Within our selected markets we intend to sell or lease PowerBuoys, and provide services associated with product sales or leases such as maintenance, application engineering, planning, training, and logistics support required for the PowerBuoy life-cycle.
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Concentrate sales and marketing efforts in specific geographic markets
. We are currently focusing our sales and marketing efforts in North America, Europe, Australia, and parts of Asia, including Japan. We believe that each of these areas has appropriate wave conditions, political and economic stability, sizeable end market opportunities, and high levels of industrialization and economic development.
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Expand our relationships in key market areas.
We believe that an important element of our business 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 organizations, including MES in Japan, the National Data Buoy Center (“NDBC”), the Wildlife Conservation Society (“WCS”), and Gardline Environmental (an international and multi-disciplinary marine service company at the forefront of marine management with offices on five continents). We continue to seek other opportunities to collaborate with application experts from within our selected markets.
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Outsource most of the equipment fabrication and deployment.
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. However, 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 value-adding core competencies while also enabling the cost effectiveness of our PowerBuoy through leveraging a larger more qualified supply base.
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Continue to increase PowerBuoy output.
Our product development and engineering efforts are focused on increasing the energy output, reliability, and expected operating life of our PowerBuoys, as well as optimizing manufacturability of our designs with a focus on cost competitiveness. We believe that by increasing the energy output we will be able to address larger segments of our target markets.
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Going Concern
Our financial statements have been prepared assuming we will continue as a going concern. We have experienced substantial and recurring losses from operations, which losses have caused an accumulated deficit of $181.7 million at July 31, 2016. At July 31, 2016, we have approximately $9.0 million in cash on hand. We generated revenues of $0.2 million and $0.1 million for the three months ended July 31, 2016 and 2015, respectively. Based on the Company’s cash and cash equivalents and marketable securities balances as of July 31, 2016, the Company believes that it will be able to finance its capital requirements and operations into at least the quarter ending April 30, 2017. The report of our independent registered public accounting firm on our consolidated financial statements filed with our Annual Report on Form 10-K for fiscal 2016, 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.
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
Generally, we recognize revenue using the percentage-of-completion method based on the ratio of costs incurred to total estimated costs at completion. In certain circumstances, revenue under contracts that have specified milestones or other performance criteria may be recognized only when our customer acknowledges that such criteria have been satisfied. In addition, recognition of revenue (and the related costs) may be deferred for fixed price contracts until contract completion if we are unable to reasonably estimate the total costs of the project prior to completion. Some revenue contracts may contain complex criteria or uncertainty surrounding the terms of performance and customer acceptance. These contracts are subject to interpretation, and management may make a judgment as to the amount of revenue earned and recorded. Because we have a small number of contracts, revisions to the percentage-of-completion determination, management interpretation or delays in meeting performance and contractual criteria or in completing projects may have a significant effect on our revenue for the periods involved. Upon anticipating a loss on a contract, we recognize the full amount of the anticipated loss in the current period.
Generally, our contracts are either cost plus or fixed price contracts. Under cost plus contracts, we bill the customer for actual expenses incurred plus an agreed-upon fee. Revenue is typically recorded using the percentage-of-completion method based on the maximum awarded contract amount. In certain cases, we may choose to incur costs in excess of the maximum awarded contract amounts resulting in a loss on the contract. Currently, we have two types of fixed price contracts, firm fixed price and cost-sharing. Under firm fixed price contracts, we receive an agreed-upon amount for providing product development and services that are specified in the contract. Revenue is typically recorded using the percentage-of-completion method based on the contract amount. Depending on whether actual costs are more or less than the agreed-upon amount, there is a profit or loss on the project. 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. We fund the remainder of the costs as part of our product development efforts. Revenue is typically recorded using the percentage-of-completion method based on the amount agreed upon with the customer. An amount corresponding to the revenue is recorded in cost of revenues resulting in gross profit on these contracts of zero. Our share of the costs is recorded as product development expense. Some of our revenue for the three months ended July 31, 2016 and 2015 was from cost-sharing contracts.
The following table provides information regarding the breakdown of our revenues by customer for the three months ended July 31, 2016 and 2015:
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Three Months Ended July 31,
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($ millions)
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2016
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2015
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US Department of Energy
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$
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-
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$
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0.1
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Mitsui Engineering & Shipbuilding
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0.2
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-
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$
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0.2
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$
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0.1
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We currently focus our sales and marketing efforts on North America, Europe, Australia and Japan. The following table shows the percentage of our revenues by geographical location of our customers for the three months ended July 31, 2016 and 2015:
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Three months ended July 31,
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Customer Location
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2016
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2015
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United States
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—
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100
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%
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Asia and Australia
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100
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%
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—
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100
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%
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100
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%
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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 revenue recorded for the three months ended July 31, 2015 included revenue generated from cost-sharing contracts, which result in zero gross profit
.
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.
Product development costs
Our 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 development of new products, product applications and complementary technologies. We expense all of our product development costs as incurred. Over the next several years, it is our goal to fund the majority of our product development efforts with sources from commercial relationships, including cost-sharing agreements. If we are unable to obtain commercial relationships or cost-sharing arrangements, we may be forced to curtail our development expenses and scope to reduce our overall expenses. We recently narrowed our development focus to the PB3 to drive toward commercialization of that product and to reduce our overall expenses. In the future, we also may continue to develop the PB15 (formerly known as PB10) if we determine that future relationships warrant incurring the costs associated with such product development.
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).
Our financial instruments not required to be adjusted to fair value on a recurring basis consist principally of cash 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 (expense), net
Interest income consists of interest received on cash and cash equivalents, investments in commercial bank-issued certificates of deposit and US Treasury bills and notes and interest expense paid on certain obligations to third parties. Total cash, cash equivalents, restricted cash, and marketable securities were $9.4 million as of July 31, 2016, compared to $14.7 million as of July 31, 2015.
We anticipate that our interest income reported in fiscal 2017 will continue to be lower than the comparable periods of the prior fiscal year as a result of the decrease in invested cash.
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. Due to the macroeconomic pressures in certain European countries, foreign exchange rates may become more volatile in the future.
We may invest our foreign cash reserves in certificates of deposit and we maintain cash accounts that are denominated in British pounds sterling, Euros and Australian dollars. These foreign-denominated certificates of deposit and cash accounts had a balance of $1.2 million as of July 31, 2016 and $1.4 million as of July 31, 2015, compared to our total cash, cash equivalents, restricted cash, and marketable securities balances of $9.4 million as of July 31, 2016 and $14.7 million as of July 31, 2015. These foreign currency balances are translated at each month end 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 than the United States, specifically Ocean Power Technologies Ltd. in the United Kingdom, the functional currency of which is the British pound sterling, and Ocean Power Technologies (Australasia) Pty Ltd. in Australia, 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.
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, cash equivalents and marketable securities 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
Three Months Ended
July 31, 2016
Compared to Three Months Ended
July 31, 2015
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 July 31, 2016 and 2015:
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% Change
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Three Months ended July 31,
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2016 Period to
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2016
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2015
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2015 Period
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Revenues
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$
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202,389
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$
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105,666
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92
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%
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Cost of revenues
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127,285
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105,666
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20
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Gross profit
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75,104
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-
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100
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Operating expenses:
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Product development costs
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1,636,372
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2,482,788
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(34
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)
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Selling, general and administrative costs
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1,518,559
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1,906,945
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(20
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)
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Total operating expenses
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3,154,931
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4,389,733
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(28
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)
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Operating loss
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(3,079,827
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)
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(4,389,733
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)
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(30
|
)
|
Change in fair value of warrant liability
|
|
|
(752,069
|
)
|
|
|
-
|
|
|
|
(100
|
)
|
Interest (expense) income, net
|
|
|
(186
|
)
|
|
|
5,123
|
|
|
|
(104
|
)
|
Other income
|
|
|
-
|
|
|
|
251,007
|
|
|
|
(100
|
)
|
Foreign exchange gain
|
|
|
4,635
|
|
|
|
18,959
|
|
|
|
(76
|
)
|
Net loss
|
|
|
(3,827,447
|
)
|
|
|
(4,114,644
|
)
|
|
|
(7
|
)
|
Less: Net (gain) loss attributable to the noncontrolling interest in Ocean Power Technologies (Australasia) Pty Ltd
|
|
|
-
|
|
|
|
(47,397
|
)
|
|
|
(100
|
)
|
Net loss attributable to Ocean Power Technologies, Inc
|
|
$
|
(3,827,447
|
)
|
|
$
|
(4,162,041
|
)
|
|
|
(8
|
)
%
|
Revenues
Revenues increased by $0.1 million, or 92%, to $0.2 million in the three months ended July 31, 2016, as compared to $0.1 million in the three months ended July 31, 2015. The increase in revenue is related to our MES agreement, announced in June 2016, compared to the billable work under our prior contracts with the U.S. Department of Energy.
Cost of revenues
Cost of revenues increased by approximately $22,000, or 20%, to approximately $127,000 for the three months ended July 31, 2016, as compared to $105,000 for the three months ended July 31, 2015. The increase in cost of revenue is related to our MES agreement, announced in June 2016, compared to the billable work under our prior contracts with the U.S. Department of Energy.
Our revenue in the three month period ended July 31, 2015 includes revenue under cost-sharing contracts. Under cost-sharing contracts, we receive a fixed amount agreed upon with the customer that is only intended to fund a portion of the costs on a specific project. We fund the remainder of the costs primarily as part of our product development efforts. Revenue is typically recorded using the percentage-of-completion method applied to the contractual amount agreed upon with the customer. An equal amount corresponding to the revenue is recorded in cost of revenues resulting in gross profit on these contracts of zero. Our share of the costs is considered to be product development expense. Our ability to generate a gross profit will depend on the nature of future contracts, our success at increasing sales of our PowerBuoy systems and on our ability to manage costs incurred on our fixed price contracts.
Product development costs
Product development costs decreased by $0.9 million, or 34%, to $1.6 million in the three months ended July 31, 2016, as compared to $2.5 million in the three months ended July 31, 2015. For the three months ended July 31, 2016 product development costs reflect the redeployment of the PB3-A1, the deployment of the commercial design PB3 PowerBuoy and estimated costs related to the retrieval of the PB40 moorings. For the three months ended July 31, 2015 product development costs reflected costs related to deployment of the legacy PB40 utility scale Powerbuoy, as well as costs related to the redesigned commercial PB3.
Selling, general and administrative costs
Selling, general and administrative costs decreased by approximately $0.4 million, or 20%, to $1.5 million for the three months ended July 31, 2016 as compared to $1.9 million for the three months ended July 31, 2015. The decrease was related primarily to lower employee related costs, legal fees and third party consultant fees. These decreases were partially offset by increased stock compensation expense.
Change in fair value of warrant liability
Change in fair value of warrant liability for the three months ended July 31, 2016 and 2015, reflected a net fair market value unrealized loss of $0.8 million and $0 on our warrant derivatives, respectively.
Interest (expense) income, net
Interest (expense) income, net was approximately ($200) for the three months ended July 31, 2016, as compared to approximately $5,000 in the three months ended July 31, 2015. The decrease in interest income was related to lower interest earned on marketable securities for the three months ended July 31, 2016 compared to the three months ended July 31, 2015.
Foreign exchange gain
Foreign exchange gain was approximately $5,000 for the three months ended July 31, 2016, compared to $19,000 for the three months ended July 31, 2014. 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.
Other income
During the three months ended July 31, 2016, we did not have any other income. During the three months ended July 31, 2015, we received a refund of $251,000 related to research and development expenditures in Australia.
Net Loss Outlook
We have incurred net losses since we began operations in 1994. To achieve profitability, we will need to increase revenue and gross profit, control our fixed costs and/or possibly reduce our expenses, including our unfunded product development expenditures.
We do not know whether or when we will become profitable because of the significant uncertainties with respect to our ability to successfully commercialize our PowerBuoys in our target markets. Even if we do achieve profitability at some point in the future, we may not be able to sustain or increase profitability on a quarterly or annual basis. Refer to “Liquidity Outlook” below for additional information.
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 April 30, 2016, our aggregate revenues were $4.8 million, our aggregate net losses were $26.3 million and our aggregate net cash used in operating activities was $28.1 million. Refer to “Liquidity Outlook” below for additional information.
Cash flows for the three months ended July 31, 2016 and 2015 were as follows:
|
|
2016
|
|
|
2015
|
|
Net loss
|
|
$
|
(3,827,447
|
)
|
|
$
|
(4,114,644
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments for noncash operating items
|
|
|
999,379
|
|
|
|
155,012
|
|
|
|
|
|
|
|
|
|
|
Net cash operating loss
|
|
|
(2,828,068
|
)
|
|
|
(3,959,632
|
)
|
|
|
|
|
|
|
|
|
|
Net change in operating assets and liabilities
|
|
|
(92,816
|
)
|
|
|
841,264
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(2,920,884
|
)
|
|
$
|
(3,118,368
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
$
|
3,857
|
|
|
$
|
93,111
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
5,224,695
|
|
|
$
|
(25,355
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
$
|
(12,970
|
)
|
|
$
|
(47,869
|
)
|
Net cash used in operating activities
Net cash used in operating activities was $2.9 million and $3.1 million for the three months ended July 31, 2016 and 2015, respectively. The change was the result of a decrease in net loss of $0.3 million, an increase in cash provided by noncash operating items of $0.8 million and the net change in operating assets and liabilities of $0.9 million.
The decrease in net loss for the three months ended July 31, 2016 compared to the three months ended July 31, 2015 reflects a decrease in product development costs of $0.9 million relating primarily to the deployment of the PB40 off the coast of NJ and the anticipated deployment of the APB350 in the prior year, coupled with a decrease in SG&A costs of $0.4 million relating primarily to decreased legal fees and employee related costs. These decreases were offset by an increase of $0.8 million in the Change in fair value of warrant liability and a decrease in other income of $0.3 million.
The increase in noncash operating items reflects an increase in the change in fair value of the warrant assets of $0.8 million and an increase in equity compensation of $0.1 million.
The decrease in operating assets and liabilities reflects a net increase in accounts payable and accrued expenses of $0.5 million and an increase of $0.3 million in other current assets, during the three months ended July 31, 2016. In July 2016, the Company paid $0.5 million related to a litigation settlement.
Net cash provided by investing activities
Net cash provided by investing activities was approximately $4,000 and $0.1 million for the three months ended July 31, 2016 and 2015, respectively. The change was primarily the result of a net decrease in maturities of marketable securities during the three months ended July 31, 2016.
Net cash provided by (used in) financing activities
Net cash provided by financing activities was $5.2 million for the three months ended July 31, 2016 and net cash used in financing activities was $25,000 for the three months ended July 31, 2015. The net cash provided in 2016 was the result of the issuance of common stock and warrants through our public offerings and related issuance costs. The net cash used in 2015 was primarily for repayment of long-term debt.
Effect of exchange rates on cash and cash equivalents
The effect of exchange rates on cash and cash equivalents was a decrease of $13,000 and $48,000 in the three months ended July 31, 2016 and 2015, respectively. 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.
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 losses have caused an accumulated deficit of $181.7 million at July 31, 2016. At July 31, 2016, respectively, we had approximately $9.0 million in cash on hand. We generated revenues of $0.2 million for the three months ended July 31, 2016, and $0.1 million for the three months ended July 31, 2015. Based on the Company’s cash and cash equivalents and marketable securities balances as of July 31, 2016, the Company believes that it will be able to finance its capital requirements and operations into at least the quarter ending April 30, 2017.
These conditions raise substantial doubt about our ability to continue as a going concern. Management recognizes that in order for us to meet our capital requirements, and continue to operate, additional financing will be necessary. We expect to raise additional funds through private or public equity investment in order to maintain and/or expand the range and scope of our business operations. However, we cannot assure you that any such additional funds will be available for us on acceptable terms, when needed, or at all. 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.
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 success in developing commercial relationships with customers;
|
|
●
|
our ability to establish and maintain additional customer relationships;
|
|
●
|
the cost of manufacturing activities;
|
|
●
|
the ability to obtain project-specific financing, grants, subsidies and other sources of funding for some of our projects;
|
|
●
|
the cost of shareholder and other litigation and regulatory inquiries;
|
|
●
|
the cost of development efforts for our PowerBuoys;
|
|
●
|
the cost and success rate of commercialization activities, including demonstration projects, product marketing and sales;
|
|
●
|
the implementation of our expansion plans, including the hiring of new employees as our business increases;
|
|
●
|
the cost of potential acquisitions of other products or technologies; and
|
|
●
|
the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs.
|
We have incurred negative operating cash flows since our inception. As of July 31, 2016, our cash and cash equivalents and marketable securities balance was approximately $9.1 million. In addition, as of July 31, 2016 and 2015, our restricted cash balance was approximately $0.3 million and $0.5 million respectively.
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.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet financing activities.