Item
1. Financial Statements
Ocean
Power Technologies, Inc. and Subsidiaries
Consolidated
Balance Sheets
(in
$000’s, except share data)
See
accompanying notes to unaudited consolidated financial statements.
Ocean
Power Technologies, Inc. and Subsidiaries
Consolidated
Statements of Operations
(in
$000’s, except per share data)
Unaudited
See
accompanying notes to unaudited consolidated financial statements.
Ocean
Power Technologies, Inc. and Subsidiaries
Consolidated
Statements of Comprehensive Loss
(in
$000’s)
Unaudited
See
accompanying notes to unaudited consolidated financial statements.
Ocean
Power Technologies, Inc. and Subsidiaries
Consolidated
Statement of Shareholders’ Equity
(in
$000’s, except share data)
Unaudited
| |
Nine
Months Ended January 31, 2021 | |
| |
Common
Shares | | |
Treasury
Shares | | |
Additional Paid-In
| | |
Stock
Subscription | | |
Accumulated
| | |
Accumulated
Other
Comprehensive
| | |
Total
Shareholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Receivable | | |
Deficit | | |
Loss | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balances
at May 1, 2020 | |
| 12,939,420 | | |
$ | 13 | | |
| (4,251 | ) | |
$ | (302 | ) | |
$ | 231,101 | | |
$ | — | | |
$ | (220,136 | ) | |
$ | (183 | ) | |
| 10,492 | |
Net
loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| | | |
| (9,560 | ) | |
| — | | |
| (9,560 | ) |
Share-based
compensation | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
$ | 338 | | |
| | | |
$ | — | | |
$ | — | | |
| 338 | |
Proceeds
from stock options exercises | |
| 175,500 | | |
| — | | |
| — | | |
| — | | |
| 184 | | |
| (144 | ) | |
| — | | |
| — | | |
| 40 | |
Exercise
of common warrants, net of costs | |
| 677,500 | | |
$ | 1 | | |
| — | | |
$ | — | | |
$ | 2,607 | | |
$ | (1,839 | ) | |
$ | — | | |
$ | — | | |
| 769 | |
Issuance
of common stock- Aspire financing, net of issuance costs | |
| 7,275,000 | | |
| 7 | | |
| — | | |
| — | | |
| 9,976 | | |
| | | |
| — | | |
| — | | |
| 9,983 | |
Issuance
of common stock- AGP At The Market offering, net of issuance costs | |
| 29,522,389 | | |
$ | 30 | | |
| — | | |
$ | — | | |
$ | 66,136 | | |
| | | |
$ | — | | |
$ | — | | |
| 66,166 | |
Acquisition
of treasury stock | |
| — | | |
| — | | |
| (16,789 | ) | |
| (36 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (36 | ) |
Other
comprehensive gain | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
$ | — | | |
| | | |
$ | — | | |
$ | 6 | | |
| 6 | |
Balances
at January 31, 2021 | |
| 50,589,809 | | |
| 51 | | |
| (21,040 | ) | |
| (338 | ) | |
| 310,342 | | |
| (1,983 | ) | |
| (229,696 | ) | |
| (177 | ) | |
| 78,199 | |
| |
Three
Months Ended January 31, 2022 | |
| |
Common
Shares | | |
Treasury
Shares | | |
Additional Paid-In
| | |
Stock
Subscription | | |
Accumulated
| | |
Accumulated
Other
Comprehensive
| | |
Total
Shareholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Receivable | | |
Deficit | | |
Loss | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balances
at November 1, 2021 | |
| 52,499,051 | | |
| 52 | | |
| (21,040 | ) | |
$ | (338 | ) | |
| 316,389 | | |
| — | | |
$ | (243,191 | ) | |
$ | (139 | ) | |
| 72,773 | |
Net
loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (5,471 | ) | |
| — | | |
| (5,471 | ) |
Share-based
compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 317 | | |
| — | | |
| — | | |
| — | | |
| 317 | |
Proceeds
from stock options exercises | |
| 65,000 | | |
| 1 | | |
| — | | |
| — | | |
| 68 | | |
| — | | |
| — | | |
| — | | |
| 69 | |
Issuance
of shares for acquisition | |
| 3,330,162 | | |
| 3 | | |
| — | | |
| — | | |
| 5,852 | | |
| — | | |
| — | | |
| — | | |
| 5,855 | |
Other
comprehensive gain/(loss) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 45 | | |
| (46 | ) | |
| (1 | ) |
Balance,
January 31, 2021 | |
| 55,894,213 | | |
| 56 | | |
| (21,040 | ) | |
| (338 | ) | |
| 322,626 | | |
| — | | |
| (248,617 | ) | |
| (185 | ) | |
| 73,542 | |
| |
Three
Months Ended January 31, 2021 | |
| |
Common
Shares | | |
Treasury
Shares | | |
Additional Paid-In
| | |
Stock
Subscription | | |
Accumulated
| | |
Accumulated
Other
Comprehensive
| | |
Total
Shareholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Receivable | | |
Deficit | | |
Loss | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balances
at November 1, 2020 | |
| 24,153,554 | | |
$ | 24 | | |
| (4,251 | ) | |
$ | (302 | ) | |
$ | 240,782 | | |
$ | — | | |
$ | (226,545 | ) | |
$ | (175 | ) | |
$ | 13,784 | |
Beginning
balances | |
| 24,153,554 | | |
$ | 24 | | |
| (4,251 | ) | |
$ | (302 | ) | |
$ | 240,782 | | |
$ | — | | |
$ | (226,545 | ) | |
$ | (175 | ) | |
$ | 13,784 | |
Net
loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (3,151 | ) | |
| — | | |
| (3,151 | ) |
Share-based
compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 115 | | |
| — | | |
| — | | |
| — | | |
| 115 | |
Proceeds
from stock options exercises | |
| 175,500 | | |
| — | | |
| — | | |
| — | | |
| 184 | | |
| (144 | ) | |
| — | | |
| — | | |
| 40 | |
Exercise
of common warrants, net of costs | |
| 677,500 | | |
| 1 | | |
| — | | |
| — | | |
| 2,607 | | |
| (1,839 | ) | |
| — | | |
| — | | |
| 769 | |
Issuance
of common stock- Aspire financing, net of issuance costs | |
| 1,750,000 | | |
| 2 | | |
| — | | |
| — | | |
| 6,740 | | |
| — | | |
| — | | |
| — | | |
| 6,742 | |
Issuance
of common stock- AGP At The Market offering, net of issuance costs | |
| 23,833,255 | | |
| 24 | | |
| — | | |
| — | | |
| 59,914 | | |
| — | | |
| — | | |
| — | | |
| 59,938 | |
Acquisition
of treasury stock | |
| — | | |
| — | | |
| (16,789 | ) | |
| (36 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (36 | ) |
Other
comprehensive gain | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2 | ) | |
| (2 | ) |
Other
comprehensive gain/(loss) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2 | ) | |
| (2 | ) |
Balances
at January 31, 2021 | |
| 50,589,809 | | |
| 51 | | |
| (21,040 | ) | |
| (338 | ) | |
| 310,342 | | |
| (1,983 | ) | |
| (229,696 | ) | |
| (177 | ) | |
| 78,199 | |
Ending
Balances | |
| 50,589,809 | | |
| 51 | | |
| (21,040 | ) | |
| (338 | ) | |
| 310,342 | | |
| (1,983 | ) | |
| (229,696 | ) | |
| (177 | ) | |
| 78,199 | |
See
accompanying notes to unaudited consolidated financial statements.
Ocean
Power Technologies, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(in
$000’s)
Unaudited
| |
2022 | | |
2021 | |
| |
Nine
months ended January 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Cash
flows from operating activities: | |
| | | |
| | |
Net
loss | |
$ | (13,721 | ) | |
$ | (9,560 | ) |
Adjustments
to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Foreign
exchange loss (gain) | |
| — | | |
| (13 | ) |
Depreciation
of fixed assets | |
| 104 | | |
| 106 | |
Amortization
of intangible assets | |
| 18 | | |
| — | |
Amortization
of right of use asset | |
| 211 | | |
| 159 | |
Loss
on disposal of property, plant and equipment | |
| — | | |
| 2 | |
Gain
on extinguishment of PPP Loan | |
| (890 | ) | |
| — | |
Stock-based
compensation | |
| 864 | | |
| 338 | |
Change
in fair value of contingent liability | |
| (60 | ) | |
| — | |
Changes
in operating assets and liabilities, net of acquisition: | |
| | | |
| | |
Accounts
receivable | |
| 237 | | |
| 105 | |
Contract
assets | |
| (217 | ) | |
| 188 | |
Inventory | |
| (193 | ) | |
| — | |
Other
assets | |
| 51 | | |
| (310 | ) |
Accounts
payable | |
| (165 | ) | |
| (473 | ) |
Accrued
expenses | |
| (589 | ) | |
| 1,192 | |
Change
in lease liability | |
| (228 | ) | |
| (169 | ) |
Contract
liabilities | |
| 15 | | |
| (90 | ) |
Litigation
payable | |
| (1,224 | ) | |
| — | |
Net
cash used in operating activities | |
| (15,787 | ) | |
| (8,525 | ) |
Cash
flows from investing activities: | |
| | | |
| | |
Purchase
of property, plant and equipment | |
| (319 | ) | |
| (17 | ) |
Payments
for MAR acquisition, net of cash
acquired | |
| (3,544 | ) | |
| — | |
Net
cash used in investing activities | |
| (3,863 | ) | |
| (17 | ) |
Cash
flows from financing activities: | |
| | | |
| | |
Proceeds
from Paycheck Protection Program Loan | |
| — | | |
| 890 | |
Proceeds
from loan payable | |
| — | | |
| 467 | |
Payments
of loan payable | |
| — | | |
| (292 | ) |
Proceeds
from stock option exercises | |
| 90 | | |
| 40 | |
Proceeds
from issuance of common stock- Aspire financing net of issuance costs | |
| — | | |
| 9,983 | |
Proceeds
from issuance of common stock- AGP At The Market offering, net of issuance costs | |
| — | | |
| 66,166 | |
Proceeds
associated with exercise of common stock warrants | |
| — | | |
| 769 | |
Acquisition
of treasury stock | |
| — | | |
| (36 | ) |
Net
cash provided by financing activities | |
| 90 | | |
| 77,987 | |
Effect
of exchange rate changes on cash, cash equivalents and restricted cash | |
| (14 | ) | |
| 32 | |
Net
(decrease) / increase in cash, cash equivalents and restricted cash | |
| (19,574 | ) | |
| 69,477 | |
Cash,
cash equivalents and restricted cash, beginning of period | |
| 83,634 | | |
| 10,930 | |
Cash,
cash equivalents and restricted cash, end of period | |
$ | 64,060 | | |
$ | 80,407 | |
| |
| | | |
| | |
Supplemental
disclosure of noncash operating activities: | |
| | | |
| | |
Prepaid
financing costs reported in accrued expenses | |
$ | — | | |
$ | 62 | |
| |
| | | |
| | |
Supplemental
disclosure of noncash investing and financing activities: | |
| | | |
| | |
Acquisition
of property, plant and equipment through accounts payable | |
$ | — | | |
$ | 9 | |
Issuance of common stock in acquisition
of MAR | |
| 5,855 | | |
| — | |
Advance payable – MAR | |
| 456 | | |
| — | |
Contingent liability | |
| 1,591 | | |
| — | |
Outstanding
receivable for sale of shares from warrant exercises | |
$ | — | | |
$ | 1,838 | |
Outstanding
receivable for sale of shares from stock option exercises | |
$ | — | | |
$ | 144 | |
See
accompanying notes to unaudited consolidated financial statements.
Ocean
Power Technologies, Inc. and Subsidiaries
Notes
to Unaudited Consolidated Financial Statements
(1)
Background, Basis of Presentation and Liquidity
(a)
Background
Ocean
Power Technologies, Inc. (the “Company”) was founded in 1984 in New Jersey, commenced business operations in 1994 and re-incorporated
in Delaware in 2007. We are a complete solutions provider, controlling the design, manufacturing, sales, installation, operations and
maintenance of our products and services. Our solutions provide distributed offshore power which is persistent, reliable, and economical
along with power and communications for remote surface and subsea applications. Historically, funding from government agencies, such
as research and development grants, accounted for a significant portion of the Company’s revenues. Today our goal is to generate
the majority of our revenue from the sale or lease of our products and solutions, and sales of services to support our business operations.
As we continue to develop and commercialize our products and services, we expect to have a net decrease in cash due to the use of cash
from operating activities unless and until we achieve positive cash flow from the commercialization of products, solutions and services.
(b)
Basis of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) and for interim financial information in accordance with the Securities and Exchange
Commission (“SEC”), instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation have been included. The interim operating results are not
necessarily indicative of the results for a full year or for any other interim period. Further information on potential factors that
could affect the Company’s financial results can be found in the Company’s Annual Report on Form 10-K for the year ended
April 30, 2021, as filed with the SEC and elsewhere in this Form 10-Q. Certain items have been reclassified from prior periods to be
consistent with current GAAP presentations.
(c)
Liquidity
For
the nine months ended January 31, 2022, and the fiscal year ended April 30, 2021, the Company incurred net losses of approximately $13.7
million and $14.8
million, respectively, and used cash in operating
activities of approximately $15.8
million and $11.7
million, respectively. The Company has continued
to make investments in ongoing product development efforts in anticipation of future growth, including its recent acquisition of Marine
Advanced Robotics, Inc., as described in Note 18. The Company’s future results of operations involve significant risks and uncertainties.
Factors that could affect the Company’s future operating results and could cause actual results to vary materially from expectations
include, but are not limited to, performance of its products, its ability to market and commercialize its products and new products that
it may develop, technology development, scalability of technology and production, ability to attract and retain key personnel, concentration
of customers and suppliers, deployment risks and integration of acquisitions, pending or threatened litigation, and the impact of COVID-19,
and any variants on its business. The Company previously obtained equity financing through its At the Market Offering Agreement (“ATM”)
with A.G.P/Alliance Global Partners (“AGP”) and through its equity line financing with Aspire Capital Fund, LLC (“Aspire
Capital”), but the Company cannot be sure that additional equity and/or debt financing will be available to the Company as needed
on acceptable terms, or at all. For fiscal year 2022 to date, management has not obtained any additional capital financing. Management
believes the Company’s current cash balance of $63.5
million is sufficient to fund its planned expenditures through
at least March 2023.
On
January 7, 2019, the Company entered into an At the Market Offering Agreement with AGP (the “2019 ATM Facility”), under which
the Company could issue and sell to or through AGP, acting as agent and/or principal, shares of the Company’s common stock having
an aggregate offering price of up to $25.0 million. From inception of the program through its termination on December 8, 2020, under
the 2019 ATM Facility, the Company sold and issued an aggregate of 17,595,472 shares of its common stock with an aggregate market value
of $23.4 million at an average price of $1.33 per share, including 12,342,506 shares in fiscal year 2021 with an aggregate market value
of $18.7 million at an average price of $1.51 per share and paid AGP a sales commission of approximately $0.8 million related to those
shares. The agreement was fully utilized and terminated on December 8, 2020.
On
November 20, 2020, the Company entered into another At the Market Offering Agreement with AGP (the “2020 ATM Facility”),
having capacity up to $100.0 million. On December 4, 2020, the Company filed a prospectus with the Securities and Exchange Commission
whereby, the Company could issue and sell to or through AGP, acting as agent and/or principal, shares of the Company’s common stock
having an aggregate offering price of up to $50.0 million. From inception of the 2020 ATM Facility through January 31, 2022, the Company
had sold and issued an aggregate of 17,179,883 shares of its common stock with an aggregate market value of $50.0 million at an average
price of $2.91 per share and paid AGP a sales commission of approximately $1.6 million related to those shares. A prospectus supplement
was filed on January 10, 2022 to allow the Company to sell an additional $25.0 million (or an aggregate of $75.0 million) under the 2020
ATM Facility, none of which has been sold to date.
Equity
Line Common Stock Purchase Agreements
On
October 24, 2019, the Company entered into a common stock purchase agreement with Aspire Capital which provided that, subject to certain
terms, conditions and limitations, Aspire Capital was committed to purchase up to an aggregate of $10.0 million shares of the Company’s
common stock over a 30-month period. Through September 18, 2020, the Company had sold an aggregate of 6,424,205 shares of common stock
with an aggregate market value of $4.0 million at an average price of $0.63 per share pursuant to this common stock purchase agreement,
including 5,025,000 shares in fiscal year 2021 with an aggregate market value of $2.9 million at an average price of $0.57 per share.
The agreement was fully utilized and terminated on September 18, 2020.
On
September 18, 2020, the Company entered into a new common stock purchase agreement with Aspire Capital which provided that, subject to
certain terms, conditions and limitations, Aspire Capital was committed to purchase up to an aggregate of $12.5 million shares of the
Company’s common stock over a 30-month period subject to a limit of 19.99% of the outstanding common stock on the date of the agreement
if the price did not exceed a specified price in the agreement. The number of shares the Company could issue within the 19.99% limit
was 3,722,251 shares without shareholder approval. Shareholder approval was received at the Company’s annual meeting of shareholders
on December 23, 2020 for the sale of 9,864,706 additional shares of common stock to Aspire Capital, which exceeded the 19.99% limit of
the outstanding common stock on the date of the agreement. Through January 31, 2022, the Company had sold an aggregate of 3,722,251 shares
of common stock with an aggregate market value of $11.8 million at an average price of $3.17 per share pursuant to this common stock
purchase agreement with approximately $1.0 million remaining on the facility as of January 31, 2022.
(2)
Summary of Significant Accounting Policies
(a)
Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
(b)
Use of Estimates
The
preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions
relating to the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the period. Significant items subject to such estimates and assumptions include, among other items, valuations,
purchase price allocations and contingent consideration related to business combinations, expected future cash flows including growth
rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets,
goodwill and other intangible assets and the related amortization methods and periods, estimated costs to complete projects and percentage
of completion of customer contracts for purposes of revenue recognition. Actual results could differ from those estimates.
(c)
Cash, Cash Equivalents, Restricted Cash and Security Agreements
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company
invests excess cash in a money market account. The following table summarizes cash and cash equivalents as of January 31, 2022 and April
30, 2021:
Schedule of Cash and Cash Equivalents
| |
January
31, 2022 | | |
April
30, 2021 | |
| |
(in
thousands) | |
| |
| | |
| |
Checking
and savings accounts | |
$ | 1,519 | | |
$ | 1,850 | |
Money
market account | |
| 61,935 | | |
| 81,178 | |
| |
$ | 63,454 | | |
$ | 83,028 | |
Restricted
Cash and Security Agreements
The
Company has a letter of credit agreement with Santander Bank, N.A. (“Santander”). Cash of $157,000 is on deposit at Santander
and serves as security for a letter of credit issued by Santander for the lease of warehouse/office space in Monroe Township, New Jersey.
This agreement cannot be extended beyond July 31, 2025 and is cancellable at the discretion of Santander.
Santander
also issued two letters of credit to subsidiaries of Enel Green Power (“EGP”) pursuant to the Company’s contracts with
EGP. The first letter of credit was issued in the amount of $126,000
that will be released 12 months after the PB3
PowerBuoy® (“PB3”) is fully deployed. The second letter of credit was issued in the amount of $645,000
and was reduced to $323,000
in August 2020. The second letter of credit will
be reduced by $259,000
once the PB3 is fully deployed and passes
final acceptance testing. The remaining restricted amount of $64,000
will be released 12 months after the buoy
is fully deployed.
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets
that total to the same amounts shown in the Consolidated Statements of Cash Flows.
Schedule of Cash and Cash Equivalents and Restricted Cash
| |
January
31, 2022 | | |
April
30, 2021 | |
| |
(in
thousands) | |
Cash
and cash equivalents | |
$ | 63,454 | | |
$ | 83,028 | |
Restricted
cash- short term | |
| 384 | | |
| 384 | |
Restricted
cash- long term | |
| 222 | | |
| 222 | |
Cash,
cash equivalents and restricted cash | |
$ | 64,060 | | |
$ | 83,634 | |
(d)
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist principally of accounts receivable and cash and cash equivalents.
The Company believes that its current contracts do not represent a risk of collectability on its receivables. The Company invests its
excess cash in a money market account and does not believe that it is exposed to any significant risks related to its cash and money
market accounts. Cash and cash equivalents are also maintained at foreign financial institutions. Cash and cash equivalents in foreign
financial institutions as of January 31, 2022 was $30,000.
The
table below shows the amount 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:
Schedule of Revenue by Major Customers by Reporting Segments
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three
months ended January 31, | | |
Nine
months ended January 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(in
thousands) | | |
(in
thousands) | |
Eni
S.p.A. | |
$ | — | | |
$ | 34 | | |
$ | 14 | | |
$ | 135 | |
Department
of Energy | |
| 102 | | |
| — | | |
| 182 | | |
| — | |
EGP | |
| — | | |
| 223 | | |
| 163 | | |
| 379 | |
ACET | |
| — | | |
| 33 | | |
| — | | |
| 37 | |
Valaris
(1) | |
| 7 | | |
| — | | |
| 142 | | |
| — | |
Brigham
Young University (2) | |
| 66 | | |
| — | | |
| 66 | | |
| — | |
Nippon
Kaiyo (2) | |
| 78 | | |
| — | | |
| 78 | | |
| — | |
Naval
Surface Warfare Center (2) | |
| 98 | | |
| — | | |
| 98 | | |
| — | |
Other
(no customer over 10%) | |
| 133 | | |
| 27 | | |
| 260 | | |
| 53 | |
Revenues | |
$ | 484 | | |
$ | 317 | | |
$ | 1,003 | | |
$ | 604 | |
(1) |
3Dent
related consulting |
(2) |
MAR
related sales |
(e)
Share-Based Compensation
Costs
resulting from all share-based payment transactions are recognized in the consolidated financial statements at their fair values. The
following table summarizes share-based compensation related to the Company’s share-based plans by expense category for the three
and nine months ended January 31, 2022 and 2021:
Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three
months ended January 31, | | |
Nine
months ended January 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(in
thousands) | | |
(in
thousands) | |
Engineering
and product development | |
$ | 209 | | |
$ | 32 | | |
$ | 551 | | |
$ | 91 | |
Selling,
general and administrative | |
| 108 | | |
| 83 | | |
| 313 | | |
| 247 | |
Total
share-based compensation expense | |
$ | 317 | | |
$ | 115 | | |
$ | 864 | | |
$ | 338 | |
(f)
Revenue Recognition
A
performance obligation is the unit of account for revenue recognition. The Company assesses the goods or services promised in a contract
with a customer and identifies as a performance obligation either: a) a good or service (or a bundle of goods or services) that is distinct;
or b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
A contract may contain a single or multiple performance obligations. For contracts with multiple performance obligations, the Company
allocates the contracted transaction price to each performance obligation based upon the relative standalone selling price, which represents
the price the Company would sell a promised good or service separately to a customer. The Company determines the standalone selling price
based upon the facts and circumstances of each obligated good or service. The majority of the Company’s contracts have no observable
standalone selling price since the associated products and services are customized to customer specifications. As such, the standalone
selling price generally reflects the Company’s forecast of the total cost to satisfy the performance obligation plus an appropriate
profit margin.
The
nature of the Company’s contracts may give rise to several types of variable consideration, including unpriced change orders and
liquidated damages and penalties. Variable consideration can also arise from modifications to the scope of services. Variable consideration
is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not
occur once the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination
of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, performance,
and any other information (historical, current, and forecasted) that is reasonably available to us. There was no variable consideration
as of January 31, 2022 or 2021. The Company presents shipping and handling costs, that occur after control of the promised goods or services
transfer to the customer, as fulfillment costs rather than evaluating whether the shipping and handling activities are promised services
to the customer.
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. 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. If estimated total costs on any contract project a loss,
the Company charges the entire estimated loss to operations in the period the loss becomes known. The cumulative effect of revisions
to revenue, estimated costs to complete contracts, including penalties, incentive awards, change orders, claims, anticipated losses,
and others are recorded in the accounting period in which the events indicating a loss are known and the loss can be reasonably estimated.
These loss projects are re-assessed for each subsequent reporting period until the project is complete. Such revisions could occur at
any time and the effects may be material.
The
Company’s contracts are either cost plus or fixed price contracts. Under cost plus contracts, customers are billed for actual expenses
incurred plus an agreed-upon fee. Under cost plus contracts, a profit or loss on a project is recognized depending on whether actual
costs are more or less than the agreed upon amount.
The
Company has two types of fixed price contracts, firm fixed price and cost-sharing. Under firm fixed price contracts, the Company receives
an agreed-upon amount for providing products and services specified in the contract, and 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 nine-month periods ended January 31, 2022 and 2021, all of the Company’s
contracts were classified as firm fixed price.
As
of January 31, 2022, the Company’s total remaining performance obligations, also referred to as backlog, totaled $0.8 million.
The Company expects to recognize 100% of the remaining performance obligations as revenue over the next twelve months.
The
Company also enters into lease arrangements for its PB3 and our Wave Adaptive Modular Vessels (“WAM-V”) 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.
Products
and Solutions Leasing
The
Company enters into lease arrangements with certain customers for their products and solutions. As of January 31, 2022, the Company had
one lease arrangement with a remaining operating lease term of less than 7 months. 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 other leases are treated as operating leases.
The
Company recognizes revenue from operating lease arrangements generally on a straight-line basis over the lease term which is presented
in Revenues in the Consolidated Statements of Operations. The lease revenue for the nine months ended January 31, 2022 and 2021 was immaterial.
(g)
Net Loss per Common Share
Basic
and diluted net loss per common share for all periods presented is computed by dividing net loss by the weighted average number of shares
of common stock and common stock equivalents outstanding during the periods. The pre-funded warrants were determined to be common stock
equivalents and have been included in the weighted average number of shares outstanding for calculation of basic net loss per common
share . Due to the Company’s net losses, potentially dilutive securities, consisting of options to purchase shares of common stock,
warrants on common stock and unvested restricted stock issued to employees and non-employee directors, were excluded from the diluted
net loss per common share calculation due to their anti-dilutive effect.
In
computing diluted net loss per common share on the Consolidated Statements of Operations, warrants exercisable for common stock, options
to purchase shares of common stock and non-vested restricted stock issued to employees and non-employee directors, totaling 6,356,123
and 5,221,258 for the nine months ended January 31, 2022 and 2021, respectively, were excluded from each of the computations as the effect
would be anti-dilutive due to the Company’s net losses.
(h)
Recently Issued Accounting Standards
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments -
Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” This amendment replaces the incurred
loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope,
including trade receivables. This update is intended to provide financial statement users with more decision-useful information about
the expected credit losses. In November 2019, the FASB issued No. 2019-10, Financial Instruments—Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date of ASU 2016-13 for Smaller Reporting
Companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is
currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
(3)
Account Receivable and Contract Assets
The
following provides further details on the balance sheet accounts of accounts receivable and contract assets from contracts with customers:
Schedule of Accounts Receivable, Contract Assets and Contract Liabilities
| |
January
31, 2022 | | |
April
30, 2021 | |
| |
(in
thousands) | |
Accounts
receivable | |
$ | 113 | | |
$ | 350 | |
Contract
assets | |
| 407 | | |
| 190 | |
Contract
liabilities | |
| 15 | | |
| — | |
Accounts
Receivable
The
Company grants credit to its customers, generally without collateral, under normal payment terms (typically 30 to 60 days after invoicing).
Generally, invoicing occurs after the related services are performed or control of goods have transferred to the customer. Accounts receivable
represent an unconditional right to consideration arising from the Company’s performance under contracts with customers. The carrying
value of such receivables represents their estimated realizable value.
Contract
Assets
Contract
assets include unbilled amounts typically resulting from arrangements whereby the right to payment is conditioned on completing additional
tasks or services for a performance obligation. Significant changes in the contract assets balance during the period were as follows:
Schedule of Significant Changes in Contract Assets and Contract Liabilities
| |
Nine
months ended January 31, 2022 | |
| |
(in
thousands) | |
Transferred
to receivables from contract assets recognized at the beginning of the period | |
$ | (190 | ) |
Revenue
recognized and not billed as of the end of the period | |
| 407 | |
Net
change in contract assets | |
$ | 217 | |
(4)
Other Current Assets
Other
current assets consisted of the following at January 31, 2022 and April 30, 2021:
Schedule of Other Current Assets
| |
January
31, 2022 | | |
April
30, 2021 | |
| |
(in
thousands) | |
Prepaid
insurance | |
$ | 178 | | |
$ | 194 | |
Prepaid
software & licenses | |
| 84 | | |
| 93 | |
Prepaid
sales and marketing | |
| 65 | | |
| 37 | |
Prepaid
recruiting | |
| 57 | | |
| 12 | |
Other
receivables | |
| 24 | | |
| 21 | |
Deposits | |
| — | | |
| 68 | |
Prepaid
expenses- other | |
| 28 | | |
| 62 | |
Other
current assets | |
$ | 436 | | |
$ | 487 | |
(5)
Property and Equipment, net
The
components of property and equipment, net as of January 31, 2022 and April 30, 2021 consisted of the following:
Schedule of Components of Property and Equipment
| |
January
31, 2022 | | |
April
30, 2021 | |
| |
(in
thousands) | |
Equipment | |
$ | 320 | | |
$ | 291 | |
Computer
equipment & software | |
| 521 | | |
| 498 | |
Office
furniture & equipment | |
| 352 | | |
| 341 | |
Leasehold
improvements | |
| 474 | | |
| 474 | |
Construction
in process | |
| 15 | | |
| 15 | |
Property
and equipment, gross | |
| 1,682 | | |
| 1,619 | |
Less:
accumulated depreciation | |
| (1,317 | ) | |
| (1,213 | ) |
Property
and equipment, net | |
$ | 365 | | |
$ | 406 | |
Depreciation
expense was approximately $104,000 and $106,000 for the nine month periods ended January 31, 2022 and 2021, respectively.
(6)
Leases
Lessor
Information
As
of January 31, 2022, the Company has one lease which has been classified as an operating lease per accounting guidance contained within
ASC Topic 842,” Leases”. The Company’s remaining term on this operating lease is less than 7 months. The maturity
of lease payments remaining on this lease is immaterial.
Lessee
Information
The
Company has a lease for its facility located in Monroe Township, New Jersey that is used as warehouse/production space and the Company’s
principal offices and corporate headquarters. The initial lease term is for seven years which expires in November of 2024 with an option
to extend the lease for another five years. The lease is classified as an operating lease. The operating lease is included in right-of-use
assets, lease liabilities- current and lease liabilities- long-term on the Company’s Consolidated Balance Sheets.
The
Company also has two leases for properties located in Houston, Texas. The first was acquired as part of the 3Dent acquisition
(see Note 18) that is used as office space. The lease term is for 3
years and is set to expire
in January of 2023. The lease is classified as
an operating lease and included in the right-of-use assets, lease liabilities- current and lease liabilities- long-term on the Company’s
Consolidated Balance Sheets.
The
other Houston lease is for additional office space and was renewed for a 12-month term ending on June 30, 2022.
In accordance with ASC 842-20-5-2, since the lease term at the time of renewal was 12 months, the asset was recognized directly
to the profit and loss statement on a straight-line basis and was not recognized as a right-of-use asset.
The
Company also has a lease with the University of California Berkeley in Berkeley, California that was acquired as part of the MAR
acquisition (see Note 18). The lease expires on June
30, 2022. In
accordance with ASC 842-20-5-2, since the remaining lease term at the time of the acquisition of MAR was less
than 12 months, the asset was recognized directly to the profit and loss statement on a straight-line basis and was not recognized
as a right-of-use asset.
Right-of-use
asset and operating lease liabilities are recognized based on the present value of future
minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined,
the Company uses the incremental borrowing rate based on the information available at the effective date to determine the present value
of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will
exercise those options. The renewal options have not been included in the lease term as they are not reasonably certain of exercise.
Lease expense for minimum lease payments is recognized on a straight- line basis over the lease term and consists of interest on the
lease liability and the amortization of the right of use asset. Variable lease expenses, if any, are recorded as incurred.
The
operating lease cash flow payments for the three months ended January 31, 2022 and 2021 were $111,000 and $91,000, respectively. The
operating lease cash flow payments for the nine months ended January 31, 2022 and 2021 were $315,000 and $259,000, respectively.
The
components of lease expense in the Consolidated Statements of Operations for the three and nine months ended January 31, 2022 and 2021
were as follows:
Schedule of Operating Lease Costs
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three
months ended January 31, | | |
Nine
months ended January 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(in
thousands) | | |
(in thousands) | |
Operating
lease cost | |
$ | 92 | | |
$ | 79 | | |
$ | 276 | | |
$ | 238 | |
Short-term
lease cost | |
| 12 | | |
| 7 | | |
| 22 | | |
| 12 | |
Total
lease cost | |
$ | 104 | | |
$ | 86 | | |
$ | 298 | | |
$ | 250 | |
Information
related to the Company’s right-of use assets and lease liabilities as of January 31, 2022 was as follows:
Schedule of Right-of Use Assets and Lease Liabilities
| |
January
31, 2022 | |
| |
| (in
thousands) | |
| |
| | |
Operating
lease: | |
| | |
Operating
right-of-use asset, net | |
$ | 825 | |
| |
| | |
Right-of-use
liability- current | |
$ | 323 | |
Right-of-use
liability- long term | |
| 615 | |
Total
lease liability | |
$ | 938 | |
| |
| | |
Weighted
average remaining lease term- operating leases | |
| 2.61
years | |
Weighted
average discount rate- operating leases | |
| 8.2 | % |
Total
remaining lease payments under the Company’s operating leases are as follows:
Schedule of Future Minimum Lease Payments Under Operating Lease
| |
January
31, 2022 | |
| |
(in
thousands) | |
| |
| | |
Remainder
of fiscal year 2022 | |
$ | 99 | |
2023 | |
| 391 | |
2024 | |
| 362 | |
2025 | |
| 184 | |
Total
future minimum lease payments | |
$ | 1,036 | |
Less
imputed interest | |
| (98 | ) |
Total | |
$ | 938 | |
(7)
Accrued Expenses
Accrued
expenses consisted of the following at January 31, 2022 and April 30, 2021:
Schedule of Accrued Expenses
| |
January
31, 2022 | | |
April
30, 2021 | |
| |
(in
thousands) | | |
(in
thousands) | |
Project
costs | |
$ | 102 | | |
$ | 368 | |
Contract
loss reserve | |
| 328 | | |
| 328 | |
Employee
incentive payments | |
| 191 | | |
| 283 | |
Accrued
salary and benefits | |
| 409 | | |
| 631 | |
Professional
fees | |
| 96 | | |
| 200 | |
Other | |
| 166 | | |
| 71 | |
Accrued
expenses total | |
$ | 1,292 | | |
$ | 1,881 | |
(8)
Warrants
Liability
Classified Warrants
On
June 2, 2016, the Company entered into a securities purchase agreement, which was amended on June 7, 2016 (as amended, the “June
Purchase Agreement”) with certain institutional purchasers (the “June Purchasers”). Pursuant to the terms of the June
Purchase Agreement, the Company sold an aggregate of 20,850 shares of Common Stock together with warrants to purchase up to an aggregate
of 7,298 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 $92.00. The warrants have an exercise price of $121.60 per share, became exercisable on December 3, 2016
(“Initial Exercise Date”), and expired on December 3, 2021, five years following the Initial Exercise Date. As of the expiration
date, none of the warrants had been exercised.
On
July 22, 2016, the Company entered into a Second Amendment to the Purchase Agreement (the “Second Amended Purchase Agreement”)
with certain institutional purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended Purchase Agreement,
the Company sold an aggregate of 29,750
shares of Common Stock together with warrants
to purchase up to an aggregate of 8,925
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 $135.00.
The warrants were exercisable immediately at an exercise price of $187.20
per share. The warrants expired on January
23, 2022, the fifth (5th)
anniversary of the initial exercise date of January 23, 2017. As of the expiration date, none
of the warrants had been exercised.
Equity
Classified Warrants
On
April 8, 2019, the Company issued and sold 1,542,000 shares of common stock and pre-funded warrants to purchase up to 3,385,680 shares
of common stock and common warrants to purchase up to 4,927,680 shares of our common stock in an underwritten public offering. The public
offering price for the pre-funded warrants was equal to the public offering price of the common stock, less the $0.01 per share exercise
price of each warrant. The pre-funded warrants have no expiration date. As of January 31, 2022, all of the pre-funded warrants had been
exercised. The common stock warrants have an exercise price of $3.85 per share and expire five years from the issuance date. As of January
31, 2022, all of the common warrants had been exercised.
The
Company accounts for warrants issued in connection with its June 2016 and July 2016 public offerings in accordance with the guidance
on “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” in Topic 480
which provides that the Company classify the warrant instruments as a liability at its fair value. The warrant liabilities are subject
to re-measurement at each balance sheet date using the Black-Scholes option pricing model. The June 2016 and July 2016 warrants contained
a feature whereby they could require the transfer of assets and therefore are classified as a liability award in accordance with the
guidance in Topic 480. The warrants were all expired as of January 31, 2022 and had a value near zero as of April 30, 2021. The pre-funded and
common warrants issued in the Company’s April 8, 2019 public offering did not meet the criteria to be classified as a liability
award and therefore were treated as an equity award and recorded as a component of shareholders’ equity in the Consolidated Balance
Sheets.
(9)
Paycheck Protection Program Loan
On
March 27, 2020, the U.S. Government passed into law the Coronavirus Aid, Relief and Economic Security Act, or the (“CARES Act”).
On May 3, 2020, the Company signed a Paycheck Protection Program (“PPP”) loan with Santander as the lender for approximately
$890,000 in support through the Small Business Association (“SBA”) under the PPP Loan. The PPP Loan was unsecured and evidenced
by a note in favor of Santander as the lender and governed by a Loan Agreement with Santander. The Company received the proceeds on May
5, 2020.
The
Company filed its loan forgiveness application at the end of February 2021 asking for 100% forgiveness of the loan. In June 2021, the
Company was informed that its application was approved, and that the loan is now fully forgiven. The Company recognized a gain on extinguishment
of PPP loan of approximately $890,000 during the nine months ended October 31, 2021 as reflected on the Consolidated Statement of Operations.
(10)
Preferred Stock
The
Company has authorized 5,000,000 shares of undesignated preferred stock with a par value of $0.001 per share. As of January 31, 2022,
no shares of preferred stock had been issued.
(11)
Common Stock
The
Company has authorized 100,000,000 shares of common stock with a par value of $0.001 per share. As of January 31, 2022, 55,894,213 shares
had been issued and are outstanding.
(12)
Treasury Shares
During
each of the nine months ended January 31, 2022 and 2021, no shares of common stock were purchased by the Company from employees to pay
taxes related to the vesting of restricted stock.
(13)
Share-Based Compensation
In
2015, upon approval by the Company’s shareholders, the Company’s 2015 Omnibus Incentive Plan (the “2015 Plan”)
became effective. A total of 1,332,036 shares were authorized for issuance under the 2015 Omnibus Incentive Plan, including shares available
for awards under the 2006 Stock Incentive Plan remaining at the time that plan terminated, or that were subject to awards under the 2006
Stock Incentive Plan that thereafter terminated by reason of expiration, forfeiture, cancellation or otherwise. If any award under the
2006 Stock Incentive Plan or 2015 Plan expires, is cancelled, terminates unexercised or is forfeited, those shares become again available
for grant under the 2015 Plan. The 2015 Plan will terminate ten years after its effective date, in October 2025, but is subject to earlier
termination as provided in the 2015 Plan. As of January 31, 2022, the Company has 696,627 shares available for future issuance under
the 2015 Plan which reflects adjustments made for the departure of our former CEO as well as other departures.
On
January 18, 2018, the Company’s Board of Directors adopted the Company’s Employment Inducement Incentive Award Plan (the
“2018 Inducement Plan”) pursuant to which the Company reserved 25,000 shares of common stock for issuance under the Inducement
Plan. In accordance with Rule 711(a) of the NYSE American Company Guide, awards under the Inducement Plan may only be made to individuals
not previously employed by the Company (or following such individuals’ bona fide period of non-employment with the Company), as
an inducement material to the individuals’ entry into employment with the Company. An award is any right to receive the Company’s
common stock pursuant to the 2018 Inducement Plan, consisting of a performance share award, restricted stock award, a restricted stock
unit award or a stock payment award. As of January 31, 2022, there were 11,487 shares available for grant under the 2018 Inducement Plan.
On February 9, 2022 the 2018 Inducement Plan was amended to increase the authorized shares by 250,000 to 275,000.
Stock
Options
The
Company estimates the fair value of each stock option award granted with service-based vesting requirements, using the Black-Scholes
option pricing model, assuming no dividends, and using the weighted average valuation assumptions noted in the following table. The risk-free
rate is based on the US Treasury yield curve in effect at the time of grant. The expected life (estimated period of time outstanding)
of the stock options granted is estimated using the “simplified” method as permitted by the SEC’s Staff Accounting
Bulletin No. 110, Share-Based Payment. Expected volatility is based on the Company’s historical volatility over the expected
life of the stock option granted. The Company granted options to acquire 793,850
and 248,876
shares of stock options during
the three and nine months ended January 31, 2022 and 2021, respectively. The following assumptions were used to value the awards:
Schedule
of Valuation Assumptions
| |
Nine
months ended January 31, | |
| |
2022 | | |
2021 | |
Risk-free
interest rate | |
| 1.5 | % | |
| 6.0 | % |
Expected
dividend yield | |
| — | % | |
| — | % |
Expected
life (in years) | |
| 5.6 | | |
| 5.9 | |
Expected
volatility | |
| 121.9 | % | |
| 136.5 | % |
A
summary of stock options under our stock incentive plans is detailed in the following table.
Schedule of Stock Option Activity
| |
Shares
Underlying
Options
| | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (In
Years) | |
Outstanding
as of April 30, 2021 | |
| 516,827 | | |
$ | 3.89 | | |
| 9.0 | |
Granted | |
| 793,850 | | |
$ | 1.43 | | |
| | |
Exercised | |
| (44,332 | ) | |
$ | 1.05 | | |
| | |
Expired | |
| (1,806 | ) | |
$ | 32.62 | | |
| | |
Cancelled/forfeited | |
| (121,383 | ) | |
$ | 3.03 | | |
| | |
Outstanding
as of January 31, 2022 | |
| 1,143,156 | | |
$ | 2.34 | | |
| 9.4 | |
Exercisable
as of January 31, 2022 | |
| 308,481 | | |
$ | 4.59 | | |
| 8.1 | |
As
of January 31, 2022, the total intrinsic value of outstanding and exercisable options was approximately $11,560. As of January 31, 2022,
approximately 835,000 additional options were unvested, which had an intrinsic value of zero and a weighted average remaining contractual
term of 9.9 years. There was approximately $183,000 and $296,000 of total recognized compensation cost related to stock options during
each of the nine months ended January 31, 2022 and 2021, respectively. As of January 31, 2022, there was approximately $102,000 of total
unrecognized compensation cost related to non-vested stock options granted under the plans. This cost is expected to be recognized over
a weighted-average period of 1.0 year.
The
Company’s acquisition of 3Dent (See Note 18) was valued at the fair value of the stock on the acquisition date of $1,451,584
(361,991
shares at $4.01).
Since the share restrictions were set to expire on February 1, 2022, within one year of the closing of the acquisition,
and lacked marketability, the Company applied a 20% discount to the purchase price making the adjusted fair value $1,161,267.
Additionally, as the sellers must be employed for 12 months from the date of acquisition to retain all of their shares, the difference
between the calculated fair value and the net assets acquired represents the value of the compensation expense to be recognized over
the period of the agreed upon employment.
Schedule of Business Acquisition and Fair Value of Net Assets, Compensation Expense Recognized
Fair
Value of Purchase | |
$ | 1,161,267 | |
Total
Acquired Assets | |
$ | (593,571 | ) |
Total
Acquired Liabilities | |
$ | 117,106 | |
Compensation
Expense | |
$ | 684,802 | |
Quarterly
Compensation Expense | |
$ | 171,201 | |
The
Company has recognized approximately $171,000
of compensation expense on a quarterly basis
for the consideration paid for 12 months from the acquisition date of February 2, 2021. The last of this compensation expense was
recognized during the quarter ended January 31, 2022.
Performance
Stock Options
In
January 2020, the Company issued 81,337 performance-based stock options to two of its executives. There were 40,668 shares that were
vested and outstanding, which were set to expire on December 15, 2021, all of which were exercised prior to the expiration date.
In
January 2021, the Company issued 344,723 performance-based stock options to employees and executives. The awards vest over 2 years provided
there is positive total shareholder return (e.g. share price increase) as measured by the closing share price on January 14, 2022 and
January 14, 2023. There were 230,000 shares unvested and outstanding at January 31, 2022. None of the shares granted to our former President
and CEO under this issuance vested prior to June 18, 2021, his last day of employment. These unvested shares are included in the Cancelled/forfeited
figure in the table below. A summary of performance stock options under our stock incentive plans is detailed in the following table.
Schedule of Stock Option Activity
| |
Shares
Underlying
Options
| | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (In
Years) | |
Outstanding
as of April 30, 2021 | |
| 424,790 | | |
$ | 2.57 | | |
| 9.5 | |
Granted | |
| 66,667 | | |
$ | 0.62 | | |
| | |
Exercised | |
| (40,668 | ) | |
$ | 1.05 | | |
| | |
Cancelled/forfeited | |
| (220,766 | ) | |
$ | 2.58 | | |
| | |
Outstanding
as of January 31, 2022 | |
| 230,023 | | |
$ | 2.26 | | |
| 9.1 | |
Exercisable
as of January 31, 2022 | |
| — | | |
| | | |
| 0.0 | |
As
of January 31, 2022, the total intrinsic value of both outstanding and exercisable options was approximately zero.
As of January 31, 2022, approximately 230,000
options were unvested, which had an intrinsic
value of zero
and a weighted average remaining contractual
term of 9.1
years. There was approximately $123,000
and $43,000
of total recognized compensation cost related
to stock options during each of the nine months ended January 31, 2022 and 2021, respectively. As of January 31, 2022, there was approximately
$242,000
of total unrecognized compensation cost related
to non-vested stock options granted under the plans. This cost is expected to be recognized over a weighted-average period of 1.1
years.
Restricted
Stock
Compensation
expense for non-vested restricted stock is generally recorded based on its market value on the date of grant and recognized ratably over
the associated service and performance period. During the nine months ended January 31, 2022 and 2021, the Company granted 777,764
and 10,000
shares,
respectively, that were subject to service-based vesting requirements.
A
summary of non-vested restricted stock under our stock incentive plans is as follows:
Schedule of Non-vested Restricted Stock Activity
| |
Number of
Shares | | |
Weighted Average
Price per Share | |
Issued
and unvested at April 30, 2021 | |
| 10,000 | | |
$ | 2.93 | |
Granted | |
| 777,764 | | |
$ | 1.42 | |
Vested | |
| (10,000 | ) | |
$ | 2.93 | |
Cancelled/forfeited | |
| — | | |
$ | — | |
Issued
and unvested at January 31, 2022 | |
| 777,764 | | |
$ | 1.42 | |
There
was approximately $43,000
and $12,000
of total recognized compensation cost related to restricted stock for the nine months ended January 31, 2022 and 2021, respectively.
As of January 31, 2022, there is approximately $54,000
of unrecognized compensation cost remaining related to unvested restricted stock granted under our plans. This cost is expected to
be recognized over a weighted-average period of approximately 1.4
years.
In
December 2019, the Company granted 51,547 shares to an employee, subject to service-based vesting requirements, that were outside the
Company stock incentive plans. There was approximately zero and $30,000 of total recognized compensation cost related to this award for
the three months ended January 31, 2022 and 2021, respectively. As of January 31, 2022, there was no unrecognized compensation cost remaining
related to this award.
(14)
Fair Value Measurements
ASC
Topic 820, “Fair Value Measurements” states that fair value is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs
used to measure fair value. This hierarchy maximizes the use of observable input and minimizes the use of unobservable inputs. The following
is a description of the three hierarchy levels.
Level
1 |
Unadjusted
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
|
|
Level
2 |
Inputs
other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly. |
|
|
Level
3 |
Inputs
that are unobservable for the asset or liability. |
Disclosure
of Fair Values
The
Company’s financial instruments that are not re-measured at fair value include cash, cash equivalents, restricted cash, accounts
receivable, contract assets and liabilities, deposits, accounts payable, and accrued expenses. The carrying values of these financial
instruments approximate their fair values and are viewed as Level 1 items. The Company’s warrant liabilities represent the only
asset or liability classified financial instrument that is measured at fair value on a recurring basis.
The
fair value of the Company’s warrant liabilities (refer to Note 8) is based on the Black-Scholes pricing model which is based on
Level 3 unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The assumptions
used by the Company are the quoted price of the Company’s common stock in an active market, risk-free interest rate, volatility
and expected life, and assumes no dividends. Volatility is based on the actual market activity of the Company’s stock. The expected
life is based on the remaining contractual term of the warrants and the risk-free interest rate is based on the implied yield available
on U.S. Treasury Securities with a maturity equivalent to the warrants’ expected life. The fair value on a recurring basis as of
January 31, 2022 and April 30, 2021 was near zero.
There
were no unrealized gains or losses for the three and nine months ended January 31, 2022 or 2021. When incurred, gains and losses are
included within “Gain (loss) due to change in fair value of warrant liabilities” in the Consolidated Statements of Operations.
The Company determined the fair value using the Black-Scholes pricing model with the following assumptions:
Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions
| |
January
31, 2022 | | |
January
31, 2021 | |
| |
| | |
| |
Dividend
rate | |
| N/A | | |
| 0.0 | % |
Risk-free
rate | |
| N/A
- N/A | | |
| 0.07%
- 0.08% | |
Expected
life (years) | |
| N/A | | |
| 0.5
- 0.8 | |
Expected
volatility | |
| N/A | | |
| 146.1 | % |
Transfers
into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were no transfers
between any hierarchy levels during each of the three and nine months ended January 31, 2022 or 2021.
(15)
Commitments and Contingencies
Employment
Litigation
On
August 28, 2018, counsel for Charles Dunleavy, the Company’s former President & Chief Executive Officer who was terminated
for cause effective June 9, 2014, filed a demand for arbitration, captioned Charles F. Dunleavy v. Ocean Power Technologies, Inc., Case
No. 01-18-0003-2374, before the American Arbitration Association in New Jersey. The demand alleged various claims relating to Mr. Dunleavy’s
termination. After the hearings in the proceeding were conducted, on December 11, 2020, the arbitration panel issued an interim award
finding, among other things, that the termination for cause of Mr. Dunleavy was in breach of his employment contract and awarded him
compensatory damages in the amount of $438,254.54. On May 3, 2021, the panel issued a second interim award and therein awarded Mr. Dunleavy
attorneys’ fees, costs and pre-judgment interest. The Company agreed, on May 24, 2021, to pay Mr. Dunleavy $1,223,963.14, representing
the total compensatory damages, attorneys’ fees, costs and pre-judgment interest, which is the full amount awarded by the arbitration
panel. The Company made the required payment on May 26, 2021, and the matter is now closed.
Spain
Income Tax Audit
The
Company underwent an income tax audit in Spain for the period from 2011 to 2014, when our Spanish branch was closed. On July 30, 2018,
the Spanish tax inspector concluded that although there was no tax owed in light of losses reported, the Company’s Spanish branch
owed penalties for failure to properly account for the income associated with the funding grant. During the nine months ended January
31, 2021, the Company received notice from the Spanish Central Economic and Administrative Tribunal that it agreed with the inspector
and ruled that the Company owes the full amount of the penalty in the amount of €279,870 or approximately $331,000. On January 25,
2021, the Company paid the Spanish Tax Administration €279,870. Notwithstanding that payment, on April 30, 2021, the Company filed
its appeal of the decision of the Central Court to the Spanish National Court. There is no schedule for a ruling from the Spanish National
Court.
(16)
Income Taxes
Uncertain
Tax Positions
The
Company applies the guidance issued by the FASB for the accounting and reporting of uncertain tax positions. The guidance requires the
Company to recognize in its consolidated financial statements the impact of a tax position if that position is more likely than not to
be sustained upon examination, based on the technical merits of the position. At January 31, 2022, the Company had no unrecognized tax
positions. The Company does not expect any material increase or decrease in its income tax expense in the next twelve months, related
to examinations or uncertain tax positions. U.S. federal and state income tax returns were audited through fiscal 2014 and fiscal 2010
respectively. Net operating loss and credit carry forwards since inception remain open to examination by taxing authorities and will
continue to remain open for a period of time after utilization.
Income
Tax Benefit
The
Company sold New Jersey State net operating losses and research development credits under the NJEDA Tax Transfer program in the amount
of approximately $12.0
million for the year ended April 30, 2021, for
net proceeds of approximately $1.0
million which was received in May 2021 and recorded
in the Company’s Statement of Operations in fiscal year 2022. This results from a program
where New Jersey-based technology or biotechnology companies with fewer than 225 US employees may be eligible to sell net operating losses
and research and development tax credits to unaffiliated corporations, up to a maximum lifetime benefit of $20.0
million
per business. As of January 31, 2022 we have approximately $5.0
million still
available to sell should we chose to do so.
(17)
Operating Segments and Geographic Information
The
Company’s business consists of one
segment as this represents how our Chief Operating
Decision Maker views the Company’s operations and financial position. The Company operates on a worldwide basis with two
wholly-owned subsidiaries, 3Dent and MAR, and subsidiaries in the UK and in Australia. Revenues and expenses are generally attributed
to the operating company that bills the customers. During each of the nine months ended January 31, 2022 and 2021, the Company’s
primary business operations were in North America.
(18)
Business Combination
3dent
Technologies, LLC
On
February 1, 2021, the Company acquired all of the outstanding equity interest of 3dent Technologies, LLC (“3Dent”), a Houston,
Texas based company that offers offshore energy engineering and design services that are complementary to the Company’s technology
and products. As consideration for the purchase, the Company issued 361,991
shares of its common stock to the sellers, subject
to a 12-month post acquisition employment condition, which has now been achieved. In addition, the former owners of 3Dent would have
been eligible for awards of performance stock with a potential value of $360,000
if certain revenue targets are achieved over
the 12 month-period post acquisition. As of January 31, 2022, it was determined that 3Dent did not meet these
revenue targets.
Marine
Advance Robotics, Inc.
On
November 15, 2021, the Company acquired all of the outstanding equity interest of Marine Advanced Robotics, Inc. (“MAR”),
a Richmond (San Francisco Bay Area), California-based developer and manufacturer of autonomous surface vehicles.
The
Company accounted for the transaction as a business combination under ASC 805, “Business Combinations.” Accordingly,
the assets and liabilities acquired were recorded at their estimated fair value on the date of acquisition. Under ASC 805, acquisition-related
transaction costs of approximately $0.3 million (such as advisory, legal, valuation, other professional fees) were expensed in the Consolidated
Statement of Operations in the period incurred.
The
Company paid cash consideration of $4.0 million
and issued 3,330,162 shares
of our common stock valued at approximately
$5.9 million based on the closing
price of $2.10
and reduced by a lack of
marketability discount since they were restricted. The Company assumed liability for advances payable to the former owners
of MAR for approximately $456,000.
The
contingent consideration is based on the achievement of certain milestones over a 30-month period. As of the acquisition date, the
contingent consideration had a fair value of $1.6 million.
Under the terms of the MAR purchase agreement, the
contingent consideration consists of two earn-out periods, one running from the date of the acquisition through April 30, 2023 in
which the maximum earn-out is $1.5 million and the other from May 1, 2023 through April 30, 2024 where the maximum earn-out is $2
million. The fair value as of the date of acquisition was determined using a simulation model based on an estimate of revenues
during these periods and discount factors ranging from 5.8% to 14.5%. As discussed in Note 14 per ASC Topic 820 we consider
this to be a Level 3 liability.
Total
consideration including cash, restricted shares, liabilities assumed, and contingent consideration was valued at
approximately $11.9 million.
Purchase
consideration consisted of the following:
Schedule
of Purchase Consideration
| |
(in thousands) | |
Cash | |
$ | 4,000 | |
Liabilities assumed | |
| 456 | |
Fair value of restricted shares | |
| 5,855 | |
Fair value of contingent consideration | |
| 1,591 | |
Total consideration | |
$ | 11,902 | |
The
preliminary allocation of the fair value of the MAR acquisition is shown in the table below. The allocation of the fair value will be
finalized when the valuation is completed, and the differences will be trued up for the final allocated amounts, hence, actual results may differ from preliminary estimate.
Schedule
of Allocated Fair Value of Purchase Consideration
Total Purchase Consideration | |
$ | 11,902 | |
| |
| | |
Cash | |
$ | 12 | |
Inventory | |
| 150 | |
Property and equipment, net | |
| 38 | |
Trademarks | |
| 2,755 | |
Patents | |
| 1,193 | |
Goodwill | |
| 7,754 | |
Net assets acquired | |
$ | 11,902 | |
The
net assets were recorded at their estimated fair value. In valuing acquired assets and liabilities, fair value estimates were based
primarily on future expected cash flows, market rate assumptions, and appropriate discount rates. In connection with the acquisition
of MAR, we acquired approximately $3.9
million of intangible assets including trademarks with an indefinite life and patents that will be amortized over a useful life of
nine years.
Goodwill
is considered an indefinite-lived asset that relates primarily to intangible assets that do not qualify for separate recognition.
The Company is currently evaluating the tax implications on the business combination accounting and compiling the information needed
for a pro forma disclosure related to the acquisition of MAR which is expected in our year end reporting.
(19)
Subsequent
Events
New
Jersey Net Operating Loss Transfer Program
In
February 2022, the Company sold New Jersey State net operating losses and research and development credits in
the amount of $4.0
million, resulting in
the recognition of income tax benefits of $0.4
million.
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 April 30, 2021 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 2021 refers to the year ended April 30, 2021).
Overview
and mission
We
were incorporated under the laws of the State of New Jersey in April 1984 and began commercial operations in 1994. On April 23, 2007,
we reincorporated in Delaware.
We
are an ocean data, marine power, 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 enable technologies for data collection, analysis, communication in remote ocean environments, as well as generate actionable intelligence and control certain equipment linked to edge and cloud environments.
Our
mission and purpose are to provide intelligent maritime solutions and services that enable more secure and more productive utilization
of our oceans and waterways, green energy power services, and sophisticated surface and sub-surface marine domain awareness solutions.
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 as well as through working with select partners.
Strategy
and marketing
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. 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.
Our recent projects have been in the offshore energy and science and research industries.
Based
on our market research and publicly available data, including but not limited to the U.S. Department of Energy (“DOE”) 2019
Powering the Blue Economy Report, the Westwood Energy World ROV Operations Forecast 2019-2023, and the World Bank Database, we believe
there is an increasing need for our products and services in maritime domain awareness applications and numerous markets may have a direct
need for our solutions. Potential customers include, but are not limited to, defense and security, offshore energy, science and research,
and offshore wind markets, as well as government applications in fishery protection and marine protected areas.
Our
Solutions
Our
solutions focus on three major services areas, Data as a Service, supported and enabled by Power as a Service, and underpinned by our
Strategic Consulting Services.
Data
as a Service
Our
Data as a Service solution concept was originally based on the work we performed for Harbour Energy (formerly known as Premier Oil) in
the North Sea. With the support of our key software and mechatronics partners, and based on feedback from participants in the government,
defense, and security markets, we have evolved this concept into our commercial development programs. These include our custom software
development efforts to further extend our edge computing and cloud hosting capabilities solution with the ability to support artificial
intelligence modules that can be delivered to customers via secure cloud environments. The initial release of our new solution will be
deployed onto a multi-buoy array off the coast of New Jersey, creating a floating test bed for current capabilities and future developments.
Maritime
Domain Awareness Solution (“MDAS”)
The
International Maritime Organization defines Maritime Domain Awareness (“MDA”) as the effective understanding of any activity
that could impact upon the security, safety, economy, or environment. Since 2002, the United States of America, for example, has had
an active strategy to secure the Maritime Domain. Furthermore, in 2020 the U.S. Coast Guard elevated Illegal, Unreported and Unregulated
(“IUU”) fisheries, one aspect of MDA security, as the leading global maritime threat.
We
have designed a solution to provide detailed, localized maritime domain awareness that can be utilized for a wide range of applications
across market segments. Our MDAS base configuration consists of a high-definition radar, stabilized high-definition optical and thermal
imaging camera, vessel automatic identification system (“AIS”) detection, and integrated command and control software that
can be installed on a range of platforms, including our buoys and autonomous vehicles. Additional sensors can be added 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 actionable intelligence promptly.
We
anticipate that data from our MDAS will be processed onboard our buoys using edge computing, transmitted to our cloud-based analytics
platform via secure Wi-Fi, cellular, and/or satellite systems. 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 third party data feeds to form a detailed surface and subsea picture of a monitored area.
The
development of our MDAS is underway, and we launched the first offshore system supporting the demonstration of the newly developed system
with our hardware and TimeZero software in October 2021. To date we have collected more than 2,000 radar and AIS tracks from our previous
New Jersey deployments. This data is being used to refine the design of our MDAS. We are working on the deployment of additional systems
to test the next generation of solutions during fiscal calendar Q4 2022.
In
October 2020, the Company entered into an agreement with Adams Communication & Engineering Technology, Inc. (“ACET”)
to conduct a feasibility study for the evaluation of a PB3 power and 5G communications solution in support of the U.S. Navy’s Naval
Postgraduate School’s Sea, Land, Air, Military Research Initiative (“SLAMR”). This forms part of our Data as a Service
division.
Autonomous
Vehicles (“WAM-V”)
On
November 15, 2021, the Company acquired all of the outstanding equity interest of MAR. Founded in 2004, MAR is the developer of the patented
Wave Adaptive Modular Vessel (WAM-V®) technology, which enables roaming capabilities for uncrewed maritime systems in waters around
the world. MAR launched the first WAM-V in 2007 as a new vessel class with a mission to manufacture and deliver to customers the most
reliable and robust autonomous surface vehicles available on the market. MAR also provides RaaS (Robotics as a Service) allowing
customers to leverage WAM-V technology and MAR expertise on a per project basis. Today, WAM-Vs operate in 11 countries for commercial,
military and scientific customers.
This
acquisition immediately provided the Company with an established, innovative inshore, nearshore and offshore product line that highly
complements the Company’s business strategy. Since the acquisition, MAR has continued to grow and is further expanding into its
core marine survey and maritime security markets in Europe, Asia, Oceania and the Americas. As we continue to bring MAR and the WAM-V
technology into the OPT family, we expect to expand on the synergistic opportunities we have identified. For example, we plan to integrate
the MDAS platform onto the WAM-V to expand our MDA offering to provide a roaming MDA solution to our customers.
Power
as a Service
Power
as a Service solutions deliver value to customers by utilizing our managed power platforms. We continue to develop and commercialize
our proprietary power platforms that generate electricity by harnessing the renewable energy of ocean waves for our PowerBuoy® (“PB3”),
and solar power for our hybrid PowerBuoy® (the “hPB”) as well as subsea battery for topside and subsea power applications.
The PB3 uses proprietary technologies that convert the kinetic energy created by the motion of ocean waves into electricity. Our focus
for these solutions is on bringing autonomous clean power to our customers wherever it is required.
In
November 2020, the Company entered into an agreement to provide engineering and technical services to the DeepStar Global Technology
Consortium Program showcasing our Power as a Service. This project was completed in July 2021, and we have used the findings of the study
to advance marketing activities for our Power as a Service solution.
On
our project with Eni S.p.A. (“Eni”), we utilized a PB3, which operated in the Adriatic Sea for over 700 days of continuous
operation as part of Eni’s resident autonomous underwater vehicle (“AUV”) feasibility studies. During commercial operations,
an AUV would remain on site to perform various inspection, maintenance, and repair tasks. As demonstrated during our project with Eni,
our solutions generated sufficient power that could, with client assets, extend missions for longer durations.
In
June 2021, the Company was notified of a pre-award for a Department of Energy (“DOE”) Small Business Innovation Research
program (“SBIR”) to support the development of the next generation of our wave energy conversion systems. In August 2021,
we completed all required documentation and signed the DOE contract. The 9-month project began in the second quarter of
fiscal 2022.
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.
A
single MDAS equipped PB3 can monitor vessel traffic, with or without AIS turned on, across an area approximately 1,300 square kilometers
of ocean territory, 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.
hybrid
PowerBuoy®
The
Company is currently optimizing the design of our original hPB. The hPB is capable of utilizing solar and wind power,
in addition to wave energy. Based on prototype testing, we are optimizing the solar and wind generation, as well as increasing the battery
energy storage capacity. The hPB is capable of providing reliable power in remote offshore locations, regardless of ocean wave conditions.
We believe this product is 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 product integration within each customer project. The
hPB is intended to provide a stable energy platform for our MDAS solution, and for agile deployment of subsea power applications, such
as recharging and surface communications hub for electric remotely operated vehicles (“eROV”) such as our WAM-V and AUV used
for underwater inspections and short-term maintenance, subsea equipment monitoring and control. The design has a high payload capacity
for surveillance and communications equipment, with the capability of being tethered to subsea payloads such as batteries, or with a
conventional anchor mooring system. Energy is stored in onboard batteries which power subsea and topside payloads. The hPB is designed
to be able to operate over a broad range of temperature and ocean wave conditions.
As
with the PB3, the control system uses sensors and an onboard computer to continuously monitor the hPB subsystems. The load is powered
by the onboard Lithium Ion batteries, so that payloads are powered no matter what the weather or sun conditions.
The
hPB can be transported over land to the deployment port using conventional transportation methods. Once at port, it can be lifted into
the water or onboard a vessel using a readily available crane of appropriate capacity. The hPB may then be towed to a site using a standard
vessel, or the hPB may be carried aboard a vessel to its offshore location and craned into the water at site.
Subsea
Battery
We
have product launched a subsea battery that is complementary to both the PB3 and hPB 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 pressure tested lithium-ion subsea batteries supply power that can enable subsea equipment,
sensors, communications and AUV and eROV recharge. Our PB3 and hPB 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.
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 100kW-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.
Strategic
Consulting Services
Our
Strategic Consulting Services were materially expanded with the acquisition of 3dent Technology, LLC (“3Dent”), in February
2021. As part of our continued strategic operations, we intend to continue to grow our service sectors and develop, evolve, and strengthen
our solutions through internal developments, partnerships, and potential acquisitions. Our 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 offshore drill rig owners, including owners of floaters, jackups, and lift boats. Consulting services include simulation
engineering, software engineering, concept design and motion analysis. During the third quarter of fiscal 2022, the Company saw an increase
in consulting services activity for conventional offshore energy and offshore wind projects.
The
focus of our Strategic Consulting Services is 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 integrated
well into our broader Power and/or Data as a Service solutions, utilizing our solutions or on a standalone basis. In the near term, we
will focus on increasing our market share in the offshore wind market and the broader floating foundation design market, as well as our
business with offshore energy customers.
In
addition to work performed by the Company for the DeepStar project, through our Strategic Consulting Services group, 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.
Business
Update Regarding COVID-19 and its variants
The
COVID-19 pandemic presented substantial health and economic risks, uncertainties and challenges to our business, the global economy and
financial markets. In March 2020, one of the Company’s customers cancelled a portion of their contract due to the outbreak of COVID-19
and instead extended an existing lease. In April 2020, the Company declared force majeure on a contract with a different customer and
delayed the deployment of its PB3 PowerBouy® in Chile. For additional information on various uncertainties and risks posed by the
COVID-19 pandemic, see Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended April 30, 2021.
On
March 27, 2020, the U.S. Government passed into law the Coronavirus Aid, Relief and Economic Security Act, or the (“CARES Act”).
On May 3, 2020, the Company signed a Paycheck Protection Program (“PPP”) loan with Santander as the lender for approximately
$890,000. The PPP loan was unsecured and evidenced by a note in favor of Santander as the lender and governed by a Loan Agreement with
Santander. The Company received the proceeds on May 5, 2020.
The
Company filed its loan forgiveness application at the end of February 2021 asking for 100% forgiveness of the loan. In June 2021, the
Company was informed that its application was approved, and that the loan is now fully forgiven. The Company recognized a gain on extinguishment
of PPP loan of approximately $890,000 in the Consolidated Statement of Operations for the nine months ending January 31, 2022.
During
2020 we started to experience some delays related to the impact of COVID-19 on the international supply chain. We were able to mitigate
much of the impact by consuming not only internal inventory but also by expanding our supply base. We have a global supply chain, and
in addition to domestic sources, we obtain components from Asia and Europe. We use a combination of off-the-shelf components and equipment
(COTS) as well as custom developed parts. There have been a number of disruptions throughout the global supply chain which have impacted
our development and manufacturing. As the global economy continues to open up, it is driving the demand for certain components. This
has outpaced the return of the global supply chain to full production. Although we have been able to find alternatives for many component
shortages, we experienced, and continue to experience, some delays and cost increases with respect to container shortages, ocean shipping
and air freight. In addition, our key suppliers have experienced longer lead times and cost increases for raw materials and have
experienced periods of interruption to production due to COVID-19 and its variants affecting manpower. Though local manpower and similar
Covid-related problems are starting to ease, we continue to have concerns over component shortages, particularly for semiconductors and
specialty metals which we foresee to continue at least through the first half of calendar 2022.
If
spikes in COVID-19 and its variants occur in regions in which our supply chain operates, we could experience periodic interruptions or
impacts due to delays in components and incur further freight price increases. We continue to monitor and adjust our operations, as appropriate.
in response to the COVID-19 pandemic.
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 January 31, | | |
Nine
months ended January 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Eni
S.p.A. | |
| 0 | % | |
| 11 | % | |
| 1 | % | |
| 22 | % |
Department
of Energy | |
| 21 | % | |
| 0 | % | |
| 18 | % | |
| 0 | % |
EGP | |
| 0 | % | |
| 70 | % | |
| 16 | % | |
| 63 | % |
ACET | |
| 0 | % | |
| 10 | % | |
| 0 | % | |
| 6 | % |
Valaris
(1) | |
| 1 | % | |
| 0 | % | |
| 14 | % | |
| 0 | % |
Brigham
Young University (2) | |
| 14 | % | |
| 0 | % | |
| 7 | % | |
| 0 | % |
Nippon
Kaiyo (2) | |
| 16 | % | |
| 0 | % | |
| 8 | % | |
| 0 | % |
Naval
Surface Warfare Center (2) | |
| 20 | % | |
| 0 | % | |
| 10 | % | |
| 0 | % |
Other
(no customer over 10%) | |
| 28 | % | |
| 9 | % | |
| 26 | % | |
| 9 | % |
| |
| 100 | % | |
| 100 | % | |
| 100 | % | |
| 100 | % |
(1) |
3Dent
related consulting |
(2) |
MAR
related sales |
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
| ● | MAR
has contracted to build WAM-Vs for Brigham Young University,
Nippon Kaiyo, and the Naval Surface Warfare Center. |
| ● | In
June 2021, the Company was notified of a pre-award for a Department of Energy (“DOE”)
Small Business Innovation Research program (“SBIR”) to support the development
of the next generation of our wave energy conversion systems. In August 2021, we completed
all required documentation, signed the DOE contract and initiated the 9-month project which
began in the second quarter of fiscal 2022. |
| ● | Throughout
the first nine months of fiscal 2022, our Strategic Consulting Services, continued to generate
revenues from both prior and new customers of approximately $424,000. Notably, we advanced
several large projects in the pipeline to an advanced stage with larger oil and gas operators
and offshore wind developers. |
| ● | In
November 2020, the Company entered into an agreement with the OOC to 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. This project was completed in July 2021. |
| ● | In
October 2020, the Company entered into an agreement with ACET to conduct a feasibility study
for the evaluation of a PB3 power and 5G communications solution in support of the U.S. Navy
Naval Postgraduate School’s SLAMR initiative. The study was completed, and the Company
is currently in active discussions with the SLAMR Consortium on the project’s next
steps on providing the data and power solution. The SLAMR initiative is ongoing and on October
29, 2021, the SLAMR Consortium released additional information about the project into the
market. |
| ● | In
March 2020, Eni exercised their option from the March 2018 contract to extend their lease
of the PB3 for an additional 18 months. The initial provision in March 2018 agreement provided
for a minimum 24-month contract that 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 New Jersey and has completed
its refurbishment and is being readied to deploy as part of our MDAS demonstration off the
coast of New Jersey. |
| ● | In
September 2019, we entered into two contracts with subsidiaries of EGP, which included the
sale of a PB3 and the development and supply of a turn-key integrated Open Sea Lab (“OSL”)
that was expected to be the Company’s first deployment off the coast of Chile. Due
to the COVID-19 pandemic, force majeure was declared in April 2020 and delayed the deployment.
In March 2021, the Company began the deployment process and placed the PB3 in the water.
During the first nine months of fiscal 2022, deployment installation activities were performed,
and additional activities are expected to be performed over the next fiscal quarter. |
| ● | In
June 2018, we entered into a contract with Harbour Energy for the lease of a PB3 to be deployed
in one of Harbour Energy’s offshore fields in the North Sea. 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 New Jersey and
is currently being refurbished to be redeployed. During the second quarter of fiscal 2022
we entered into a contract with Aker Solutions to support a study integrating the PB3 system
for the next phase of Harbour Energy’s development plans. |
Partnerships
We
believe that our solutions are best developed, sold, deployed, and maintained together with subject matter experts in their respective
fields. This enables the Company to protect, maintain, and evolve our power platforms and integrate them with surface and subsea payloads.
The Company 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 MDAS, we recently entered into strategic software
and robotics partnerships with two software companies, Greensea Systems, Inc. and Fathom5. We believe the partnerships with Greensea
and Fathom5 will further the development of our next-generation MDAS product for the maritime industrial market and governmental defense
and security organizations.
Greensea
Systems, Inc. is contributing to the Company’s MDAS by providing integration software, control software, autonomy and systems integration
for the buoy sensor payload.
Fathom5
is designing and building a customized industrial analytics platform to support the Company’s MDAS. 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 MDAS
payload and view sensor data in real time.
We
also maintain active dialogues with several offshore deployment and marine operations partners in the North Sea and North America to
support our projects.
Business
Strategy
During
fiscal 2021 and the first nine months of fiscal 2022, we advanced our marketing programs, products, and solutions. We have made progress
in transitioning from R&D to commercialization and moving further into the ocean data as a service market. 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. This strategy was further enhanced by our acquisition of MAR in November 2021.
Most
of the Company’s opportunities with potential customers have been for projects in Western Europe, including the North Sea, as well
as North and South America, and South East Asia. Nearly two-thirds of these opportunities have progressed past initial feasibility and
non-disclosure agreement stages to more detailed, confidential discussions around specific customer applications. Many proposal requests
are for projects where one of our PowerBuoy® products, either the PB3, the hPB, or our subsea battery is part of a larger solution
deployment, and typically include the potential lease or sale of one or more of our solutions deployed on our PowerBuoy® platforms,
as well as required services and maintenance support.
Historically,
demonstration projects have been a necessary step toward broad solution deployment and revenues associated with specific applications
like our New Jersey MDAS test array as part of our Data as a Service offering. 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.
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. We believe our Data and Power as a Service offerings,
together with our platforms, 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. As our
MDAS grows, we expect that this will also include data and cloud services. |
| ● | Expand
customer system solution offerings through new complimentary products that enable shorter
and more cost-efficient deployments. We are continuously improving our technology solutions.
The hPB 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 hPB is intended
for deployments for which the PB3 is not suitable, including shorter term missions and very
low wave environments. It supports deployment applications such as maritime domain awareness
and communications, eROV and AUV inspections 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.
| ● | Focus
sales and marketing efforts in global markets. While we are marketing our products and
services globally, we have focused on several key markets and applications, including US
and foreign defense and security applications with our MDAS offering; subsea power for oil
and gas; and the hydrographic survey market in US, Europe and Australia with the WAM-V’s.
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 Houston, Texas to further support our customers and
strengthen our dialogue with our solution partners. During fiscal 2022, we further solidified
our European footprint, concentrating on our North Sea resource. We are in active discussions
with potential partners in North and South America, Southeast Asia and West Africa. |
| ● | 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 and MAR, 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. |
| ● | Survey
and security market applications. With the addition of the WAM-V, we are able to increase
our ability to lease vehicles specifically to support the survey markets as well as security
applications while integrating MDA into these solutions. |
Liquidity
During
the first nine months ending January 31, 2022, the Company incurred a net loss of approximately $13.7 million and used cash in operating
activities of approximately $15.3 million. The Company has continued to make investments in ongoing product development efforts
in anticipation of future growth. The Company’s future results of operations involve significant risks and uncertainties. Factors
that could affect the Company’s future operating results and cause actual results to vary materially from expectations include,
but are not limited to, performance of its products, its ability to market and commercialize its products and new products that it may
develop, technology development, scalability of technology and production, dependence on skills of key personnel, concentration of customers
and suppliers, deployment risks and integration of acquisitions, pending or threatened litigation, and the continued impact of COVID-19
and its variants on its business. The Company currently has committed sources of equity financing through its At the Market Offering
Agreement with A.G.P/Alliance Global Partners (“AGP”) and the Aspire Capital financing, but the Company cannot be sure that
additional equity and/or debt financing will be available to the Company as needed on acceptable terms, or at all. Management believes
the Company’s current cash balance of $63.8 million is sufficient to fund its planned expenditures through at least March 2023.
In addition to the acquisition of 3Dent in the prior year and MAR in November 2021, the Company is looking at further organic and inorganic
growth opportunities to advance our data and power services and solutions.
Capital
Raises
At
the Market Offering Agreements
On
January 7, 2019, the Company entered into an At the Market Offering Agreement (“2019 ATM Facility”) with AGP, under which
the Company may issue and sell to or through AGP, acting as agent and/or principal, shares of the Company’s common stock having
an aggregate offering price of up to $25.0 million. From inception of the program through its termination on December 8, 2020, under
the 2019 ATM Facility, the Company sold and issued an aggregate of 17,595,472 shares of its common stock with an aggregate market value
of $23.4 million at an average price of $1.33 per share and paid AGP a sales commission of approximately $0.8 million related to those
shares. The agreement was fully utilized and terminated on December 8, 2020.
On
November 20, 2020, the Company entered into an At the Market Offering Agreement with AGP (the “2020 ATM Facility”). On December
4, 2020 the Company filed a prospectus with the Securities and Exchange Commission whereby, the Company could issue and sell to or through
AGP, acting as agent and/or principal, shares of the Company’s common stock having an aggregate offering price of up to $50.0 million.
From inception of the 2020 ATM Facility through April 30, 2021, the Company sold and issued an aggregate of 17,179,883 shares of its
common stock with an aggregate market value of $50.0 million at an average price of $2.91 per share and paid AGP a sales commission of
approximately $1.6 million related to those shares. A prospectus supplement was filed on January 10, 2022 to allow the Company to sell
an additional $25.0 million (or an aggregate of $75.0 million) under the 2020 ATM Facility.
Equity
Line Common Stock Purchase Agreements
On
October 24, 2019, the Company entered into a common stock purchase agreement with Aspire Capital which provided that, subject to certain
terms, conditions and limitations, Aspire Capital was committed to purchase up to an aggregate of $10.0 million shares of the Company’s
common stock over a 30-month period. Through September 18, 2020, the Company had sold an aggregate of 6,424,205 shares of common stock
with an aggregate market value of $4.0 million at an average price of $0.63 per share pursuant to this common stock purchase agreement.
The agreement was fully utilized and terminated on September 18, 2020.
On
September 18, 2020, the Company entered into a new common stock purchase agreement with Aspire Capital which provided that, subject to
certain terms, conditions and limitations, Aspire Capital was committed to purchase up to an aggregate of $12.5 million shares of the
Company’s common stock over a 30-month period subject to a limit of 19.99% of the outstanding common stock on the date of the agreement
if the price did not exceed a specified price in the agreement. The number of shares the Company could issue within the 19.99% limit
was 3,722,251 shares without shareholder approval. Shareholder approval was received at the Company’s annual meeting of shareholders
on December 23, 2020 for the sale of 9,864,706 additional shares of common stock which exceeds the 19.99% limit of outstanding common
stock on the date of the agreement. Through January 31, 2022, the Company had sold an aggregate of 3,722,251 shares of common stock with
an aggregate market value of $11.8 million at an average price of $3.17 per share pursuant to this common stock purchase agreement. The
Company is able to purchase an additional $0.7 million in shares under the agreement with Aspire Capital, which expires in March of 2023.
The
sale of additional equity or convertible securities could result in dilution to our shareholders. 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 Aspire Capital financing, but the Company cannot be sure that additional equity and/or debt financing will
be available to the Company as needed on acceptable terms, 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 January 31, 2022, the Company’s backlog was $0.8 million. As of April 30, 2021,
backlog was $0.2 million. Our backlog can include unfilled firm orders for our products and services from commercial or governmental
customers. If any of our contracts were to be terminated, our backlog would be reduced by the expected value of the remaining terms of
such contract.
The
amount of contract backlog is not necessarily indicative of future revenue because modifications to or terminations of present contracts
and production delays can provide additional revenue or reduce anticipated revenue. A substantial portion of our revenue 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.
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 U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The preparation of financial statements
also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses and related
disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences
between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and
cash flows will be affected. We believe that the accounting policies are critical to understanding our historical and future performance,
as these policies relate to the more significant areas involving management’s judgments and estimates.
For
a discussion of our critical accounting estimates, see the section entitled Item 7.- “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended April 30, 2021. There were
no material changes to our critical accounting estimates or accounting policies during the nine months ended January 31, 2022.
Recently
Issued Accounting Standards
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments -
Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” This amendment replaces the incurred
loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope,
including trade receivables. This update is intended to provide financial statement users with more decision-useful information about
the expected credit losses. In November 2019, the FASB issued No. 2019-10, Financial Instruments—Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date of ASU 2016-13 for Smaller Reporting
Companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is
currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
Financial
Operations Overview
The
following describes certain line items in our statement of operations and some of the factors that affect our operating results.
Revenues
A
performance obligation is the unit of account for revenue recognition. The Company assesses the goods or services promised in a contract
with a customer and identifies as a performance obligation either: a) a good or service (or a bundle of goods or services) that is distinct;
or b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
A contract may contain a single or multiple performance obligations. For contracts with multiple performance obligations, the Company
allocates the contracted transaction price to each performance obligation based upon the relative standalone selling price, which represents
the price the Company would sell a promised good or service separately to a customer. The Company determines the standalone selling price
based upon the facts and circumstances of each obligated good or service. The majority of the Company’s contracts have no observable
standalone selling price since the associated products and services are customized to customer specifications. As such, the standalone
selling price generally reflects the Company’s forecast of the total cost to satisfy the performance obligation plus an appropriate
profit margin.
The
nature of the Company’s contracts may give rise to several types of variable 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 January 31, 2022 and 2021.
The
Company recognizes revenue when or as it satisfies a performance obligation by transferring a good or service to a customer, either (1)
at a point in time or (2) over time. A good or service is transferred when or as the customer obtains control of it. The evaluation of
whether control of each performance obligation is transferred at a point in time or over time is made at contract inception. Input measures
such as costs incurred or time elapsed are utilized to assess progress against specific contractual performance obligations for the Company’s
services. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the services
to be provided. For the Company, the input method using costs incurred or time elapsed best represents the measure of progress against
the performance obligations incorporated within the contractual agreements. When the Company’s estimate of total costs to be incurred
to satisfy the performance obligations exceed revenue, the Company recognizes the loss immediately.
The
Company’s contracts are either cost plus or fixed price contracts. Under cost plus contracts, customers are billed for actual expenses
incurred plus an agreed-upon fee. Under cost plus contracts, a profit or loss on a project is recognized depending on whether actual
costs are more or less than the agreed upon amount.
The
Company has two types of fixed price contracts, firm fixed price and cost-sharing. Under firm fixed price contracts, the Company receives
an agreed-upon amount for providing products and services specified in the contract, a profit or loss is recognized depending on whether
actual costs are more or less than the agreed upon amount. Under cost-sharing contracts, the fixed amount agreed upon with the customer
is only intended to fund a portion of the costs on a specific project. Under cost sharing contracts, an amount corresponding to the revenue
is recorded in cost of revenues, resulting in gross profit on these contracts of zero. The Company’s share of the costs is recorded
as product development expense. The Company reports its disaggregation of revenue by contract type since this method best represents
the Company’s business. For the nine-month periods ended January 31, 2022 and 2021, all of the Company’s contracts were classified
as firm fixed price.
As
of January 31, 2022, the Company’s total remaining performance obligations, also referred to as backlog, totaled $0.8
million. The Company expects to recognize approximately 100% of the remaining performance obligations as revenue over the next
twelve months.
The
Company also enters into lease arrangements for its PB3 and WAM-V 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 or WAM-V 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 nine months ended January 31, 2022 and 2021 was immaterial.
The
following table provides information regarding the breakdown of our revenues by customer for the three and nine months ended January
31, 2022 and 2021.
| |
Three
months ended January 31, | | |
Nine
months ended January 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(in
thousands) | | |
(in
thousands) | |
Eni
S.p.A. | |
$ | — | | |
$ | 34 | | |
$ | 14 | | |
$ | 135 | |
Department
of Energy | |
| 102 | | |
| — | | |
| 182 | | |
| — | |
EGP | |
| — | | |
| 223 | | |
| 163 | | |
| 379 | |
ACET | |
| — | | |
| 33 | | |
| — | | |
| 37 | |
Valaris
(1) | |
| 7 | | |
| — | | |
| 142 | | |
| — | |
Brigham
Young University (2) | |
| 66 | | |
| — | | |
| 66 | | |
| — | |
Nippon
Kaiyo (2) | |
| 78 | | |
| — | | |
| 78 | | |
| — | |
Naval
Surface Warfare Center (2) | |
| 98 | | |
| — | | |
| 98 | | |
| — | |
Other
(no customer over 10%) | |
| 133 | | |
| 27 | | |
| 260 | | |
| 53 | |
| |
$ | 484 | | |
$ | 317 | | |
$ | 1,003 | | |
$ | 604 | |
|
|
(1) 3Dent
related consulting |
|
|
(2) MAR
related sales |
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 nine months ended January 31, 2022 and 2021.
| |
Nine
months ended January 31, | |
Customer
Location | |
2022 | | |
2021 | |
| |
| | |
| |
Europe | |
| 1 | % | |
| 27 | % |
South
America | |
| 16 | % | |
| 63 | % |
North
America | |
| 83 | % | |
| 10 | % |
| |
| 100 | % | |
| 100 | % |
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®
and our other products supplied by third-party suppliers. Cost of revenues also includes PowerBuoy® and other product 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 and other products, 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 U.S. dollars and our functional currency is the U.S. dollar, our main
foreign exchange exposure, if any, results from changes in the exchange rate between the U.S. dollar and the British pound sterling,
the Euro and the Australian dollar.
We
maintain cash accounts that are denominated in British pounds sterling, Euros and Australian dollars. These foreign-denominated accounts
had a balance of $30,000 as of January 31, 2022 and January 31, 2021, compared to our total cash, cash equivalents and restricted cash
balances of $64.1 million as of January 31, 2022 and $80.4 million as of January 31, 2021. These foreign currency balances are translated
each month into our functional currency, and any resulting gain or loss is recognized in our results of operations.
In
addition, during the nine months ended January 31, 2022, a portion of our operations was 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 and cash equivalents denominated in
foreign currencies sufficient to satisfy these anticipated requirements. We also assess the need and cost to utilize financial instruments
to hedge currency exposures on an ongoing basis and may hedge against exchange rate exposure in the future.
Results
of Operations
This
section should be read in conjunction with the discussion below under “Liquidity and Capital Resources.”
Three
months ended January 31, 2022 compared to the three months ended January 31, 2021
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 January 31, 2022 and 2021.
| |
Three
months ended January 31, | |
| |
2022 | | |
2021 | |
| |
| |
Revenues | |
$ | 484 | | |
$ | 317 | |
Cost
of revenues | |
| 597 | | |
| 698 | |
Gross
loss | |
| (113 | ) | |
| (381 | ) |
Operating
expenses: | |
| | | |
| | |
Engineering
and product development costs | |
| 2,465 | | |
| 1,019 | |
Selling,
general and administrative costs | |
| 2,974 | | |
| 1,763 | |
Total
operating expenses | |
| 5,439 | | |
| 2,782 | |
Operating
loss | |
| (5,552 | ) | |
| (3,163 | ) |
| |
| | | |
| | |
Interest
income, net | |
| 16 | | |
| 25 | |
Other
income (expense), net | |
| 60 | | |
| (16 | ) |
Foreign
exchange gain/(loss) | |
| 5 | | |
| 3 | |
Loss
before income taxes | |
| (5,471 | ) | |
| (3,151 | ) |
Income
tax benefit | |
| — | | |
| — | |
Net
loss | |
$ | (5,471 | ) | |
$ | (3,151 | ) |
Revenues
Revenues
for the three months ended January 31, 2022 and 2021 were $0.5 million and $0.3 million, respectively. The year-over-year increase was
primarily due to higher levels of revenue derived from our EGP contract, new revenues related to MAR and new consulting services work
from 3Dent projects as compared to the same period in the prior year.
Cost
of revenues
Cost
of revenues for the three months ended January 31, 2022 and 2021 were $0.6 million and $0.7 million, respectively. The decrease from
2020 was mostly due to the acquisitions of both MAR and 3Dent, as they have a lower cost ratio related to their revenue.
Engineering
and product development costs
Engineering
and product development costs for the three months ended January 31, 2022 and 2021 were $2.5 million and $1.0 million, respectively.
The year over year increase is the result of higher spending on new product development related
to increases in materials, labor, overhead and costs associated with Greensea and Fathom5.
Selling,
general and administrative costs
Selling,
general and administrative costs for the three months ended January 31, 2022 and 2021 were $3.0 million and $1.8 million, respectively.
The increase of $1.2 million for the three months ended January 31, 2022 was primarily due to higher professional fees of $0.7 million,
and employee related costs of $0.3 million.
Nine
months ended January 31, 2022 compared to the nine months ended January 31, 2021
The
following table contains selected statement of operations information, which serves as the basis of the discussion of our results of
operations for the nine months ended January 31, 2022 and 2021.
| |
Nine
months ended January 31, | |
| |
2022 | | |
2021 | |
| |
| |
Revenues | |
$ | 1,003 | | |
$ | 604 | |
Cost
of revenues | |
| 1,320 | | |
| 1,248 | |
Gross
loss | |
| (317 | ) | |
| (644 | ) |
Operating
expenses: | |
| | | |
| | |
Engineering
and product development costs | |
| 7,518 | | |
| 3,334 | |
Selling,
general and administrative costs | |
| 7,933 | | |
| 5,591 | |
Total
operating expenses | |
| 15,451 | | |
| 8,925 | |
Operating
loss | |
| (15,768 | ) | |
| (9,569 | ) |
| |
| | | |
| | |
Interest
income, net | |
| 56 | | |
| 45 | |
Other
expense, net | |
| 60 | | |
| (49 | ) |
Gain
on forgiveness of PPP loan | |
| 890 | | |
| — | |
Foreign
exchange gain | |
| — | | |
| 13 | |
Loss
before income taxes | |
| (14,762 | ) | |
| (9,560 | ) |
Income
tax benefit | |
| 1,041 | | |
| — | |
Net
loss | |
$ | (13,721 | ) | |
$ | (9,560 | ) |
Revenues
Revenues
for the nine months ended January 31, 2022 and 2021 were $1.0 million and $0.6 million, respectively. The year-over-year increase was
primarily due to higher levels of revenue derived from our EGP contract, new work from MAR, and new work with 3Dent consulting services
projects as compared to the same period in the prior year.
Cost
of revenues
Cost
of revenues for the nine months ended January 31, 2022 and 2021 were $1.3 million and $1.2 million, respectively. The increase over 2020
was mostly due to new costs related to MAR sales and higher deployment and material costs incurred on the EGP contract for the nine months
ended January 31, 2022 as compared to the nine months ended January 31, 2021.
Engineering
and product development costs
Engineering
and product development costs for the nine months ended January 31, 2022 and 2021 were $7.5 million
and $3.3 million, respectively. The increase of approximately $4.2 million was the result of higher spending on new product development
costs related to increases in materials, labor, overhead and costs associated with subcontractors Greensea and Fathom5.
Selling,
general and administrative costs
Selling,
general and administrative costs for the nine months ended January 31, 2022 and 2021 were $7.9 million and $5.6 million, respectively.
The increase of $2.3 million for the nine months ended
January 31, 2022 was primarily due to higher professional fees related to consultants, contractors, legal and accounting of $1.2 million,
employee related costs of $0.6 million and stock compensation expense related to 3Dent of $0.5 million.
Forgiveness
of Debt
The
Company filed its loan forgiveness application at the end of February 2021 asking for 100% forgiveness of the loan. In June 2021, the
Company was informed that its application was approved, the loan is now fully forgiven, and the Company recognized a gain on extinguishment
of PPP loan of $0.9 million.
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 $13.7
million and $9.6 million for the nine months ended January 31, 2022 and 2021, respectively. Refer to “Liquidity Outlook”
below for additional information.
Net
cash used in operating activities
During
the nine months ended January 31, 2022, net cash flows used in operating activities was $15.3 million, an increase of $6.8
million compared to net cash used in operating activities during the nine months ended January 31, 2021. This increase is primarily
due to higher project and employee related costs and the payment on the settlement of litigation, discussed in Note 15 to the Consolidated
Financial Statements under Part I, Item 1 of this report, of approximately $1.2 million.
Net
cash used in investing activities
Net
cash used in investing activities during the nine months ended January 31, 2022 was $3.9 million, compared to zero cash used for investing
activities during the nine months ended January 31, 2021. The net cash used in investing activities was due to spending on the purchase
of property, plant and equipment of $0.3 million and the net acquisition costs of MAR of $3.6 million.
Net
cash used in/provided by financing activities
Net
cash used in financing activities during the nine months ended January 31, 2022 was $0.1 compared to net cash provided by financing activities
during the nine months ended January 31, 2021 of $78.0 million. The decrease in net cash provided by financing activities reflects the
combination of no capital raises during the first half of fiscal 2022 in addition to proceeds related to the PPP loan and capital raises
related to Aspire and AGP in the prior year.
Effect
of exchange rates on cash and cash equivalents
The
effect of exchange rates on cash and cash equivalents was a decrease of approximately $14,000 during the nine months ended January
31, 2022. 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
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 April 30, 2021 and 2020, our aggregate revenues were $2.9 million, our aggregate net losses
were $25.1 million and our aggregate net cash used in operating activities was $22.3 million.
Our
business is capital intensive, and up through January 31, 2022, we have been funding our business principally through sales of our securities.
As of January 31, 2022, cash and cash equivalents were $63.8 million and we expect to fund our business with this amount and, to a limited
extent, with our revenues until, we generate sufficient cash flow to internally fund our business. Management believes the Company’s
current cash and cash equivalents is sufficient to fund its planned expenditures through at least March 2023. In addition to the acquisition
of 3Dent in the prior year and MAR in November 2021, the Company is looking at further organic and inorganic growth opportunities to
advance our data and power services and solutions.
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 develop, market and 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 several factors,
including market conditions, and our operating performance; |
| ● | the
continued impact of the COVID-19 pandemic and its variants on our business, operations, customers,
suppliers and manufacturers and personnel; |
| ● | our
acquisitions and our ability to integrate them into our operations may use significant resources,
be unsuccessful or expose us to unforeseen liabilities; |
|
● |
our
ability to meet product development, manufacturing and customer delivery deadlines that may be impacted by disruptions to our supply
chain, primarily related to labor shortages and manufacturing and transportation delays both here in the U.S. and abroad; |
| ● | our
estimates regarding future expenses, revenues, and capital requirements; |
| ● | the
adequacy of our cash balances and our need for additional financings; |
| ● | our
ability to identify and penetrate markets for our products, services, and solutions; |
| ● | 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, products and solutions; |
| ● | our
ability to improve the power output and survivability 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, or restrict the use of our products; |
| | |
| ● | our
ability to attract and retain key personnel, including senior management, to achieve our
business objectives;
|
| ● | our
history of operating losses, which we expect to continue for at least the short term and
possibly longer; 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.