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, 2022 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 2023 refers to the year ended April 30, 2023).
Our solutions focus on three major service areas, Data as a Service ("DaaS"), which includes data collected by our Wave Adaptive Modular Vessel (WAM-V®) autonomous vehicles or our PowerBuoy® Product lines; Power as a Service ("PaaS"), which includes our PowerBuoy® and Subsea battery products; and our Strategic Consulting Services.
We provide ocean data collection and reporting, marine power, offshore communications, and Maritime Domain Awareness ("MDA") products and consulting services. We offer our products and services to a wide-range of customers, including those in government and offshore energy, oil and gas, construction, wind power and other industries. We are involved in the entire life cycle of product development, from product design through manufacturing, testing, deployment, maintenance and upgrades, while working closely with partners across our supply chain. We also work closely with our third party partners that provide us with, among other things, software, controls, sensors, integration services, and marine installation services. Our solutions enable technologies for data collection, analysis, and communication in ocean and other offshore environments, and generate actionable intelligence via a variety of inputs. We then channel the information we collect, and other communications, through control equipment linked to edge computing and cloud hosting environments.
Our mission is to provide intelligent maritime solutions and services that enable more secure and more productive utilization of our oceans and waterways, provide clean energy power services, and offer sophisticated surface and subsea maritime 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, and our solutions and services.
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.
The COVID-19 pandemic presented substantial health and economic risks, uncertainties and challenges to our business, the global economy and financial markets. 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 not only consuming internal inventory but also by expanding our supply base. While our supply chain is primarily domestically oriented with the majority of our products domestically sourced, we obtain some components from Asia and Europe. We use a combination of off-the-shelf components and equipment 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 and raw materials. 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 without compromising our product standards or integrity, 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.
As of July 31, 2022, some COVID-related problems are starting to ease. However, ongoing labor pool shortages are continuing and are impacting some of our delivery deadlines. Like others in the industry, we continue to have concerns over component shortages, particularly for semiconductors, lithium-ion batteries and specialty metals, however, this has not prevented us from manufacturing our products. 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.
Our DaaS solution is at the forefront of our strategic plan to be a leader in offshore data collection, integration, analytics and real time communication for a variety of important applications. For example, our solutions can track surface movement for maritime border enforcement, illegal fishing interdiction, provide security for offshore wind farms and oil and gas fields, or provide harbor or port security as well as logistics support. We have the ability to support aquaculture and gather information on ocean currents, water quality, wind and other weather metrics, and map shorelines or subsurface areas. Additionally, we offer 24/7 monitoring solutions that can provide meaningful real time information, and long term data collection and analytics for sophisticated applications across many industries and scientific applications.
As part of our DaaS offering, 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"). As of July 31, 2022, the Company continues to work with the Naval Postgraduate School and SLAMR to explore how 5G technologies can be used to connect ships, all-domain autonomous systems, and sensors in the domain where the U.S. Navy and U.S. Marine Corps operate.
Maritime Domain Awareness Solution ("MDAS")
The International Maritime Organization defines Maritime Domain Awareness ("MDA") as the effective understanding of any activity that could impact the security, safety, economy, or environment related to and within our oceans and seas. Since 2002, the United States of America has had an active strategy to secure the maritime domain, primarily through the U.S. Navy. 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 our solution to provide detailed, localized maritime domain awareness that can be utilized for a wide range of applications across market segments. Our MDAS base hardware consists of a high-definition radar, a stabilized high-definition optical and thermal imaging camera, and a vessel automatic identification system ("AIS") detection module. This hardware can be customized or supplemented by other solutions, depending on our customer's requirements. These devices can be mounted on our products, such as our PB3 PowerBuoy® or WAM-V®, and then utilizing integrated command and control software, data is sent to us and to our customers via secure communications channels. Multiple sensors can be used on a single unit based on the comprehensiveness of customer needs. Capabilities of our MDAS include 24/7 vessel tracking, automatic radar plotting, and high-definition optical and thermal video surveillance capable of providing actionable intelligence day or night, in real time.
Our MDAS processes data onboard our buoys using edge computing and transmits the results to our cloud-based analytics platform via secure Wi-Fi, and cellular. We anticipate integrating MDAS into our WAM-Vs® and utilizing satellite communication to expand the availability of our data service. Surveillance data can be integrated with third party 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. This network can be coordinated with the use of our WAM-Vs® so that customers can have mobile sensor networks linked to our self-powered buoy data and communication hubs. 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 a complete, integrated MDAS is still underway; however, we achieved a key milestone in October 2021, with the initiation of our offshore demonstration of the new system utilizing our hardware and TimeZero software off the coast of New Jersey. To date we have collected more than 3,000 radar and AIS tracks from this demonstration, which is being used to refine the design of our MDAS. Initial field demonstration of our MDAS software began in May 2022 and is ongoing.
On November 15, 2021, the Company acquired all of the outstanding equity interest of Marine Advanced Robotics, Inc. ("MAR"). Founded in 2004, MAR is the developer of the patented Wave Adaptive Modular Vessel (WAM-V®) technology, which enables roaming capabilities for unmanned maritime systems in waters around the world. MAR launched the first WAM-V® in 2007 as a new vessel class to deliver to customers reliable autonomous surface vehicles that could provide robust, real-time data collection and reporting. MAR also provides RaaS (Robotics as a Service) allowing customers to lease WAM-V® robotics and access information from our WAM-Vs® while we maintain ownership and maintenance and repair responsibilities. Today, WAM-Vs® operate in 11 countries for commercial, military and scientific uses. Our WAM-Vs® exist in three primary sizes, 8, 16, and 22 feet, however, many of the design components are common across the sizes, allowing for integration of different payloads and adaption of the payload platforms for larger equipment. All sizes can be adapted to suit different propulsion methods.
This acquisition immediately provided the Company with an established product line that highly complements the Company's business strategy and can be used inshore, nearshore, and offshore. Since the acquisition, the business of 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 leverage MAR technology with the Company, 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.
PaaS solutions deliver value to customers by utilizing our managed power platforms. We continue to develop and commercialize our proprietary power platforms that generate electricity primarily by harnessing the renewable energy of ocean waves for our PB3 PowerBuoy® ("PB3"), solar power for our hybrid PowerBuoy® (the "hybrid PB") and have the option of adding small wind turbines to supplement power generation. We also continue to commercialize our subsea battery for subsea power applications and as additional storage when combined with our buoy platforms. Our focus for these solutions is on bringing autonomous clean power to our customers wherever it is required. Moreover, offshore data and communications networks require power to function, and our solution solves for this need without requiring ongoing battery replacement or older technologies such as shore to station power cables. Lessons learned from the deployments of both our PB3 and hybrid PB are being used to develop the next generation of PowerBuoy® systems that is based on modularity for Wave Energy Converter ("WEC") and non-WEC applications. The PB3 and hybrid PB will continue to be available and supported.
The PB3 uses proprietary technologies that convert the hydrokinetic energy of ocean waves into electricity. 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 nameplate capacity rating of up to 3 kilowatts ("kW") of peak power during recharging of the onboard batteries. Power generation is deployment-site dependent, as wave activity impacts power generation. Our energy storage system ("ESS") has a 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 offshore locations. The hull consists of a main spar structure compliantly 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 the 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 protect the PB3 from being damaged by storms.
Our PB3 can be equipped with MDAS, which can, among other functions, monitor vessel traffic across a specific offshore area of interest, with the ability to utilize 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, tsunami activity, and water quality.
The hybrid PB is an alternative platform to the PB3 capable of utilizing solar and wind power. The hybrid PB is capable of providing reliable power in remote offshore locations, regardless of ocean wave conditions. We believe this product addresses a broader spectrum of customer deployment needs, including low-wave and nearshore environments, with the potential for greater product integration within each customer project. The hybrid PB is intended to provide a stable energy platform for our MDAS solution, and for agile deployment of subsea power applications, such as a surface communications hub for electric remotely operated vehicles ("eROV") and autonomous underwater vehicles ("AUV") used for underwater inspections and short-term maintenance, and 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 lithium ion batteries which can power subsea and topside payloads. The control system uses sensors and an onboard computer to continuously monitor the hybrid PB subsystems. The hybrid PB is designed to be able to operate over a broad range of temperature and ocean wave conditions. It has a 30kW-hour battery system and carries up to 1.2MW-hour energy when combined with the current onboard propane storage system. We are also developing another hybrid system with increased solar capacity and increased battery storage with the option of adding incremental wind turbine power generation, replacing the propane system.
Our subsea battery is complementary to both the PB3 and hybrid PB products and can be deployed together with our PowerBuoys® or as a standalone unit. 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 phosphate subsea batteries supply power that can enable subsea equipment, sensors, communications and AUV and eROV recharge. Our PB3 and hybrid PB 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 provides both long 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 available energy storage and is designed to operate in a water depth of up to 500 meters. It comes installed on a ready deployable subsea skid suitable for installation on the seabed. The subsea battery can be integrated into other subsea equipment on land prior to deployment.
The 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 in support of our broader PaaS and/or DaaS solutions, utilizing our products or on an independent basis for third party clients. In the near term, we will focus on increasing our market share in the offshore wind market, the broader floating foundation design market, as well as with our offshore energy customers.
We intend to continue to grow our service sectors and strengthen our solutions through internal developments, partnerships, and potential acquisitions. Our Strategic Consulting Services were materially expanded with the acquisition of 3dent Technology, LLC ("3Dent"), in February 2021. Our team of dedicated consultants/designers has expertise in structural engineering, hydrodynamics and naval architecture. Consulting services include simulation engineering, developing purpose specific software, concept design and motion analysis. We also offer a full range of high-level offshore engineering to offshore wind developers, offshore construction companies, drilling contractors, major oil companies, service companies, shipyards, and engineering firms. For example, we advise offshore drill rig owners, including owners of floaters, jackups, and lift boats. The Company has seen an increase in consulting services activity for conventional offshore energy and for offshore wind projects over the last year and continuing into the first quarter of fiscal year 2023.
Our strategy includes developing integrated solutions and services, including autonomous and 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, data collection, and communications, either by supplying electric power to payloads that are integrated directly with our products or located in its vicinity, such as on the surface, the seabed, or 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 2019 DOE Report: Exploring Opportunities for Marine Renewable Energy in Maritime Markets Report (the "Powering the Blue Economy Report"), and the Westwood Global Energy World ROV Operations Forecast 2019-2023, we believe there is an increasing need for our products and services in maritime domain awareness applications and numerous other markets.
Potential customers include, but are not limited to, defense and security, offshore oil and gas, science and research, and offshore wind markets, as well as government applications in border security, vessel tracking, fishery protection, aquaculture, and monitoring of marine protected areas. For example, autonomously monitoring and surveying offshore wind farm lease areas would enable developers to collect data needed to support environmental impact studies with low carbon emissions. This could be done with buoys and vehicles.
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. For the three months ended July 31, 2022 and 2021, the Company had three and two customers, respectively whose revenues accounted for at least 10% of the Company's consolidated revenues. These revenue accounted for approximately 69% and 88% of the Company's total revenue for the respective periods.
In order to achieve success in ongoing efforts to commercialize 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.
? Our November 2021 MAR acquisition has led to contracts to build WAM-Vs® for
Brigham Young University, Nippon Kaiyo, Australian Defense, S.T. Hudson, and
Applied Research Lab at University of Hawaii, and has resulted in leased
WAM-Vs® to Sulmara and other commercial customers and universities.
? In June 2021, the Company was notified of a pre-award for a DOE Phase I Small
Business Innovation Research program ("SBIR") to support the development of the
next generation of our wave energy conversion systems. We then initiated a
subsequent 9-month follow-on project which began in July of fiscal 2022. We
completed Phase I in April of fiscal year 2022 and were notified of a pre-award
for Phase II which is expected to begin in September or October 2022.
? For the three months ended July 31, 2022, our Strategic Consulting Services
continued to generate revenues from both existing and new customers of
approximately $365,000. Notably, we advanced several large projects in the
pipeline with larger oil and gas operators and offshore wind developers.
? In September 2019, we entered into two contracts with subsidiaries of Enel
Green Power Chile, LTDA ("EGP"), which included the sale of a PB3 and the
development and supply of a turn-key integrated Open Sea Lab ("OSL") which was
the Company's first deployment off the coast of Chile. Due to the COVID-19
pandemic and other factors, force majeure was declared in April 2020 and
delayed the deployment. In April 2021, the Company resumed the deployment
process and placed the PB3 in the water. During fiscal 2022, deployment of the
PB3 was completed. Ongoing installation and commissioning activities of the OSL
subsea equipment continue into fiscal 2023.
? 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 autonomous exclusion zone monitoring
service during well decommissioning. 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 to provide subsea power
and communication for well monitoring for the next phase of Harbour Energy's
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 various platforms and integrate them with surface and subsea payloads. The Company has previously entered into business relationships 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 business relationships 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 designed and is building a customized data platform that supports the Company's MDAS with sensor data feed management, secure communications management, a cloud-based infrastructure, and web-based user interface. The platform was designed with a flexible architecture that allows the Company to integrate new sensor technologies and third-party analytics capabilities and share MDAS data with customers and partners.
We also maintain active dialogue with several offshore deployment and marine operations partners in the North Sea and North America to support our projects.
During fiscal 2022, we advanced our marketing programs, products, and solutions. We have made progress in transitioning from an R&D focused organization to more robust commercialization efforts and we are moving further into the ocean DaaS market. We intend to build on these efforts by introducing additional processes and making investments in appropriate human capital to target potential customers more effectively from demand generation to close of contract. In addition we are focusing on customer care and service efforts to increase repeat business opportunities. This strategy was further enhanced by our acquisition of MAR in November 2021.
The majority of the Company's potential customers are in areas of defense and security, hydrographic survey, and maritime domain awareness, including mitigation of IUU fishing. These are largely for customers in the United States, where the end use may be both domestic or abroad. Further, the Company's acquisition of MAR provides an unmanned surface vehicle platform for use in oil & gas, renewable energy, hydrographic survey, and security and defense markets largely in North America and Europe.
Historically, demonstration projects have been a requisite step towards broad solution deployment and revenues associated with specific applications such as our New Jersey MDAS test array as part of our DaaS solution and to highlight these capabilities. Customers may want their own dedicated demonstration depending on customer needs. 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 its capabilities. Such demonstrations are often a required step prior to leasing and may include negotiation of standard terms and conditions. Many proposals contain provisions which would provide the option to purchase or lease of our PowerBuoy® or WAM-V® product upon successful conclusion of the demonstration project. The Company has successfully demonstrated the capabilities of many of its solutions on its own or in customers sponsored evaluation projects and remains focused on further demonstrations to build customer awareness and confidence and to drive sales.
The Company is pursuing a long-term growth strategy to expand its market value proposition while growing the Company's revenue base. This strategy includes partnerships with leading companies and organizations in adjacent and complementary markets. We continue to develop our PowerBuoy® and WAM-V® products for use in offshore power, data acquisition, and real-time data communications applications, and in order to achieve this goal, we are pursuing the following business objectives:
? Integrated turn-key solutions, purchases or leases. We believe our DaaS and
PaaS solutions, together with our platforms, are well suited to enable
unmanned, autonomous (non-grid connected) offshore applications, such as
topside and subsea surveillance and communications, subsea equipment
monitoring, early warning systems platform, 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/or lease our
products to these markets as part of these broader integrated solutions.
Additionally, we intend to provide services associated with our solution
offerings such as paid engineering studies, value-added engineering,
maintenance, remote monitoring and diagnostics, application engineering,
planning, training, project management, and marine and logistics support
required for our solution life cycle. We continue to increase our commercial
capabilities through new hires in sales, engineering, product development,
safety, and application support, and through engagement of expert market
consultants in various geographies. As our MDAS development continues, we
expect that this will also include data and cloud services.
? Expand customer system solution offerings through new complementary products
that enable shorter and more cost-efficient deployments. We are continuously
improving our technology solutions. The hybrid PB is highly complementary to
the PB3 by providing the Company with additional ways to address a broader
spectrum of customer deployment needs, including operating in low-wave
environments, with the potential for greater system integration within each
customer project. The hybrid PB is intended for deployments for which the PB3
is not optimal, including shorter term missions and low wave environments. In
addition, we have future plans to integrate PB3 and WAM-V® capabilities,
including the possibility of adding recharging capabilities to our PB3's, and
MDAS capabilities to our WAM-Vs®, thus extending our reach and providing both
fixed and mobile MDAS offerings to our customers.
The Company has also finished the development of a subsea battery system that is complementary 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 designed to be safe, high performance, cost-efficient, and quickly deployable.
Our WAM-Vs® are easily and economically shipped via land, air, or sea, and their modular design enables us to quickly reduce their size for storage or shipment. The optional folding features further reduces the footprint by as much as 75% and as a result, a 20' container can hold four 16 foot WAM-Vs®. To integrate our solutions and add roaming as an option or enhancement to our MDAS, we are advancing developments to further integrate MDAS into the WAM-V® platform and develop additional autonomy capabilities.
? 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 U.S. and foreign defense and security applications with
our MDAS offering; subsea power for oil and gas; and the hydrographic survey
market in the U.S., Europe, Canada and Australia with regard to our WAM-Vs®. We
believe that each of these areas has demand for our solutions, sizable end
market opportunities, and high levels of industrialization and economic
development. We have an office in Houston, Texas that enables us to further
support our customers and strengthen our dialogue with our solution partners.
During fiscal 2022, we added an office in Richmond, California through our
acquisition of MAR. During fiscal 2022, we also further streamlined our global
operation by selecting to work with partners in active offshore markets, such
as the North Sea. We are in active discussions with potential partners in North
and South America, the Caribbean, Southeast Asia and West Africa. We are also
participating in a global study for a major oil and gas operator to use our
PowerBuoys® to help reduce their carbon footprint, with applications in Gulf of
Mexico, the North Sea, and Asia-Pacific.
? Expand our relationships in key market areas through strategic partnerships and
collaborations. We believe that strategic partners are an important part of
expanding visibility to our 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. 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, including, for example, our
acquisition of 3Dent and MAR.
? Partner 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. We believe this
domestically 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 our WAM-V®
products, we are able to increase our ability to lease vehicles specifically to
support shoreline and offshore survey markets as well as security applications
while integrating MDA into these solutions.
During the first three months ending July 31, 2022, the Company incurred a net loss of approximately $5.9 million and used cash in operations of approximately $5.1 million. The Company has continued to make investments in ongoing product development efforts in anticipation of future growth, including its acquisition of MAR. 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, 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. Management believes the Company's cash balance at July 31, 2022 of $9.4 million and marketable securities balance of $42.7 million is sufficient to fund its planned operations through at least September 2023.
At the Market Offering Agreements: On November 20, 2020, the Company entered into an 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 July 31, 2021, 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 September 18, 2020, 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 $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 the outstanding common stock on the date of the agreement. Through July 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 July 31, 2022.
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.
As of July 31, 2022, the Company's backlog was $0.3 million. Our backlog includes 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 progress towards completion of our customer contracts over time, 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, 2022. There were no material changes to our critical accounting estimates or accounting policies during the three months ended July 31, 2022.
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 the adoption of ASU 2016-13 will have on its consolidated financial statements.
The following describes certain line items in our statement of operations and some of the factors that affect our operating results.
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 related to open contracts as of July 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 or labor hour incurred 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 exceeds revenues, 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 three-month periods ended July 31, 2022 and 2021, all of the Company's contracts were classified as firm fixed price.
As of July 31, 2022, the Company's total remaining performance obligations, also referred to as backlog, totaled $0.3 million. The Company expects to recognize approximately 100%, or $0.3 million, 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 three months ended July 31, 2022 and 2021 was immaterial.
For the three months ended July 31, 2022 and 2021, the Company had three and two customers, respectively whose revenues accounted for at least 10% of the Company's consolidated revenues. These revenue accounted for approximately 69% and 88% of the Company's total revenue for the respective periods.
We currently focus our sales and marketing efforts globally. The following table shows the percentage of our revenues by geographical location of our customers for the three months ended July 31, 2022 and 2021.
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 consists of interest received on cash, cash equivalents, and marketable securities and interest paid on certain obligations to third parties.
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 in addition to U.S. dollars. These foreign-denominated accounts had an aggregate balance of $24,000 as of July 31, 2022 and $0.3 million as of July 31, 2021, compared to our total cash, cash equivalents, marketable securities, and restricted cash balances of $52.4 million as of July 31, 2022 and $57.7 million as of April 30, 2022.
In addition, a portion of our operations is conducted through our subsidiaries in countries other than the U.S., 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. The Company is in the process of winding down its Australian subsidiary and expects it to be completed by the end of the second quarter of fiscal 2023. The unrealized gains or losses resulting from foreign currency balances translation are included in Accumulated Other Comprehensive Loss within Shareholders' Equity. Foreign currency translation gains and losses are recognized within our Consolidated Statement of Operations.
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.
This section should be read in conjunction with the discussion below under "Liquidity and Capital Resources."
Three months ended July 31, 2022 compared to the three months ended July 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 July 31, 2022 and 2021.
Revenues for the three months ended July 31, 2022 and 2021 were $0.7 million and $0.3 million, respectively. The year-over-year increase was primarily due to higher levels of revenue stemming from the acquisition of MAR which produced $0.3 million in revenue as of July 31, 2022.
Cost of revenues for the three months ended July 31, 2022 and 2021 were $0.5 million and $0.4 million, respectively. The increase of approximately $0.1 million over 2021 was mostly due to the acquisition of MAR and their related projects for the three months ended July 31, 2022 which were not part of the Company during the three months ended July 31, 2021.
Change in fair value of contingent consideration
The change in fair value of contingent consideration for the three months ended July 31, 2022 was $131,000 relating to an adjustment of the contingent consideration liability based on actual and forecasted revenues relating to the MAR acquisition.
Operating expenses for the three months ended July 31, 2022 and 2021 were $6.3 million and $4.9 million, respectively. The increase of approximately $1.4 million was the result of an increase in employee related cost of $0.8 million, an increase in product development and engineering cost of $0.2 million, and an increase in insurance cost of $0.1 million related to the acquisition of MAR. Additional increases of marketing and travel expense of $0.2 million related to increased travel activity now that the COVID-19 pandemic has waned, thus enabling more travel.
Interest income for three months ended July 31, 2022 and 2021 were $0.1 million and $20,000, respectively. The increase was directly related to the marketable securities acquired during the fourth quarter of fiscal 2022.
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 was fully forgiven, and the Company recognized a gain on extinguishment of PPP loan of $0.9 million.
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 $5.9 million and $3.1 million for the three months ended July 31, 2022 and 2021, respectively. Refer to "Liquidity Outlook" below for additional information.
Net cash used in operating activities
During the three months ended July 31, 2022, net cash flows used in operating activities was $5.1 million, a decrease of $195,000 compared to net cash used in operating activities during the three months ended July 31, 2021. This reflects an increase in net loss of $2.8 million, partially offset by a gain on extinguishment of the PPP loan of $0.9 million and the payment of litigation payable in the prior year of $1.2 million.
Net cash provided by (used in) investing activities
Net cash provided by investing activities during the three months ended July 31, 2022 was $6.4 million, compared to $7,000 cash used for investing activities during the three months ended July 31, 2021. The increase in net cash provided by investing activities was primarily due to the redemption of marketable securities during the three months ended July 31, 2022.
Net cash provided by financing activities
Net cash provided by financing activities during the three months ended July 31, 2022 and July 31, 2021 was zero.
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 three months ended July 31, 2021. 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.
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. As of July 31, 2022, our aggregate revenues were $0.7 million, our aggregate net losses were $5.9 million, our aggregate net cash used in operating activities was $5.1 million and our accumulated deficit was $259.6 million.
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
? 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
? the continued impact of COVID-19 and its variants on our business, operations,
customers, suppliers and manufacturers and personnel;
? our ability to meet product development, manufacturing and customer delivery
deadlines may be impacted by disruptions to our supply chain, primarily related
to labor shortages and manufacturing and transportation delays both here in the
? our acquisitions and our ability to integrate them into our operations may use
significant resources, be unsuccessful or expose us to unforeseen liabilities;
? 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
? our ability to implement our commercialization strategy as planned as markets
? our ability to establish relationships with our existing and future strategic
partners may not be successful;
? 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
? changes in current legislation, regulations and economic conditions that affect
the demand for, or restrict the use of our products;
? our ability to hire and retain key personnel, including senior management, to
? 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.
Our business is capital intensive, and through July 31, 2022, we have been funding our business principally through sales of our securities. As of July 31, 2022, our cash and cash equivalents, restricted cash, and marketable securities balance was $52.4 million and we expect to fund our business with this amount and, to a limited extent, with our revenues. Management believes the Company's current cash and cash equivalents, and marketable securities, are sufficient to fund its planned expenditures through at least September, 2023.
Since inception, we have not engaged in any off-balance sheet financing activities.
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