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Summary of Significant Accounting Policies

6 Months Ended

Oct. 31, 2022

Summary of Significant Accounting Policies

(2) Summary of Significant Accounting Policies

(a) Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, Ocean Power Technologies Ltd. in the United Kingdom, and Ocean Power Technologies (Australasia) Pty Ltd. in Australia (“OPT-A”). OPT-A is in the process of being liquidated due to inactivity. All documents have been filed with the Australian Tax Organization and the Company expects this to be completed in the current fiscal year. All significant intercompany accounts 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, stock-based compensation, 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 hours and costs to complete customer contracts for purposes of revenue recognition. Actual results could differ from those estimates.

(c) Cash, Cash Equivalents, Restricted Cash and Security Agreements and Marketable Securities

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 or in short term held-to-maturity marketable securities. The Company had cash and cash equivalents $10.0 million as of October 31, 2022 and $7.9 million as of April 30, 2022.

Restricted Cash and Security Agreements

The Company has a letter of credit agreement with Santander Bank, N.A. (“Santander”). Cash of $154,000 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 cancelable at the discretion of the bank.

Santander also issued a letter of credit to subsidiaries of Enel Green Power (“EGP”) pursuant to the Company’s contracts with EGP. This letter of credit was originally issued in the amount of $645,000 and was reduced to $323,000 in August 2020. The letter of credit will be reduced by an additional $258,000 once the PowerBuoy® (“PB3”) and its accompanying systems pass final acceptance testing which the Company expects to take place during the third quarter of fiscal year 2023. The remaining restricted amount of $65,000 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.

	October 31, 2022		April 30, 2022
	(in thousands)
Cash and cash equivalents	$	10,030	$	7,885
Restricted cash- short term		258		258
Restricted cash- long term		219		219
	$	10,507	$	8,362

Marketable Securities

During fiscal 2022, the Company acquired investment securities through Charles Schwab Bank. As of October 31, 2022 and April 30, 2022, their value was approximately $35.9 million and $49.4 million, respectively. All marketable securities consist of corporate bonds, government agency bonds, or U.S. Treasury Notes and Bonds, are investment grade rated or better, and mature within 12 months. The Company has the ability and the intention to hold all investments to maturity, and as such are classified as held-to-maturity investments and carried at amortized cost. The total recognized interest expense on the premium we paid for the securities as of October 31, 2022 and 2021 is approximately $0.2 million and zero, respectively, on an amortized cost basis of approximately $0.3 million and zero, respectively. Additionally, there has been no impairment on these investments.

The following table summarizes the Company’s marketable securities as of October 31, 2022:

Category	Amortized Cost		Unrealized Gains (Losses)			Market Value
Corporate Bonds	$	27,364	$	(23	)	$	27,341
Government Bonds & Notes		5,008	$	—			5,008
Government Agency		3,496	$	(5	)		3,491
Total Marketable Securities	$	35,868	$	(28	)	$	35,840

(d) Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist principally of trade accounts receivable, marketable securities and cash. The Company believes that its credit risk is limited because the Company’s current contracts are with companies with a reliable payment history. The Company invests its excess cash in a money market fund and short term held-to maturity investments and does not believe that it is exposed to any significant risks related to its cash accounts, money market fund, or held-to maturity investments. Cash is also maintained at foreign financial institutions. Cash in foreign financial institutions as of October 31, 2022 was approximately $5,000.

For the six months ended October 31, 2022 and 2021, the Company had four and three customers whose revenues accounted for at least 10% of the Company’s consolidated revenues, respectively. These revenues accounted for approximately 69% and 73% of the Company’s total revenues for the respective periods. For the three months ended October 31, 2022 and 2021, the Company had five and four customers whose revenues accounted for at least 10% of the Company’s consolidated revenues, respectively. These revenues accounted for approximately 80% and 76% of the Company’s total revenues for the respective periods.

(e) Share-Based Compensation

Costs resulting from all share-based payment transactions are recognized in the consolidated financial statements at their fair values. The aggregate share-based compensation expense recorded in the Consolidated Statements of Operations for the six months ended October 31, 2022 and 2021 was approximately $0.6 million and $0.5 million, respectively. For the three months ended October 31, 2022 and 2021, share-based compensation expense was $0.3 million and $0.2 million, respectively.

(f) Revenue Recognition

The Company accounts for revenues in accordance with Accounting Standards Codification 606 (ASC 606) which states that 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 is estimated based upon 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, 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 October 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 in costs of goods sold and regular shipping and handling activities charged to operating expenses.

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 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 labor hours 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, 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, fixed-price contracts, time and material agreements, lease or service agreements. Under cost plus contracts, customers are billed for actual expenses incurred plus an agreed-upon fee.

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 revenues by contract type since this method best represents the Company’s business. For the six-month periods ended October 31, 2022 and 2021, all of the Company’s contracts were classified as firm fixed-price.

The Company at times enters into agreements with government agencies through SBIR contract agreements. These are typically fixed-priced agreements where the Company retains ownership of the data and grants the government a license with unlimited rights to use, disclose, reproduce, prepare derivative works and publicly distribute the data.

Time and materials agreements are billed based solely on the cost of time spent working on the contract and the material used.

As of October 31, 2022, the Company’s total remaining performance obligations, also referred to as backlog, totaled $2.4 million. The Company expects to recognize approximately 77%, or $1.8 million, for the remaining performance obligations as revenue over the next twelve months.

The Company also enters into lease arrangements for its PowerBuoys and 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 PowerBuoy and components, while non-lease elements, which the Company expects to become more prevalent, generally include engineering, monitoring and support services. In the lease arrangement, the customer may be provided an option to extend the lease term or purchase the leased PB3 or WAM-V® 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 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 Statement of Operations. Lease revenues were de minimus for the three and six months ended October 31, 2022 and 2021.

(g) Other Income – Employee Retention Credit

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act provides an employee retention credit (“CARES ERC”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee through December 31, 2020. Additional relief provisions were passed by the United States government, which extend and slightly expand the qualified wage caps on these credits through December 31, 2021. Based on these additional provisions, the tax credit is now equal to 70% of qualified wages paid to employees during a quarter, and the limit on qualified wages per employee has been increased to $10,000 of qualified wages per quarter. The Company qualifies for the tax credit under the CARES Act.

During the three-month period ended October 31, 2022, the Company claimed CARES ERC’s of approximately $612,000 and $590,000 for the fiscal years ended April 30, 2021 and 2022, respectively, and recognized approximately $1,202,000 as other income in the statement of operations for the three and six-month periods ended October 31, 2022. Claimed CARES ERC’s are expected to be settled during the year ended April 30, 2023 and have been recorded within other current assets in the accompanying balance sheet as of October 31, 2022.

In November 2022 the company received approximately $200,000 from the IRS related to the receivable.

(h) Net Loss per Common Share

Basic and diluted net loss per 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 period. The pre-funded warrants (Note 11) were determined to be common stock equivalents and were included in the weighted average number of shares outstanding for calculation of the basic earnings per share number before being exercised.

Due to the Company’s net losses, potentially dilutive securities, consisting of options to purchase shares of common stock, potential exercises of warrants on common stock and unvested restricted stock issued to employees and non-employee directors, were excluded from the diluted loss per share calculation due to their anti-dilutive effect.

In computing diluted net loss per share on the Consolidated Statement of Operations, potential exercises of warrants on common stock, options to purchase shares of common stock and non-vested restricted stock issued to employees and non-employee directors, totaling 6,242,465 and 4,928,474 for the six months ended October 31, 2022 and 2021, respectively, were excluded from each of the computations as the effect would be anti-dilutive.

(i) 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 the adoption of ASU 2016-13 will have on its consolidated financial statements.