Annual Report
For The Year Ended April 30, 2008
Making Waves in Power
Visit by Spanish government officials to inspect assembly and testing of PowerBuoy in Santander, Spain
FINANCIAL HIGHLIGHTS
Key Financial Highlights
In millions of U.S. dollars for fiscal years ended April 30
seuneveR
sesnepxE gnitarepO latoT
ssoL teN
Cash, Cash Equivalents and Investments
stessA latoT
tbeD mreT-gnoL latoT
seitilibaiL latoT
ytiuqE ’sredlohkcotS
golkcaB redrO tcartnoC
FY 2007
5.2
FY 2008
4.8
% Change
89%
1.11
)6.9(
115.9
7.911
32.0
2.7
5.211
2.5
16.0
(14.7)
101.1
107.6
0.19
7.5
100.1
5.5
44%
52%
-13%
-10%
-18%
4%
-11%
6%
(cid:3)
Comparison of Cumulative Total Return
Among Ocean Power Technologies, Inc., the FTSE NASDAQ Small Cap Index and the Zacks Industry Group Index: Energy – Alternative Sources
(cid:3)
120.00
(cid:3)
(cid:3)
(cid:3)
4/25/2007
7/31/2007
10/31/2007
1/31/2008
4/30/2008
100.00
80.00
60.00
(cid:3)
40.00
20.00
(cid:3)
0.00
(cid:3)
(cid:3)
Total Revenues
Millions of U.S. dollars
Percentage Revenue
By geographical location of customers
4.8
9%
91%
2%
39%
41%
59%
59%
Australia
Europe
United States
2.5
1.7
2006
2007
2008
2006
2007
2008
Dear Shareholder,
We are pleased to share with you in this Annual Report the progress Ocean Power Technologies
has made in the year ended April 30, 2008. Presented within are the company’s consolidated financial
statements and additional detailed information about our business as reported in our Form 10-K as filed
with the U.S. Securities
and Exchange Commission.
Fiscal year 2008 was a notable year for OPT, and we are pleased to share a few of the highlights:
Revenues for the year were $4.8 million – an increase of 89% compared with $2.5 million in
fiscal 2007. This significant growth was driven by projects such as work on the first phase of
construction of a 1.39 MW wave power station off the coast of Spain, and work on the design,
manufacture and installation of an OPT wave power station consisting of a single 150 kW
PowerBuoy device in Orkney, Scotland. Further, our successful partnership with the U.S. Navy
continues to progress, as is evidenced by the revenues we received from our on-going work on
the Hawaii project and from the autonomous PowerBuoy system that will be used for data
gathering in the ocean.
We continued to see good signs of our traction in the marketplace as contract order backlog at
April 30, 2008 increased to $5.5 million as compared to $5.2 million
at April 30, 2007
.
Net loss for fiscal 2008 was $14.7 million, as compared to a net loss of $9.6 million in the prior
year. This increase takes into account the higher level of activity on revenue-bearing contracts,
and the recognition of an additional $2.4 million of anticipated loss at completion on the
contract for a wave power station off the coast of Spain. The net loss additionally reflects the
increase in product development costs attributable to our efforts to increase the power output
of the utility PowerBuoy system. We also saw an increase in selling, general and administrative
costs in fiscal year 2008 as we expanded our
first full fiscal year as a U.S. public company, our expenses related to this status also increased.
These increased investments in our PowerBuoy technology and business development activity,
as well as the added costs after becoming a public company in the U.S., were in line with the
planned use of proceeds from the U.S. initial public offering completed in April 2007.
sales and marketing capabilities. As this was our
The company finished the year with very strong liquidity, an enviable position for a company in
the alternative energy space. Cash, cash equivalents and long-term investments were $101.1
million at fiscal year end, as compared with $115.9 million at April 30, 2007. These balances
consist primarily of U.S. treasury bills, term deposits at highly rated commercial banks, and
money market funds with large commercial banks.
Our debt load remains low with long-term debt of only $0.2 million, a non-interest bearing loan
from the State of New Jersey which will come due in January 2012.
On the international front, we made a great deal of progress in conjunction with our partners:
In Western Australia, OPT and Griffin Energy agreed to explore the development of a
wave power station off the Australian coast. This joint development agreement paves
the way for the development of a wave power station capable of producing up to 10
MW, with potential expansion to 100 MW.
In fiscal 2008, fabrication of the enhanced 40 kW PowerBuoy under our contract with
Iberdrola in Spain was completed, and extensive on-land endurance testing was
conducted. In March 2008, OPT hosted a ministerial visit by leading Spanish
government officials to the Santander, Spain work site. The Ministers viewed the
power-take-off system undergoing its test program, following its assembly and shipment
from OPT’s New Jersey facility. In addition, they inspected the fully assembled
PowerBuoy steel structure, which was fabricated by a local supplier in Spain.
In connection with our project for the Scottish Government, we have moved forward
on the design and development of a 150 kW PowerBuoy for deployment at the Orkney
Islands European Marine Energy Center.
Elsewhere in the United Kingdom, OPT is in the process of planning and developing a
project for the South West of England Regional Development Agency (SWRDA) to
install a 5 MW demonstration wave power station off the coast of Cornwall, England.
OPT was selected to partner with SWRDA as part of the “Wave Hub” project.
We also made significant advancements on our U.S. projects during fiscal year 2008:
OPT’s PowerBuoy that was installed off the coast of New Jersey has completed two
years of in-ocean deployment to date. During its in-ocean operation off Tuckerton, this
system has withstood hurricane storm-driven waves, and the Company believes this to
be a record-breaking achievement for any offshore wave energy conversion system.
In Oregon, we signed a $0.5 million contract with PNGC Power for support of a wave
energy project in Reedsport. This project is for the deployment of a 150 kW
PowerBuoy, which is expected to be ready for deployment in 2009.
Our partnership with the U.S. Navy continues to expand. We received $1.9 million in
additional funding from the Navy related to an on-going contract to install PowerBuoy
systems in Hawaii, off the island of Oahu.
U.S.
Navy also awarded OPT a $1.7 million contract to provide
In June 2007, the
autonomous PowerBuoy technology for its Deep Water Acoustic Detection System
(DWADS) for ocean data gathering. Construction and fitting is now well underway on
an initial demonstration buoy, as well as assembly of the power take-off and control
systems with a target deployment date by the end of 2008. In an innovative decision,
OPT and the Navy decided to utilize in the DWADS project the same PowerBuoy that
was tested in Hawaii in June 2007. This re-usability highlights the flexibility and
modularity of the core PowerBuoy design.
OPT has made significant investments to scale up our technology over the last year, and during
the year, we received third-party certification of compliance with international standards for our
PowerBuoy grid connection system. This is a major milestone for OPT, as it qualifies our
technology for connection to utility grid systems. We also have achieved substantial progress
with the design of the 150 kW PowerBuoy. We are on target to complete the design of our
150 kW utility PowerBuoy system in 2008. The power conversion and controls system is
substantially complete for the 150 kW PowerBuoy system, and we expect to commence land
testing in 2008 and ocean testing of the complete 150 kW PowerBuoy in 2009.
The present schedule for development of the 150 kW PowerBuoy reflects management’s
decision to enhance the system design to allow for improved survivability in 100-year storm
wave conditions, and also to work with a third-party engineering group to attain independent
certification of the 150 kW PowerBuoy design. In early 2008, we conducted tests of a 150 kW
model in a wave tank facility used by the offshore oil and gas industry. The results of these
tests, plus additional tests undertaken mid-year, all provide enhanced information to OPT and
the engineering group to harden the design for the 100-year storm wave conditions. In addition,
we believe that direct transition to the 500 kW from the 150 kW prototype PowerBuoy system
will be accelerated by the measures now being undertaken in connection with the 150 kW
design.
We continued to enhance and strengthen our intellectual property assets with six new U.S.
patents issued during fiscal 2008. At year-end the company
with patent coverage in other parts of the world.
had a total of 37 U.S. patents issued,
The growth and progress of our company over the past fiscal year included the appointments of
Mark R. Draper to the position of Chief Operating Officer of Ocean Power Technologies, Inc.
and Herbert T. Nock as Vice President, Business Development and Marketing.
Subsequent to April 30, 2008, the Company announced that we have begun production of what we
believe to be the first utility-grade underwater substation, or pod, for wave power. The pod will serve
as the point at which energy generated by multiple PowerBuoys is aggregated prior to being transmitted
ashore.
Fiscal 2008 was a year of great progress for Ocean Power Technologies. As our focused international
expansion strategy began to bear fruit, we achieved a significant independent certification technology
milestone; revenue increased by 89% as a result of our project growth in Hawaii, Spain, Scotland and in
connection with the U.S. Navy’s deep ocean data gathering system; and we continued to focus on our
long-term energy projects with strategic customers. This year marked significant strides in the
development of our next generation 150 kW system and
key additions to our team.
we have enhanced our capabilities with
OPT continues to benefit from our strong cash position, ocean-tested technology, intellectual capital
and an experienced and knowledgeable management team. These advantages make us extremely well-
positioned to lead the commercial adoption of wave power as an economically viable renewable energy
source, with the potential of competing head-on with fossil fuel.
Seymour S. Preston III
Chairman
Dr. George W. Taylor
Chief Executive Officer
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2008
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
.
¥
n
Commission File Number 001-33417
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
22-2535818
(I.R.S. Employer
Identification No.)
1590 REED ROAD
PENNINGTON, NJ 08534
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (609) 730-0400
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Exchange on Which Registered
Common Stock, par value $0.001
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes n
No ¥
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes n
No ¥
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ¥
No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ¥
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer n Accelerated filer ¥
Smaller reporting company n
Non-accelerated filer n
(Do not check if a smaller reporting company)
Indicate by check mark whether
No ¥
Act). Yes n
the registrant
is a shell company (as defined in Rule 12b-2 of
the Exchange
The aggregate market value of the common stock of the registrant held by non-affiliates as of October 31, 2007, the last business day
of the registrant’s most recently completed second fiscal quarter, was $157.0 million based on the closing sale price of the of the
registrant’s common stock on that date as reported on the Nasdaq Global Market.
The number of shares outstanding of the registrant’s common stock, as of June 30, 2008 was 10,210,354.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of the Form 10-K into Which Incorporated
Proxy Statement for the registrant’s 2008 Annual Meeting of
Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
III
OCEAN POWER TECHNOLOGIES, INC.
INDEX TO REPORT ON FORM 10-K
PART I
Item 1:
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A: Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B: Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2:
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3:
Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4:
PART II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6:
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
Item 7A: Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8:
Item 9:
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . .
Item 9A: Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B: Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10: Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11: Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 12:
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13: Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14:
PART IV
Item 15: Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EX-23.1: CONSENT OF KPMG LLP
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION
Page
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58
PowerBuoy» is a registered trademark of Ocean Power Technologies, Inc. The Ocean Power Technologies
logo, CellBuoyTM, Talk on WaterTM and Making Waves in PowerSM are trademarks or service marks of Ocean Power
Technologies, Inc. All other trademarks appearing in this annual report are the property of their respective holders.
2
Special Note Regarding Forward-Looking Statements
We have made statements in this Annual Report on Form 10-K (the “Annual Report”) in, among other sections,
Item 1 — “Business,” Item 1A — “Risk Factors,” Item 3 — “Legal Proceedings,” and Item 7 — “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” that are forward-looking statements.
Forward-looking statements convey our current expectations or forecasts of future events. Forward-looking
statements include statements regarding our future financial position, business strategy, budgets, projected costs,
plans and objectives of management for future operations. The words “may,” “continue,” “estimate,” “intend,”
“plan,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions may identify forward-looking
statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.
Any or all of our forward-looking statements in this Annual Report may turn out to be inaccurate. We have
based these forward-looking statements on our current expectations and projections about future events and
financial trends that we believe may affect our financial condition, results of operations, business strategy and
financial needs. They may be affected by inaccurate assumptions we might make or unknown risks and uncer-
tainties, including the risks, uncertainties and assumptions described in Item 1A — “Risk Factors.” In light of these
risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not
occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-
looking statements.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this filing.
Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to
reflect new information or future events or otherwise.
3
PART I
ITEM 1. BUSINESS
Overview
We develop and are commercializing proprietary systems that generate electricity by harnessing the renewable
energy of ocean waves. The energy in ocean waves is predictable, and electricity from wave energy can be produced
on a consistent basis at numerous sites located near major population centers worldwide. Wave energy is an
emerging segment of the renewable energy market. Based on our proprietary technology, considerable ocean
experience, existing products and expanding commercial relationships, we believe we are the leading wave energy
company.
We currently offer two products as part of our line of PowerBuoy» systems: a utility PowerBuoy system and an
autonomous PowerBuoy system. Our PowerBuoy system is based on modular, ocean-going buoys, which we have
been ocean testing for over a decade. The rising and falling of the waves moves the buoy-like structure creating
mechanical energy that our proprietary technologies convert into electricity. We have tested and developed wave
power generation and control technology using proven equipment and processes in novel applications. Our two
products are designed for the following applications:
(cid:129) Our utility PowerBuoy system is capable of supplying electricity to a local or regional electric power grid.
Our wave power stations will be comprised of a single PowerBuoy system or an integrated array of
PowerBuoy systems, plus the remaining components required to deliver electricity to a power grid. We
intend to sell our utility PowerBuoy system to utilities and other electrical power producers seeking to add
electricity generated by wave energy to their existing electricity supply. In July 2007, our PowerBuoy
interface with the electrical utility power grid was certified as compliant with international standards. An
independent laboratory provided testing and evaluation services to certify that the OPT systems comply with
designated national and international standards. The PowerBuoy grid interface will bear the Electrical
Testing Laboratories (ETL) listing mark, and can be connected to the utility grid.
(cid:129) Our autonomous PowerBuoy system is designed to generate power for use independent of the power grid in
remote locations. There are a variety of potential applications for this system, including sonar and radar
surveillance, tsunami warning, oceanographic data collection, offshore platforms and offshore aquaculture.
From October 2005 to October 2006, we operated a demonstration PowerBuoy system with a maximum peak,
or rated, output of 40 kilowatts, or kW, off the coast of New Jersey under a contract with the New Jersey Board of
Public Utilities. This PowerBuoy system was removed from the ocean in October 2006 and underwent planned
maintenance and diagnostic testing of the system. This system was redeployed off the coast of New Jersey in
September 2007.
Our product development and engineering efforts are focused on increasing the maximum rated output of our
utility PowerBuoy system from the current 40kW, and, to a lesser extent, researching and developing new products,
product applications and complementary technologies. We believe that, by increasing the maximum related output
of our utility PowerBuoy system, we will be able to decrease the cost per kW of our PowerBuoy system and the cost
per kilowatt hour of the energy generated. We expect to complete the design for our 150kW PowerBuoy by the end
of 2008, and for our 500kW PowerBuoy by the end of 2010. We had previously planned to increase the maximum
rated output to 150kW in 2007 and then to 250kW prior to achieving our goal of 500kW; however, the present
schedule for development of the 150kW and 500kW PowerBuoys reflects management’s decision to enhance the
system design to allow for improved survivability in 100-year storm wave conditions, and to work with a third-party
engineering group to attain independent certification of the 150kW PowerBuoy design. In addition, we believe that
direct transition to the 500kW from the 150kW PowerBuoy system will be accelerated by the measures now being
undertaken in connection with the 150kW design. We have made substantial progress in the design, analysis and
commencement of fabrication of what we believe to be the first utility-grade underwater substation, or pod, for
wave power. The pod serves as the point at which energy generated by multiple PowerBuoys is aggregated and the
voltage is increased, prior to transmission ashore and being fed into the power grid. The required switching and
protection circuits for the individual PowerBuoys are also included in the pod. In addition, our 150kW PowerBuoy
4
design effort is well underway. The power conversion and controls system is substantially complete for the 150kW
PowerBuoy system, and we expect to commence ocean testing in 2009.
In addition, we are focusing on expanding our key commercial opportunities for both the utility and the
autonomous PowerBuoy systems. We currently have commercial relationships with the following:
(cid:129) Iberdrola S.A., or Iberdrola, which is a large electric utility company located in Spain and one of the largest
renewable energy producers in the world, Total S.A., or Total, which is one of the world’s largest oil and gas
companies, and two Spanish governmental agencies, for the first phase of the construction of a 1.39
megawatt, or MW, wave power station off the coast of Santoña, Spain. The initial 40kW PowerBuoy for this
project is fully fabricated, is now undergoing final on-land endurance testing, and is expected to be ready for
deployment in August 2008.
(cid:129) Total and Iberdrola, to evaluate the development of a wave power station off the coast of France.
(cid:129) The United States Navy, to develop and build wave power systems at the US Marine Corps Base in Hawaii.
One PowerBuoy system was installed in connection with this project for a total of eight months over a two-
year period and another PowerBuoy system was deployed and tested during June 2007. A third PowerBuoy
system is ready for deployment.
(cid:129) The Scottish Government, to develop a 150kW PowerBuoy for deployment at the Orkney Islands European
Marine Energy Center. This project is in progress, and the PowerBuoy is expected to be ready for
deployment in 2009.
(cid:129) Pacific Northwest Generating Cooperative (PNGC Power), who is providing funding toward the fabrication
and ocean installation of a 150kW PowerBuoy near Reedsport, Oregon. This project is in progress, and the
PowerBuoy is expected to be ready for deployment in 2009.
(cid:129) The United States Navy, to provide PowerBuoy technology to a unique program for ocean data gathering.
Under this program, the Navy will conduct an ocean test of our autonomous PowerBuoy as the power source
for the Navy’s Deep Water Acoustic Detection System. The PowerBuoy is expected to be ready for
deployment by the end of 2008.
As part of our marketing efforts, we use demonstration wave power stations to establish the feasibility of wave
power generation. In addition to the demonstration PowerBuoy system operated off the coast of New Jersey, we plan
to develop and operate two additional demonstration wave power stations. Unlike the New Jersey power system,
these demonstration wave power stations will, if approved and constructed as planned, be connected to the local
power grids.
In February 2006, we received approval from the South West of England Regional Development Agency
(SWRDA) to install a 5MW demonstration wave power station off the coast of Cornwall, England as part of
SWRDA’s “Wave Hub” project, a planned offshore facility for demonstrating and testing wave energy generation
devices. SWRDA has obtained the necessary permits for this Wave Hub project, and the project has been approved
for over £20 million of funding for construction of the Wave Hub infrastructure. SWRDA currently is considering
the tender process for the design and construction of such infrastructure, and expects it to be installed in 2010. We
are in the planning and development stage for our part of the project.
In February 2007, the US Federal Energy Regulatory Commission (FERC) granted us a preliminary permit to
evaluate the feasibility of a location off the coast of Reedsport, Oregon for the proposed construction and operation
of a wave power station with an anticipated maximum rated output of 50MW, of which up to the first 2MW will be a
demonstration wave power station. In February 2007, we signed a cooperative agreement with PNGC Power as our
utility partner for the development of a wave power station. In July 2007, we filed a Pre-Application Document and
Notice of Intent with FERC for the Reedsport project, which provides notice of our intent to seek a license for the
Reedsport wave park and information regarding the project. We believe this was the first Pre-Application Document
and Notice of Intent filed by a wave power company, and is an important step in the full licensing process for the
Reedsport project.
5
We plan to generate revenue from the demonstration wave power stations in Cornwall and Reedsport by selling
electricity to utilities.
In January 2007, we filed applications with FERC for preliminary permits to evaluate the feasibility of two
locations, off the coasts of Coos Bay, Oregon and Newport, Oregon, for the proposed construction and operation of
wave power stations, each with an anticipated maximum rated output of 100MW. In March 2007, FERC granted us
a preliminary permit to evaluate the Coos Bay location, and in March 2008, we filed a Pre-Application Document
and Notice of Intent with FERC for Coos Bay.
In May 2008, we announced a Joint Development Agreement with Griffin Energy for the development,
construction and operation of a wave power station off the coast of Western Australia. Griffin Energy is a leading
Western Australia diversified energy supplier. Under the terms of the agreement, Ocean Power Technologies
(Australasia) Pty. Ltd., our subsidiary based in Australia, and Griffin Energy plan to form a joint venture, to which
Ocean Power Technologies (Australasia) will provide the turn-key power system, plus operations and maintenance
service.
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. Our principal executive offices are located at
1590 Reed Road, Pennington, New Jersey 08534, and our telephone number is (609) 730-0400. Our website address
is www.oceanpowertechnologies.com. We make available free of charge on our website our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as
soon as reasonably practicable after such material is filed electronically with the Securities and Exchange
Commission, or SEC. The information on our website is not a part of this Annual Report. Our common stock
has been listed on the AIM market of the London Stock Exchange plc since October 2003 and on the NASDAQ
Global Market since April 24, 2007, the date on which we commenced our initial public offering in the United
States. In that offering, we sold 5,000,000 shares of our common stock at a price to the public of $20.00 per share.
Our Market
Global demand for electric power is expected to increase from 14.8 trillion kilowatt hours in 2003 to 30.1
trillion kilowatt hours by 2030, according to the Energy Information Administration, or the EIA. To meet this
demand, the International Energy Agency, or the IEA, estimates that investments in new generating capacity will
exceed $4 trillion in the period from 2003 to 2030, of which $1.6 trillion will be for new renewable energy
generation equipment.
According to the IEA, fossil fuels such as coal, oil and natural gas generated over 60% of the world’s electricity
in 2002. However, a variety of factors are contributing to the increasing development of renewable energy systems
that capture energy from replenishable natural resources, including ocean waves, flowing water, wind and sunlight,
and convert it into electricity.
(cid:129) Rising cost of fossil fuels. The cost of fossil fuel used to generate electricity has been rising. From 2000 to
2005 in the United States, the cost of coal used for electricity generation increased by 28%, the cost of
natural gas used for electricity generation increased by 91% and the cost of oil used for electricity generation
increased by 64%.
(cid:129) Dependence on energy from foreign sources. Many countries, including the United States, Japan and much
of Europe, depend on foreign resources for a majority of their domestic energy needs. Concerns over
political and economic instability in some of the leading energy producing regions of the world are
encouraging consuming countries to diversify their sources of energy.
(cid:129) Environmental concerns. Environmental concerns regarding the by-products of fossil fuels have led many
countries and several US states to agree to reduce emissions of carbon dioxide and other gases associated
with the use of fossil fuels and to adopt policies promoting the development of cleaner technologies.
(cid:129) Government incentives. Many countries have adopted policies to provide incentives for the development
and use of renewable energy sources, such as subsidies to encourage the commercialization of renewable
energy power generation.
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(cid:129) Infrastructure constraints.
In many parts of the world, the existing electricity infrastructure is insufficient
to meet projected, and in some places existing, demand. Expansion of generating capacity from existing
energy sources is frequently hindered by significant regulatory, political and economic constraints.
As a result of these and other factors, the EIA projects that grid-connected generating capacity fueled by
renewable energy resources will continue to grow over the next 25 years.
Wave Energy
The energy in ocean waves is a form of renewable energy that can be harnessed to generate electricity. Ocean
waves are created when wind moves across the ocean surface. The interaction between the wind and the ocean
surface causes energy to be exchanged. At first, small waves occur on the ocean surface. As this process continues,
the waves become larger and the distance between the tops of the waves becomes longer. The size of the waves, and
the amount of energy contained in the waves, depends on the wind speed, the time the wind blows over the waves
and the distance covered. The rising and falling of the waves move our PowerBuoy system creating mechanical
energy that our proprietary technologies convert into usable electricity.
There are a variety of benefits to using wave energy for electricity generation.
(cid:129) Scalability within a small site area. Due to the tremendous energy in ocean waves, wave power stations
with high capacity — 50MW and above — can be installed in a relatively small area. We estimate that, upon
completion of the development of our 500kW PowerBuoy system, we would be able to construct a wave
power station that would occupy approximately one-tenth of the ocean surface occupied by an offshore wind
power station of equivalent capacity.
(cid:129) Predictability. The supply of electricity from wave energy can be forecasted in advance. The amount of
energy a wave thousands of miles away will have when it arrives at a wave power station days later can be
calculated based on satellite images and meteorological data with a high degree of accuracy. Customers can
use this information to develop sourcing plans to meet their short-term electricity needs.
(cid:129) Constant source of energy. The annual flow of waves at specific sites can be relatively constant. Based on
our studies and analysis of our target sites, we believe our wave power stations will be able to produce usable
electricity for approximately 90% of all hours during a year.
There are currently several approaches, in different stages of development, for capturing wave energy and
converting it into electricity. Methods for generating electricity from wave energy can be divided into two general
categories: onshore systems and offshore systems. Our PowerBuoy system is an offshore system. Offshore systems
are typically located one to five miles offshore and in water depths of between 100 and 200 feet. The system can be
above, on or below the ocean surface. Many offshore systems utilize a floatation device to harness wave energy. The
heaving or pitching of the floatation device due to the force of the waves creates mechanical energy, which is
converted into electricity by various technologies. Onshore systems are located at the edge of the shore, often on a
sea cliff or a breakwater, and typically must concentrate the wave energy first before using it to drive an electrical
generator. Although maintenance costs of onshore systems may be less than those associated with offshore systems,
there are a variety of disadvantages with these systems. As waves approach the shore, the energy in the waves
decreases; therefore, onshore wave power stations do not take full advantage of the amount of energy that waves in
deeper water produce. In addition, there are a limited number of suitable sites for onshore systems and there are
environmental and possible aesthetic issues with these wave power stations due to their size and location on the
seashore.
Our Competitive Advantages
We believe that our technology for generating electricity from wave energy and our commercial relationships
give us several potential competitive advantages in the renewable energy market.
Our PowerBuoy system uses an ocean-tested technology to generate electricity.
(cid:129) We have been conducting ocean tests for over a decade in order to demonstrate the viability of our
technology. We initiated our first ocean installation in 1997 and have had several deployments of our
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systems for testing and operation since then, the longest of which has had continuous operation of
12 months. Our PowerBuoy systems have survived several hurricanes and winter storms while installed in
the ocean.
(cid:129) We had an operational demonstration PowerBuoy system off the coast of New Jersey from October 2005
until October 2006 when the system was removed from the ocean for planned maintenance and diagnostic
testing. The system was redeployed off the coast of New Jersey in September 2007. We currently plan to
build and deploy two additional demonstration wave power stations that, unlike the PowerBuoy system in
New Jersey, will provide electricity to the local power grids. In February 2006, we received approval from
the SWRDA to install a demonstration wave power station off the coast of Cornwall, England and in
February 2007, FERC granted us a preliminary permit to evaluate the feasibility of a wave power station
off the coast of Reedsport, Oregon, a portion of which will be for demonstration purposes. During fiscal
2008, we filed a Pre-Application Document and Notice of Intent with FERC for the Reedsport project.
This provided notice of our intent to seek a license for the Reedsport Wave Park and information regarding
the project.
Our PowerBuoy system’s grid connection has been certified.
(cid:129) In July 2007, we announced that our PowerBuoy grid connection system had been certified as compliant
with designated national and international standards. This qualifies our technology for integration into
utility grid systems.
Our PowerBuoy system is efficient in harnessing wave energy.
(cid:129) Our PowerBuoy system is designed to efficiently convert wave energy into electricity by using onboard
sensors to detect actual wave conditions and then to automatically adjust the performance of the generator
using our proprietary electrical and electronics-based control systems in response to that information.
(cid:129) One measure of the efficiency of an electric power generation system is load factor. The load factor is the
percent of kilowatt hours produced by a system in a given period as compared to the maximum kilowatt
hours that could be produced by the system in that period. A high load factor indicates a high degree of
utilization of the capacity of the system and provides a means to compare the efficiencies of different
energy sources to produce equivalent power outputs (without taking into account the relative costs of
constructing such systems). Since we have not yet operated a complete wave power station, we do not
have a measured load factor. However, based on our research and analysis, we believe the load factor for a
PowerBuoy wave power station located at most of our targeted sites would be in the range of 30% to 45%.
Our PowerBuoy system takes advantage of time-tested and well-known technology.
(cid:129) Our PowerBuoy system is designed to combine features of ocean-going buoys with advanced electrical
and electronics-based systems. Since standard ocean-going buoys have been deployed in maritime
applications for decades, their survival and risk profiles are known and proven. By using electrical, rather
than mechanical, engineering solutions whenever possible, we are able to control materials, construction
and other capital costs while maintaining reliability.
(cid:129) Our PowerBuoy system can be built using easily sourced components supplied by third parties. Due to the
PowerBuoy system’s modular design, total construction time is minimized as multiple components can be
built simultaneously, and generating capacity can be scaled up or down by incrementally adding or
subtracting groups of PowerBuoy units. In addition, our PowerBuoy system can be deployed using
common maritime techniques.
Numerous potential sites for our wave power stations are located near major population centers worldwide.
(cid:129) Our systems are designed to work in sites with average annual wave energy of at least 20kW per meter of
wave front, which can be found in many coastal locations around the world. In particular, we are targeting
coastal North America, the west coast of Europe, the coasts of Australia and the east coast of Japan. These
potential sites not only have appropriate natural resources for harnessing wave energy, but they are also
located near large population centers with significant and increasing electricity requirements.
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We have significant commercial relationships.
(cid:129) Our current projects with Iberdrola, Total and PNGC Power provide us with an initial opportunity to sell
our wave power stations to utilities. By collaborating with leaders in renewable energy development, we
believe we are able to accelerate both our in-house knowledge of the utility power generation market and
our reputation as a credible renewable energy equipment supplier. If these projects are successful, we
intend to leverage our experiences with our Spain and France projects to add wave power stations, new
customers and complementary revenue streams from operations and maintenance contracts similar to the
agreement we have in connection with the Spain project.
(cid:129) With the funding from the US Navy, we have been able to refine our PowerBuoy system while
simultaneously preparing for commercial deployment to address a particular customer need. We believe
that the successful deployment of our PowerBuoy systems for the US Navy will significantly enhance
market visibility.
Our PowerBuoy system has the potential to offer a cost competitive renewable energy power generation
solution.
(cid:129) Our product development and engineering efforts are focused on increasing the maximum rated output of
the design of our utility PowerBuoy system from the current 40kW. We expect to complete the design for
our 150kW PowerBuoy by the end of 2008, and for our 500kW PowerBuoy by the end of 2010. Assuming
we are able to reach manufacturing levels of at least 300 units of 500kW PowerBuoy systems per year, we
believe, based upon our research and analysis, that the economies of scale we would have with our
fabricators would allow us to offer a renewable electricity solution that competes with other existing
renewables in key markets. We expect to complete development of our 500kW PowerBuoy system in
2010.
(cid:129) Prior to achieving full production levels of the 500kW PowerBuoy system, if we achieve economies of
scale for our 150kW PowerBuoy systems, we expect to be able to offer a renewable electricity solution
that competes with the price of electricity from traditional sources in certain local markets where the
current retail price of electricity is relatively high or where sufficient subsidies are available.
Our systems are environmentally benign and aesthetically non-intrusive.
(cid:129) We believe that our PowerBuoy system does not present significant risks to marine life and does not emit
significant levels of pollutants. In connection with our project at the US Marine Corps Base in Hawaii, our
customer, the US Navy, obtained an independent environmental assessment of our PowerBuoy system
prior to installation, as required by the National Environmental Policy Act. Although our project for the
US Navy only contemplates an array of up to six PowerBuoy systems in Hawaii, we believe that
PowerBuoy systems deployed in other geographic locations, including larger PowerBuoy systems under
development and multiple-system wave power stations, would have minimal environmental impact due to
the physical similarities with the tested system.
(cid:129) Since our PowerBuoy systems are typically located one to five miles offshore, PowerBuoy wave power
stations are usually not visible from the shore. Visual impact is often cited as one of the reasons that many
communities have opposed plans to develop power stations, in particular wind power stations. Our
PowerBuoy system has the distinct advantage of having only a minimal visual profile. Only a small
portion of the unit is visible at close range, with the bulk of the unit hidden below the water.
Our Business Strategy
Our goal is to strengthen our leadership in developing wave energy technologies and commercializing wave
power stations and related services. In order to achieve this goal, we are pursuing the following business strategies:
(cid:129) Concentrate sales and marketing efforts on four geographic markets. We are focusing our sales and
marketing efforts over the next three years on coastal North America, the west coast of Europe, the coasts of
Australia and the east coast of Japan. We believe that each of these areas represents a strong potential market
for our PowerBuoy wave power stations because they combine appropriate wave conditions, political and
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economic stability, large population centers, high levels of industrialization and significant and increasing
electricity requirements.
(cid:129) Continue to increase PowerBuoy system output. Our product development and engineering efforts are
focused on increasing the output of the design of our PowerBuoy systems from 40kW to 500kW. We expect
to complete the design for our 150kW PowerBuoy by the end of 2008, and for our 500kW PowerBuoy by the
end of 2010. The key to increasing the rated output of the PowerBuoy system is to increase the system’s
efficiency as well as its diameter. If we increase the size of a PowerBuoy system, we will be able to increase
the amount of wave energy the system can capture and, in turn, increase the output of the system. For
example, if we double the size of the unit’s diameter, we will approximately quadruple its power capacity.
We believe that by increasing system output, we will be able to decrease the cost per kW of our PowerBuoy
system and the cost per kilowatt hour of the energy generated.
(cid:129) Construct demonstration wave power stations to encourage market adoption of our wave power stations.
Our demonstration wave power stations are intended to allow us to prove the viability of our PowerBuoy
systems in a particular region. By enabling customers to experience our technology first-hand, we believe we
will be able to facilitate our entry into our target markets. In addition, demonstration wave power stations
provide us with the opportunity to test and refine our technology in actual operating conditions. In February
2006, we were approved by SWRDA to install a 5MW demonstration wave power station off the coast of
Cornwall, England. In February 2007, FERC granted us a preliminary permit to evaluate the feasibility of a
location off the coast of Reedsport, Oregon for the proposed construction and operation of a wave power
station with a maximum rated output of 50MW, of which up to the first 2MW will be a demonstration wave
power station utilizing our 150kW PowerBuoy systems. In July 2007, we filed with FERC for the Reedsport
project what we believe to be the first Pre-Application Document and Notice of Intent filed by a wave power
company. This filing provided notice to FERC of our intent to seek a license for the Reedsport wave park,
and provided information regarding the project. The Cornwall and Reedsport power stations will, if
approved and constructed as planned, be connected to local power grids.
(cid:129) Leverage customer relationships to enhance the commercial acceptance of our utility PowerBuoy system.
We currently have commercial relationships with Iberdrola and Total for two projects. We are in the first
phase of the construction of a 1.39MW wave power station off the coast of Santoña, Spain, under which a
40kW PowerBuoy is now undergoing final on-land endurance testing, and is expected to be ready for
deployment in August 2008. We, along with affiliates of Iberdrola and Total, are currently assessing the
viability of a 2 to 5MW power station off the coast of France. We believe that our projects at the US Marine
Corps Base in Oahu, Hawaii will serve as a prototype wave power station for the installation of wave power
stations at other US Navy bases. Our relationship with PNGC Power regarding our Reedsport, Oregon
project, is the first such utility relationship on the west coast of the United States. We intend to build on these
existing commercial relationships both by expanding the number and size of projects we have with our
current customers and by entering into new alliances and commercial relationships with other utilities and
independent power producers.
(cid:129) Expand revenue streams from our autonomous PowerBuoy system. The autonomous PowerBuoy system
addresses specific power generation needs of customers requiring off-grid electricity generation in remote
locations in the open ocean. Since our PowerBuoy systems are well suited for many of these uses, we do not
expect that they will require subsidies or other price incentives for commercial acceptance. This equipment
might be used for powering sonar and radar surveillance, tsunami warning, oceanographic data collection,
offshore platforms and offshore aquaculture. We have entered into a contract with the US Navy for the
testing of our autonomous PowerBuoy in connection with a unique program for ocean data gathering. We
believe that successful testing of our autonomous PowerBuoy System under this contract may result in
additional revenues from the US Navy and other prospective customers.
(cid:129) Maximize revenue opportunities with existing customers.
In January 2007, we entered into an agreement
under which we are responsible for the monitoring, operation and maintenance of the 40kW PowerBuoy
system and the ocean-based substation and infrastructure to be manufactured and deployed in connection
with the first phase of the Spain project. This agreement will become effective subsequent to buoy
10
deployment. Under this agreement, we will be paid a fixed fee for scheduled maintenance, ongoing
operations and other routine services, and fees to be negotiated for unscheduled repairs. We plan to pursue
similar operations and maintenance contracts with future customers, including for our France project, in
order to provide us with ongoing revenue streams.
Our Products
We offer two types of PowerBuoy systems: our utility PowerBuoy system, which is designed to supply
electricity to a local or regional electric power grid, and our autonomous PowerBuoy system, which is designed to
generate power for use independent of the power grid in remote locations. Both products use the same PowerBuoy
technology.
Pictured below is our 40kW utility PowerBuoy system at our facilities in New Jersey and installed in the ocean
off the coast of New Jersey.
Our PowerBuoy system consists of a floating buoy-like device that is loosely moored to the seabed so that it
can freely move up and down in response to the rising and falling of the waves, as well as a power take off device, an
electrical generator, a power electronics system and our control system, all of which are sealed in the unit.
The power take off device converts the mechanical stroking created by the movement of the unit caused by
ocean waves into rotational mechanical energy, which, in turn, drives the electrical generator. The power electronics
system then conditions the output from the generator into usable electricity. The operation of the PowerBuoy system
is controlled by our customized control system.
The control system uses sophisticated sensors and an onboard computer to continuously monitor the
PowerBuoy subsystems as well as the height, frequency and shape of the waves interacting with the PowerBuoy
system. The control system collects data from the sensors and uses proprietary algorithms to electrically adjust the
performance of the PowerBuoy system in real-time and on a wave-by-wave basis. By making these electrical
adjustments automatically, the PowerBuoy system is able to maximize the amount of usable electricity generated
from each wave. We believe that this ability to optimize the performance of the PowerBuoy system in real-time is a
significant advantage of our product.
In the event of storm waves larger than 23 feet, the control system automatically locks down the PowerBuoy
system and electricity generation is suspended. When the wave heights return to a normal operating range of 23 feet
or less, the control system automatically unlocks the PowerBuoy system and electricity generation and transmission
recommence. This safety feature prevents the PowerBuoy system from being damaged by the increased amount of
energy in storm waves.
Our 40kW PowerBuoy system has a maximum diameter of 12 feet near the surface, and is 52 feet long, with
approximately 13 feet of the PowerBuoy system protruding above the surface of the ocean. Larger PowerBuoy
systems will be longer and have a larger diameter. For example, our 500kW PowerBuoy system, once developed and
manufactured, is expected to have a maximum diameter of approximately 62 feet and be approximately 128 feet
long with approximately 26 feet protruding above the ocean surface.
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Utility PowerBuoy System
The utility PowerBuoy system is designed to transmit electricity to shore by an underwater power cable, which
would then be connected to a power grid. Our utility PowerBuoy system presently has a capacity of 40kW. We
expect to complete the design for our 150kW PowerBuoy by the end of 2008, and for our 500kW PowerBuoy by the
end of 2010. The utility PowerBuoy system is designed to be positioned in water with a depth of 100 to 200 feet,
which can usually be found one to five miles offshore. This depth allows the system to capture meaningful amounts
of energy from the waves, since decreasing water depth depletes the energy in the waves.
The mooring system for keeping a utility PowerBuoy system in position connects it by lines to three floats that,
in turn, are connected by lines to three anchors. This is a well-established mooring system, referred to as three-point
mooring, which we have improved upon with various techniques that reduce cost and deployment time.
We refer to the entire utility power generation system at one location as a wave power station, which can either
be comprised of a single PowerBuoy system or an integrated array of PowerBuoy systems connected to an
underwater cable to transmit the electricity to shore. Our system is designed to be scalable as multiple PowerBuoy
units can be integrated to create a wave power station with a larger output capacity. An array of PowerBuoy systems
would typically be arranged in three staggered rows parallel to the incoming wave front to form a long rectangle.
This staggered arrangement would maximize the level of wave energy that the wave power station can capture.
We are also exploring the use of our utility PowerBuoy systems for applications that include generating
electricity for desalination of water, hydrogen production, water treatment and natural resource processing. In these
instances, the power generated by the utility PowerBuoy system would bypass the grid and be delivered directly to
the point of electricity consumption for these special applications.
Status of Utility PowerBuoy Systems
We have made substantial progress in the design, analysis and commencement of fabrication of what we
believe to be the first utility-grade underwater substation, or pod, for wave power. The pod serves as the point at
which energy generated by multiple PowerBuoys is aggregated and the voltage is increased, prior to transmission
ashore and being fed into the power grid. The required switching and protection circuits for the individual
PowerBuoys are also included in the pod. Construction of our first commercial pod is now in progress, in connection
with our wave power project located in Santoña, Spain.
In addition, our 150kW PowerBuoy design effort is well underway. The power conversion and controls system
is substantially complete for the 150kW PowerBuoy system, and we expect to be ready for ocean testing in 2009.
Although we had initially anticipated commencing ocean testing in 2008, the present schedule for development of
the 150kW PowerBuoy reflects management’s decision to enhance the system design to allow for improved
survivability in 100-year storm wave conditions, and to work with a third-party engineering group to attain
independent certification of the 150kW PowerBuoy design. We believe that direct transition to the 500kW from the
150kW PowerBuoy system will be accelerated by the measures now being undertaken in connection with the
150kW design.
Our PowerBuoy interface with the electrical utility power grid has been certified as compliant with inter-
national standards. An independent laboratory provided testing and evaluation services to certify that the OPT
systems comply with designated national and international standards. The PowerBuoy grid interface will bear the
ETL listing mark, and can be connected to the utility grid.
Our projects in Spain, France and Hawaii are being conducted in conjunction with third-party customers. We
have completed the planning phase for the wave power project to be located at Santoña, Spain and have completed
construction of a 40kW PowerBuoy system, which is now undergoing on-land endurance testing, and is expected to
be ready for deployment in August 2008. Construction of the underwater infrastructure for the wave power station is
in progress. This infrastructure includes the underwater substation (pod) designed by us and the undersea
transmission cables that allow the power station to be connected to the grid. Customer funding under this current
phase of the project provides for construction and deployment of the first PowerBuoy and its mooring, plus
procurement of the pod and undersea transmission cables. Funding for the deployment of the pod and cables is
under discussion with the customer. We are paid in connection with this project as we complete milestones. Under
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our agreement for this current phase of construction, our revenues are limited to reimbursement for our construction
costs without any mark-up and we are required to bear the first A0.5 million, or approximately $0.8 million, of any
cost overruns and to absorb certain other costs as set forth in the agreement. As of April 30, 2008, we had recognized
an anticipated loss of approximately $3.7 million under this contract, which includes costs incurred to date and our
current estimate of other amounts we may be required to bear under the agreement. This anticipated loss at
completion of the contract also reflects our decision made in the fourth quarter of fiscal year 2008 to absorb
$1.9 million of additional costs of the project beyond our obligation for the initial cost overruns and certain other
costs as set forth in the agreement. This decision was based on the progress of the project to date, the benefits to be
derived from a successful initial project and the prospect of incremental contract value to be received in connection
with additional work under this contract. Consistent with our revenue recognition policies, each quarter we evaluate
if additional loss amounts need to be recognized. In addition, the next phase of this project may include the
manufacturing and deployment of nine additional 150kW PowerBuoy systems and connection of the ten total
PowerBuoy systems in an integrated array. The economic and other terms relating to the next phase of the project
have not been negotiated. The initial 40kW PowerBuoy system for this project is expected to be ready for
deployment in August 2008 and we expect the next phase of this contract to be determined by the end of 2008.
The wave power station to be located off the west coast of France is in the planning and development phase.
The current development contract has been extended to December 2008. Before we begin construction of this wave
power station, we must enter into an additional agreement with affiliates of Total and Iberdrola. We currently plan to
enter into an agreement for the next phase of development of a wave power station prior to the expiration of the
current agreement in December 2008.
At the Marine Corps Base in Oahu, Hawaii, we had installed a wave power system for a total of eight months
over a two-year period and another PowerBuoy system was deployed and tested during June 2007. A third
PowerBuoy system is ready for deployment at the Marine Corps Base in Oahu and is awaiting suitable weather
conditions for deployment. The US Navy reimburses us for our costs and pays us a fixed fee in connection with this
project. In September 2007, we received $1.9 million of additional funding under this program. Our current contract
with the US Navy expires in December 2008.
Pictured below is our 40kW-rated utility PowerBuoy system awaiting deployment in Oahu, Hawaii.
In February 2006, we received approval from SWRDA to install a wave power station off the coast of
Cornwall, England, and this project is currently being funded solely by us. SWRDA has obtained the necessary
permits for this Wave Hub project, and the project has been approved for over £20 million of funding for the
construction of the project infrastructure. SWRDA currently is considering the tender process for the design and
construction of such infrastructure, and expects it to be installed in 2010. We are currently in the planning and
development stage of our part of the project. This wave power station will serve as a demonstration wave power
station, which we intend to operate as an independent power producer. We plan to collect revenue from the sale of
power to electrical utilities.
In February 2007, FERC granted us a preliminary permit to evaluate the feasibility of a location off the coast of
Reedsport, Oregon for the proposed construction and operation of a wave power station with anticipated capacity of
50MW. We plan to operate up to the first 2MW using our 150kW PowerBuoys, as an independent producer,
whereby we would collect revenue from the sale of power to electrical utilities. However, we currently do not have
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any revenue-generating contracts in place for the sale of energy with respect to this project. We plan to construct the
additional 48MW under a supply contract with a third-party customer who, in turn, would own and operate the wave
power station. We have begun the planning and development phase of the initial wave power station and in August
2007, we signed a cooperative agreement with PNGC Power. We also filed in July 2007 with FERC a
Pre-Application Document and Notice of Intent for Reedsport, which provided notice of our intent to seek a
license for the Reedsport wave park, and provided information regarding the project. This is an important step in the
full licensing process for the Reedsport project.
Also, in March 2007, we were awarded funding from the Scottish Ministers’ Wave and Tidal Energy Support
Scheme, managed by the Scottish Executive. This funding is to support the design, manufacture and installation of a
150kW PowerBuoy system in Orkney, Scotland. This project is in progress, and the 150kW PowerBuoy system is
expected to be ready for deployment in 2009.
In May 2008, we announced a Joint Development Agreement with Griffin Energy to explore the development,
construction and operation of a wave power station off the coast of Western Australia. Griffin Energy is a leading
Western Australia diversified energy supplier. Under the terms of the agreement, Ocean Power Technologies
(Australasia) Pty. Ltd., our subsidiary based in Australia, and Griffin Energy plan to form a joint venture, to which
Ocean Power Technologies (Australasia) would provide the turn-key power station, plus operations and mainte-
nance service.
Autonomous PowerBuoy System
The autonomous PowerBuoy system is based on the same technology as the utility PowerBuoy system, but is
designed for electricity generation of relatively low amounts of power for use independent of the power grid in
remote locations. The autonomous PowerBuoy system currently has a maximum rated output ranging from
300 watts to 40kW, depending on the application. Our autonomous PowerBuoy system is designed to operate
anywhere in the ocean and in any depth of water.
We expect that autonomous PowerBuoy systems will generally be suitable for use on a stand-alone basis for
providing power for specific applications, including sonar and radar surveillance, tsunami warning, oceanographic
data collection, offshore platforms and offshore aquaculture.
Status of Autonomous PowerBuoy Systems
Our PowerBuoy system off the coast of New Jersey was deployed from October 2005 to October 2006 when it
was removed from the ocean for planned maintenance. We have conducted extensive diagnostic tests on the system,
providing us with information about the effects of ocean deployments that will help us implement improvements in
future PowerBuoy systems. This system was redeployed off the coast of New Jersey in September 2007. We
discovered no significant problems with the system, and the system required only routine maintenance. This system
was not designed to supply electricity to the power grid, but rather to provide us with operational data and marketing
opportunities. We were partially funded for the construction of this PowerBuoy system by the New Jersey Board of
Public Utilities. We do not anticipate recognizing any additional revenue in connection with this project, nor do we
expect to incur significant additional investment.
In June 2007, we received a $1.7 million contract from the US Navy to provide our PowerBuoy technology to a
unique program for ocean data gathering. Under this 18-month program, the Navy will conduct an ocean test of our
autonomous PowerBuoy as the power source for the Navy’s Deep Water Acoustic Detection System. The
PowerBuoy is expected to be ready for deployment by the end of 2008.
Marketing and Sales
We are developing our sales capabilities and have begun commercial marketing and selling of our PowerBuoy
systems. Because our products use a new commercial technology, the decision process of a customer requires
substantial educational efforts, in which many of our employees may participate.
In addition to our own direct sales, we will continue to enter into development agreements and strategic
alliances with regional utility and energy companies committed to providing electricity from renewable energy
14
sources. We plan to leverage these relationships to sell and market our PowerBuoy wave power stations to these
companies and their affiliates and to other customers in the region. We plan to expand our relationships by entering
into long-term operations and maintenance contracts to support completed wave power stations. For example, in
January 2007, we entered into an agreement for the monitoring, operation and maintenance of the 40kW
PowerBuoy system and the ocean-based substation and infrastructure to be manufactured and deployed in
connection with the current phase of the Spain project. Under this operations and maintenance agreement, we
are required to provide services for two years following provisional acceptance of the PowerBuoy system and
substation and infrastructure. We are to be paid a fixed fee for scheduled maintenance, ongoing operations and other
routine services, subject to adjustment for unscheduled repairs.
In order to penetrate certain international markets, we plan to implement marketing strategies that respond to
local market demands. In particular markets, we may grant licenses to local businesses, including independent
power producers, to sell, manufacture or operate PowerBuoy wave power stations.
Utility PowerBuoy System Marketing
We plan to market our utility PowerBuoy systems to utilities and independent power producers interested in
adding electricity generated from renewable sources to their existing electricity supply. We are currently targeting
customers in coastal North America, the west coast of Europe, the coasts of Australia and the east coast of Japan. In
addition, we are exploring the use of our utility PowerBuoy systems for applications that include desalination of
water, hydrogen production, water treatment and natural resource processing. In these instances, the power
generated by the utility PowerBuoy system would bypass the grid and be delivered directly to the point of electricity
consumption for these special applications.
Subsidies and Incentives
Countries in Europe and Asia and several states in the United States have adopted a variety of government
subsidies to allow renewable sources of electricity to compete with conventional sources of electricity, such as fossil
fuels. Government subsidies and incentives generally focus on grid-connected systems and take several forms,
including tariff subsidies, renewable portfolio standards, rebates, tax incentives and low interest loans. In addition,
the adoption by governments of limits on carbon dioxide emissions and targets for renewable energy production has
spurred a market for trading of surplus carbon credits and renewable energy certificates.
We expect to be able to use the availability of subsidies and other incentives to market the electricity generated
by wave power stations as an alternative to fossil fuel generated electricity. We plan to educate potential customers
on the availability of these incentives and, where appropriate, work with them to prepare and file the necessary
applications, select sites to meet program requirements and take advantage of these incentives.
Demonstration Wave Power Stations
We use demonstration PowerBuoy systems to establish the feasibility of providing wave-generated electricity
to customers. Demonstration wave power stations allow potential customers to see first-hand the viability of wave
energy as a significant source of electricity. From October 2005 through October 2006, we operated a demonstration
PowerBuoy system off the coast of New Jersey, which allowed us to continuously monitor the system and evaluate
its performance in actual wave conditions. This PowerBuoy system was removed from the ocean for maintenance
and diagnostic testing in October 2006 and was redeployed off the coast of New Jersey in September 2007.
Although the system does not supply electricity to the power grid, it provides us with valuable operational data as
well as important marketing opportunities.
We have identified a site off the coast of the United Kingdom to install a demonstration wave power station of
up to 5MW that will connect to the power grid in Cornwall, England. In connection with the development of this
wave power station, we are planning to take advantage of incentives offered in the United Kingdom to encourage
growth in power derived from renewable sources.
The FERC has granted us a preliminary permit to develop a 50MW PowerBuoy wave power station off the
coast of Oregon that will be connected to the local power grid, the first phase of which is expected to be up to a 2MW
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demonstration wave power station. In July 2007, we filed with FERC a Pre-Application Document and Notice of
Intent for the Reedsport project. This provided notice to FERC of our intent to seek a license for the Reedsport wave
park, and provided information regarding the project. We will need additional authorization from FERC to sell
electric power generated from the Oregon wave power station into the wholesale or retail markets.
Autonomous PowerBuoy System Marketing
There are a variety of potential customers, such as the US Department of Homeland Security, that have specific
needs for off-grid power generation that can be supplied by our autonomous PowerBuoy system. Potential
applications for off-grid power supply include sonar and radar surveillance, tsunami warning, oceanographic data
collection, offshore platforms and offshore aquaculture.
Customers
The table below shows the percentage of our revenue we derived from significant customers for the periods
indicated:
Customer
Fiscal
2006
Fiscal
2007
Fiscal
2008
US Navy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey Board of Public Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iberdrola and Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lockheed Martin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Scottish Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
61%
5% —
9%
22% —
54%
35%
4%
58%
—
31%
—
10%
The US Navy accounted for a substantial portion of our revenue in fiscal 2008, but its relative contribution as a
percentage of revenues is expected to decrease in future years.
Our potential customer base for our utility PowerBuoy systems consists of public utilities, independent power
producers and other governmental entities and agencies. Our potential customer base for our autonomous
PowerBuoy systems consists of different public and private entities who use electricity in and near the ocean.
Our efforts to identify new customers are concentrated on four geographic markets: coastal North America, the west
coast of Europe, the coasts of Australia and the east coast of Japan. Our efforts to identify new customers are
currently led and coordinated by our chief executive officer and our vice president of business development and
marketing who joined us in January 2008. We also use consultants and other personnel to assist us in locating
potential customers.
Spain Project
In July 2004, we entered into a development agreement, which we refer to as the Spain development
agreement, with Iberdrola Energias Renovables II, S.A. (Iberdrola Energias), an affiliate of Iberdrola, Sociedad para
el Desarrollo Regional de Cantabria, S.A., or SODERCAN, which is the industrial development agency of the
Spanish region of Cantabria, and Instituto para la Diversificacion y Ahorro de la Energia, S.A., or IDAE, a Spanish
government agency dedicated to energy conservation and diversification efforts, to jointly study the possibility of
developing a wave power station off the coast of Santoña located in the Cantabria region in northern Spain. Total
Eolica S.A., an affiliate of Total, joined the development agreement in June 2005. In January 2006, we completed
the assessment phase of the project, which included an assessment of wave energy resources at the site, feasibility
analysis for deployment at the site, determination of capacity and design, and an estimation of investments needed
for the project as well as anticipated costs for operation, maintenance and repairs. Expenses associated with this
phase were shared among the parties to the agreement based on agreed upon percentages. As of April 30, 2007 and
2008, we had invested less than $0.1 million for our share of the assessment phase funding, and had recognized
revenue of approximately $0.3 million under the assessment phase.
In July 2006, Iberdrola Energias Marinas de Cantabria, S.A., or Iberdrola Cantabria, was formed for the
purpose of constructing and operating a wave power station off the coast of Santoña, Spain. Iberdrola Energias is the
largest shareholder of Iberdrola Cantabria. Total Eolica, SODERCAN, IDAE and we each have minority ownership
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positions. Funding is shared among the parties to the agreement based on agreed upon percentages which reflect the
parties’ anticipated ownership interest in the wave power station. We own 10% of Iberdrola Cantabria.
In July 2006, we entered into a construction agreement with Iberdrola Cantabria, which we refer to as the Spain
construction agreement. Under this agreement, we agreed to complete the first phase of the construction of a
1.39MW wave power station. As originally agreed, this phase of construction included the manufacturing and
deployment of one 40kW PowerBuoy system, acquisition and installation of the underwater power transmission
cable and the manufacturing and deployment of the underwater substation required for connecting the 40kW
PowerBuoy system with nine additional 150kW PowerBuoy systems that together are contemplated to constitute
the 1.39MW wave power station. In February 2008, the Spain construction agreement was amended. Under this
amendment, the first phase of the construction of the 1.39MW wave power station consists of the manufacture and
deployment of one 40kW PowerBuoy system plus the fabrication of the underwater power transmission cable and
underwater substation for all ten PowerBuoy systems. Funding for the deployment of the pod and cable is under
discussion with the customer. Under the Spain construction agreement, our revenues are limited to reimbursement
for our construction costs without any mark-up and we are required to bear the first A0.5 million of any cost overruns
and to absorb certain other costs as set forth in the agreement. The Spain construction agreement does not cover the
terms for the next phase of the 1.39MW wave power station project, which encompasses the manufacturing and
deployment of the nine additional 150kW PowerBuoy systems. We will need to agree to the terms for the next phase
of this project and enter into a subsequent contract with Iberdrola Cantabria before we can complete the
construction of the full wave power station. The initial 40kW PowerBuoy system for this project is now undergoing
final on-land endurance testing, and is expected to be ready for deployment in August 2008. We expect to submit
proposals to Iberdrola Cantabria in mid-2008 for funding of the installation of the underwater cable and substation,
and for succeeding phases of the project.
Pictured below are views of our 40kW-rated PowerBuoy system after completion of construction at our
supplier in Spain.
We are paid under the Spain construction agreement as we complete certain milestones for a total potential
payment for the current phase of construction of approximately A2.7 million. As of April 30, 2008, we had
recognized revenue of approximately $2.3 million and an anticipated loss of $3.7 million under the Spain
construction agreement. The loss was recognized based on a change in estimated costs associated with the Spain
construction agreement, which include costs incurred to date and our current estimate of other amounts we may be
required to bear under the agreement. The anticipated loss at completion of the contract also reflects our decision
made in the fourth quarter of fiscal year 2008 to absorb $1.9 million of additional costs of the project beyond our
obligation for the initial cost overruns and certain other costs as set forth in the agreement. This decision was based
on the progress of the project to date, the benefits to be derived from a successful initial project and the prospect of
incremental contract value to be received in connection with additional work under this contract. Our estimates of
the project’s costs may increase in the future, and we may elect to incur the additional costs and continue the project,
to seek other suppliers for the materials or services related to the cost increases or to terminate the agreement. Any
of such outcomes may have a material adverse effect on our financial condition and results of operations.
France Project
In June 2005, we entered into a development agreement, which we refer to as the France development
agreement, with Total Energie Development S.A. (Total Energie), an affiliate of Total, and Iberdrola Energias, to
study and assess the feasibility of a 2 to 5MW wave power station off the coast of France. Pursuant to the France
development agreement, the parties have agreed to extend the current phase until December 2008. Expenses are
17
shared among the parties based on agreed upon percentages, which also reflect the parties’ anticipated ownership
interest in the wave power station. Iberdrola Energias has a majority interest, while Total Energie and we have
minority interests, with our interest being 10%.
If upon completion of the feasibility study, Iberdrola Energias, Total Energie and we unanimously conclude
that the operation of a wave power station off the coast of France is economically, technically and financially
feasible, we will meet to discuss whether and how the wave power station should be implemented. If we proceed,
Iberdrola Energias, Total Energie and we will form a company for the purpose of constructing and operating the
wave power station. Each party will be entitled to retain its current percentage interest by making a proportionate
capital investment. Regardless of our participation in the new company, we will supply and install equipment on
market terms so that the new company can operate the wave power station. Specific terms, including price and
schedule, for these supply and installation agreements are not included in the France development agreement.
Iberdrola Energias and Total Energie may withdraw from the France development agreement without any further
obligation. If we withdraw, however, we will remain bound by our supply and installation agreements under the
contract.
As of April 30, 2008, we had contributed approximately $31,000 for expenses and had recognized revenue of
approximately $0.1 million under the France development agreement.
US Navy
Since September 2001, we have entered into a series of contracts with the United States Office of Naval
Research for the development and construction of wave power systems at the Marine Corps Base in Oahu, Hawaii.
In September 2007, we received $1.9 million of additional funding under this program. Under the contract for the
current phase of the project, which was entered into in September 2005 and expires in December 2008, we are
reimbursed for costs and paid a fixed fee for total potential revenue of $4.1 million.
In June 2007, we received a $1.7 million contract from the US Navy to provide our PowerBuoy technology to a
unique program for ocean data gathering. Under this 18-month program, the Navy will conduct an ocean test of our
autonomous PowerBuoy as the power source for the Navy’s Deep Water Acoustic Detection System. The
PowerBuoy is expected to be ready for deployment by the end of 2008.
Backlog
Our contract backlog consists of the aggregate anticipated revenue remaining to be earned at a given time from
the uncompleted portions of our existing customer contracts. As of April 30, 2008, our contract backlog was
$5.5 million as compared to $5.2 million as of April 30, 2007. We anticipate that a majority of our backlog will be
recognized as revenue over the next 12 months.
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 majority of our revenue is recognized using the percentage-of-completion method, and
changes in estimates from time to time may have a significant effect on revenue and backlog. Our backlog is also
typically subject to large variations from time to time due to the timing of new awards.
Manufacturing and Deployment
Manufacturing and Raw Materials
We engage in two types of manufacturing activities: the manufacturing of the high value-added components, or
modules, for systems control, power generation and power conversion for each PowerBuoy system, and the
contracting and fabrication of the buoy-like structure, anchoring and mooring, and cabling.
Our core in-house manufacturing activity is the assembly and testing of the power generation and control
modules at our Pennington, New Jersey facility. The power generation and control modules include the critical
electrical and electronic systems that convert the mechanical energy into usable electrical energy. The sensors and
control systems use sophisticated technology to monitor ocean conditions and automatically optimize the
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performance of the PowerBuoy system in response to those changing conditions. We have several patents, including
those that cover our power generation, power conversion and control technologies. Due to the critical and
proprietary nature of these systems, we do not outsource their assembly and testing. After a generator and control
module passes our rigorous quality control procedures, it is transported as a ready-to-install component to the
project site. We currently employ 47 employees who are responsible for manufacturing and testing our generators
and control systems. In order to meet our growth objectives, we expect to increase our engineering and manu-
facturing staff by over 160 people by the end of fiscal 2011.
We purchase the remaining components of and raw materials for each PowerBuoy system from various
vendors. Currently, we contract for these components on a project-by-project basis. We conduct a bidding process to
select a supplier with the optimal combination of price, delivery terms and quality. Our goal is to develop ongoing
relationships with select vendors centrally located in different regions, which will allow us to reduce unit costs as
our volume increases. We provide specifications to each vendor, and they are responsible for performing quality
analysis and quality control over the course of construction, subject to our review of the quality test procedures and
results. After each vendor completes testing of the component, it is transported ready-to-install to the project site.
Upon arrival at the project site, the generator and control modules are integrated with the balance of the
components of the PowerBuoy system. We are highly dependent on our third-party suppliers; however, we actively
manage key steps in the supply chain. We act as the general contractor, and retain the ultimate responsibility for
building the PowerBuoy wave power station, and installing, testing and deploying the complete wave power station
at the project site. This process requires significant project and contract management by us. We currently employ
individuals who have experience with all aspects of both the manufacturing and engineering contracting processes,
and demonstrated organizational capabilities in these critical areas.
Deployment
For our existing and currently planned deployments, we purchase from subcontractors the mooring system and
cables needed to install the PowerBuoy system and connect it to either the power grid or a remote power site. The
vendor usually transports these components to the project site.
Each step in the deployment process for our existing and currently planned deployments is outsourced to
subcontractors located near the project site. First the mooring system, consisting of floats, anchors and chains, are
brought to the wave power station’s ultimate ocean location by workboats or barges. At the same time, the cable to
transmit the generated electricity is laid by a subcontractor. Next, the PowerBuoy system is towed to the ocean
location and fixed to the mooring system. The PowerBuoy system would then be connected to the transmission
cable, which would then be connected to the grid or the distributed power site. At this point, we would have a fully
assembled PowerBuoy wave power station, which, subject to final testing, would be ready for operation. An array of
PowerBuoy systems would be installed using a similar approach.
We expect that the subcontractor services required for deployment of a wave power station will be readily
available in the locations where we currently plan to deploy our systems, although we are dependent on third parties
for the entire process. We actively manage each step with personnel who have significant project management and
deployment experience.
Research and Development
Our research and development team consists of employees with a broad range of experience in mechanical
engineering, electrical engineering, hydrodynamics and systems engineering. We engage in extensive research and
development efforts to improve PowerBuoy efficiency and power output and to reduce manufacturing cost and
complexity. Our research and development efforts are currently focused on product development, in particular
increasing the output of our utility PowerBuoy system. We are also conducting research on improvements to our
current technology, including alternative power generation and power take off systems.
Research and development expenses are reflected on our consolidated statements of operations as product
development costs. Our company-sponsored research and development expenses were approximately $4.2 million
for fiscal 2006, $6.2 million for fiscal 2007 and $8.3 million for fiscal 2008. In addition, while we have in the past
19
self-funded the majority of our research and development expenditures, we also have customer-sponsored research
and development expenses of approximately $0.1 million for fiscal 2006, $0.1 million for fiscal 2007 and
$0.5 million for fiscal 2008, and such expenses are reflected on our consolidated statements of operations as
cost of revenues.
We expect to complete the design for our 150kW PowerBuoy by the end of 2008, and for our 500kW
PowerBuoy by the end of 2010. We had planned to increase the maximum rated output to 150kW in 2007 and then to
250kW prior to achieving our goal of 500kW; however, the present schedule for development of the 150kW
PowerBuoy reflects management’s decision to enhance the system design to allow for improved survivability in
100-year storm wave conditions, and to work with a third-party engineering group to attain independent certi-
fication of the 150kW PowerBuoy design. We believe that direct transition to the 500kW system from the 150kW
system will be facilitated by the measures now being undertaken in connection with the 150kW design. The key to
increasing the rated output of the PowerBuoy system is to increase the system’s efficiency as well as its diameter. If
we increase the size of a PowerBuoy system, we will be able to increase the amount of wave energy the system can
capture and, in turn, increase the output of the system. For example, if we double the size of the unit’s diameter, we
will approximately quadruple its power capacity. We believe that we will be able to increase the output capacity of
the PowerBuoy system using technology that we have already developed, so our focus is on the design,
manufacture, testing and deployment of the higher capacity systems. We are exploring design and construction
techniques that will enable the larger PowerBuoy systems to be deployed cost effectively and without damage. For
example, our 40kW PowerBuoy systems are transported to the onshore deployment sites using standard flatbed
trucks. However, the assembled 150kW PowerBuoy systems will be too large for these trucks and will need to be
transported in modules and assembled on-site. In addition, we may need to adjust the mooring system to account for
the larger-sized PowerBuoy systems.
We have made substantial progress in the design, analysis and commencement of fabrication of what we
believe to be the first utility-grade underwater substation, or pod, for wave power. The pod serves as the point at
which energy generated by several PowerBuoys is aggregated and the voltage is increased, prior to transmission
ashore and being fed into the power grid. The required switching and protection circuits for the individual
PowerBuoys are also included in the pod. In addition, our 150kW PowerBuoy design effort is well underway. The
power conversion and controls system is substantially complete for the 150kW PowerBuoy system, and we expect
to commence ocean testing in 2009.
We also plan to continue our technology development of specific applications for our PowerBuoy systems to
expand our growth opportunities. For example, we are exploring applications that include desalination of water,
hydrogen production, water treatment and natural resource processing.
We expect our research and development expenses to continue to rise in the next several years, with our
product development expenses increasing more rapidly than our research expenses.
Intellectual Property
We believe that our technology differentiates us from other providers of wave and other renewable energy
technologies. As a result, our success depends in part on our ability to obtain and maintain proprietary protection for
our products, technology and know-how, to operate without infringing the proprietary rights of others and to prevent
others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among
other methods, filing United States and foreign patent applications related to our proprietary technology, inventions
and improvements that are important to the development of our business. We also rely on trade secrets, know-how,
and continuing technological innovation and may rely on in-licensing opportunities to develop and maintain our
proprietary position.
As of April 30, 2008, we owned a total of 37 issued United States patents and 12 United States patent
applications. We have pending foreign counterparts to 12 of our issued patents and ten of our pending non-
provisional patent applications.
Our patent portfolio includes patents and patent applications with claims directed to:
(cid:129) system design;
20
(cid:129) control systems;
(cid:129) power conversion;
(cid:129) anchoring and mooring; and
(cid:129) wave farm architecture.
The expiration dates for our issued United States patents range from 2015 to 2026. We do not consider any
single patent or patent application that we hold to be material to our business. The patent positions of companies like
ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify
our proprietary position for our technology will depend on our success in continuing to obtain effective patent
claims and enforcing those claims once granted. In addition, certain technologies that we developed with US federal
government funding are subject to certain government rights as described in “Risk Factors — Risks Relating to Our
Business.”
We use trademarks on nearly all of our products and believe that having distinctive marks is an important factor
in marketing our products. We have registered our PowerBuoy» and CellBuoyTM marks and filed applications to
register our Talk on WaterTM mark for a cellular telephone service application of our autonomous PowerBuoy
system and our Making Waves in PowerSM service mark in the United States.
Competition
We compete and will compete with power generation equipment suppliers in all segments of the electric power
industry, including wave energy, other forms of renewable energy and traditional fossil fuel. The renewable energy
industry is both highly competitive and continually evolving as participants strive to distinguish themselves within
their markets and compete within the larger electric power industry. Many of our competitors in certain of these
segments have established a stronger market position than ours and have greater resources and name recognition
than we have. In addition, there are many companies, including some of the largest multinational energy companies,
that are developing or sponsoring innovative technologies for renewable energy production. Accordingly, our
success depends in part on developing and demonstrating the commercial viability of wave energy solutions and
identifying markets for and applications of our PowerBuoy systems and technology.
Although the market for equipment that generates electricity from wave energy is in its early stage of
commercial development, there are a number of private companies, some with institutional funding, developing
technologies to generate electricity from wave energy, and we compete or will compete with them. We believe there
are 30 to 40 companies worldwide developing wave energy technologies. Most of these companies are located in the
United Kingdom, continental Europe, the United States and Australia, and almost all are focused on offshore
systems. Only a few of these companies have conducted ocean testing of their systems, which is the critical factor in
proving the survivability and performance of any wave energy system.
Sixteen companies expressed an interest to SWRDA in participating in the development of a new Wave Hub
power station project off the coast of Cornwall, England. Four companies were ultimately selected: Ocean Prospect
Ltd., a subsidiary of the Wind Prospect group, Fred.Olsen Ltd., Oceanlinx and us.
Ocean Prospect Ltd. has stated that it will deploy the Pelamis device developed by Pelamis Wave Power at the
Cornwall site. The Pelamis system is a semi-submerged, articulated structure composed of cylindrical sections
linked by hinged joints. The wave-induced motion of these cylinders relative to each other is used to pump hydraulic
power take off systems, providing the mechanical power to turn the generators to produce electricity. Fred.Olsen, a
ship and offshore platform builder, intends to deploy a multiple point-absorber system comprised of a number of
floating buoys attached to a stable floating platform. Oceanlinx intends to deploy a large floating system which is
based on an oscillating water column and proprietary turbine. Additional competitors may enter the market, and we
are likely to compete with new companies in the future.
To compete effectively, we have to demonstrate that our PowerBuoy systems are attractive, compared to other
wave energy systems and other renewable energy systems, by differentiating our systems on the basis of
performance, survivability in operation and storm wave conditions, cost effectiveness and the operations and
21
maintenance services that we provide. We believe that we perform favorably to our competition with respect to each
of these factors.
Government Regulation
The electric power industry is subject to extensive regulation, which varies by jurisdiction. For example, the
electricity industry in the United States is governed by both federal and state laws and regulations, with the federal
government having jurisdiction over the sale and transmission of electricity at the wholesale level in interstate
commerce, and the states having jurisdiction over the sale and distribution of electricity at the retail level. The
electricity industry in the European Union, or the EU, is primarily governed by national law, but a number of EU-
level regulations impose obligations on member states, notably with respect to the liberalization of the electricity
markets.
The renewable energy industry has also been subject to increasing regulation, however none of the countries in
which we are currently marketing our PowerBuoy systems have comprehensive regulatory schemes tailored to
wave energy. As the renewable energy industry continues to evolve and as the wave energy industry in particular
develops, we anticipate that wave energy technology and our PowerBuoy systems and their deployment will be
subject to increased oversight and regulation in accordance with international, national and local regulations
relating to safety, sites, environmental protection, utility interconnection and metering and related matters.
Our PowerBuoy wave power stations currently face regulation in the US and in foreign jurisdictions
concerning, among other areas, the sale and transmission of electricity, site approval and environmental approval
and compliance. In order to encourage the adoption of renewable energy systems, many governments offer
subsidies and other financial incentives and have mandated renewable energy targets. These subsidies, incentives
and targets may not be applicable to our wave energy technology and therefore may not be available for us or our
customers.
Sale and Transmission of Electricity
The US government regulates the electricity wholesale and transmission business through FERC. FERC
regulates the rates and terms for sales of electricity at the wholesale level, and the organization, governance and
financing of the companies engaged in electricity sales. As a result, FERC regulates the rates charged for sales of
electric power from a wave power station into the wholesale market, although it is possible to obtain an exemption
from FERC that would allow those sales to occur at market-based rates. FERC also regulates the construction,
operation and maintenance of any dam, water conduit, reservoir or powerhouse along or in any of the navigable
waters of the United States for the purpose of generating electric power. As a result, the construction and operation
of a wave power station in the United States requires the issuance of a license by FERC. We have been granted a
preliminary permit by FERC to evaluate the feasibility of a 50MW wave power station and a 100MW wave power
station off the coast of Oregon. Further, we have filed with FERC the required applications for these two wave
power station projects to provide our notice of intent to seek licenses for the projects and to provide required
information regarding the projects. An application to FERC was not required for the current project in New Jersey
because the system is not grid-connected and is for demonstration purposes.
Under Spanish law, each of the Spanish Autonomous Regions, including the Cantabria region, has the power to
issue administrative authorizations for the construction and exploitation of installations for the production of
renewable energy, including installations that use the energy of waves. Iberdrola Energias has applied for and
received the necessary authorizations for installation of the first PowerBuoy at our Santoña, Spain wave power
project.
Site Approval
Generally, we expect that we will deploy our PowerBuoy systems in the range of one to five miles from the
shore, subject to water depth and overall wave heights. Although regulations regarding the use of ocean space vary
around the world, we do not expect significant delay in obtaining site approvals, as governments have to date
encouraged the use of renewable energy sources. Our customers for the Spain and France projects and SWRDA for
the Cornwall, England project are responsible for obtaining the necessary siting permits for their projects.
22
In the United States, federal agencies regulate the siting of renewable energy and related-uses located on the
outer continental shelf, which is generally more than three miles offshore. For projects located within three miles of
the US shore, the adjacent state would be responsible for issuing a lease and other required authorizations for the
location of the project. In either case, an assessment of the potential environmental impact of the project would be
conducted in addition to other requirements.
Environmental Approval and Compliance
We are subject to various foreign, federal, state and local environmental protection and health and safety laws
and regulations governing, among other things: the generation, storage, handling, use and transportation of
hazardous materials; the emission and discharge of hazardous materials into the ground, air or water; and the health
and safety of our employees. In addition, in the United States, the construction and operation of a power system
offshore would require permits and approvals from FERC, the Coast Guard, the Army Corps of Engineers and other
governmental authorities. These required permits and approvals evaluate, among other things, whether the proposed
project is in the public interest and ensure that the project would not create a hazard to navigation. Other foreign and
international laws may require similar approvals. Each PowerBuoy system installed within Spanish territorial
waters must be approved and authorized by the Spanish Ministry of Environment. In addition, we anticipate that our
PowerBuoy systems will be subject to EU law on the protection of the environment and environmental assessments
of development projects including the Environmental Impact Assessment and Strategic Environmental Assessment
Directives.
We believe that a significant advantage of our PowerBuoy systems is that they do not present significant
environmental risks when compared to traditional power generation technologies, as there is no significant visual or
audible impact and such systems have not been shown to have a significant negative effect on fish or sea mammals.
We are not aware of any liabilities in connection with compliance with such laws, regulations, permits and approvals
that would have a material adverse effect on our financial position, results of operations or cash flows.
Subsidies and Incentives
Several governments have enacted subsidies and incentives designed to encourage the development of
renewable energy resources. Because of the relative novelty of wave energy generation, these government
programs generally do not apply specifically to wave energy generation, and so these programs may not be
available to our customers or us in all cases.
Under a tariff subsidy, the government sets price subsidies to be paid to electricity producers for renewable
electricity generated by them. The prices are set above market rates and may be differentiated based on system size
or application. Under a renewable portfolio standard, the government requires regulated utilities to supply a portion
of their total electricity in the form of renewable electricity. Some programs further specify that a portion of the
renewable energy quota must be from a particular renewable energy source, although none have specific quotas for
wave energy.
Tax incentive programs for renewable energy exist in the United States at both the federal and state level and
can take the form of investment tax credits, accelerated depreciation and property tax exemptions. Several
governments also facilitate low interest loans for renewable energy systems, either through direct lending, credit
enhancement or other programs.
Each of the member states of the EU has a country-specific target for the level of consumption of electricity
from renewable sources that it should attain by 2010. The United Kingdom Renewables Obligation of April 2002
included a target of 10% of electricity generation to come from renewable sources by 2010 and 15% by 2016, which
will continue until 2027. Electricity suppliers that are unable to otherwise meet their renewables obligation have to
pay a buy-out price (currently £0.033 per kilowatt hour) or purchase Renewables Obligation Certificates from
companies that generate electricity from renewable resources. The United Kingdom Department of Trade and
Industry has established a £50 million Marine Renewables Deployment Fund, of which £42 million is allocated to
provide a maximum seven-year benefit to any one marine power technology of £9 million, in the form of a 25%
capital grant and a tariff supplement of £0.10 per kilowatt-hour generated.
23
Many countries and other local jurisdictions have established limits on carbon dioxide emissions. In particular,
a key component of the Kyoto Protocol is the commitments made by certain countries to reduce carbon dioxide
emissions. The country, locality or companies within the jurisdiction are given carbon emission allowances, or
carbon credits, which represent the right to emit a specific amount of carbon dioxide. A country, locality or
company having emissions that exceed its allocated carbon credits may purchase unused carbon credits from a
country, locality or company that has reduced its emissions beyond its requirements to do so. The carbon dioxide
emissions from a PowerBuoy wave power station are far lower than the emissions from a fossil fuel power station of
the same capacity. Therefore, a PowerBuoy wave power station may generate carbon credits that could be used and
sold.
In 2000, we entered into an agreement with Woodside Sustainable Energy Solutions Pty. Ltd., or Woodside,
under which we received $0.6 million in exchange for granting Woodside an option to purchase, at a 30% discount
from the then-prevailing market rate, up to 500,000 metric tons of carbon emission credits we generate during the
years 2008 through 2012. If by December 31, 2012 we do not sell to Woodside the full amount of emission credits
covered by the option, we may be obligated to return all or a portion of the option fee and, in certain circumstances,
pay additional amounts to Woodside.
Employees
As of April 30, 2008, we had 47 employees, including 17 employees in manufacturing, 16 in research,
development and engineering functions and 14 employees in selling, general and administrative functions. Of these
employees, 35 are located in Pennington, New Jersey and 12 are located in Warwick, UK. We believe that our future
success will depend in part on our continued ability to attract, hire and retain qualified personnel. None of our
employees is represented by a labor union, and we believe our employee relations are good.
In order to meet our short-term goals, we plan to add approximately 16 employees, including engineers with
varying levels and areas of expertise, by the end of fiscal 2009. By the end of fiscal 2011, we expect to increase our
staff significantly in order to meet our current manufacturing targets. The majority of our new hires will be
engineers with varying levels and areas of expertise, project managers and manufacturing personnel.
Product Insurance
We currently have a property and liability insurance policy underwritten by Lloyd’s Underwriters that covers
our PowerBuoy systems in Hawaii and New Jersey, and that can be expanded to cover our PowerBuoy systems to be
deployed off the coasts of Santoña, Spain, Cornwall, England and France. We have not claimed any losses under this
policy.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below with all of the other information included in this
Annual Report before deciding to invest in our common stock. If any of the following risks actually occur, they may
materially harm our business and our financial condition and results of operations. In this event, the market price of
our common stock could decline and your investment could be lost.
Risks Relating to Our Business
We have a history of operating losses and may never achieve or maintain profitability.
We have incurred net losses since we began operations in 1994, including net losses of $7.1 million in fiscal
2006, $9.6 million in fiscal 2007 and $14.7 million in fiscal 2008. As of April 30, 2008, we had an accumulated
deficit of approximately $52.9 million. These losses have resulted primarily from costs incurred in our research and
development programs and from our selling, general and administrative costs. We expect to increase our operating
expenses significantly as we continue to expand our infrastructure, research and development programs and
commercialization activities. As a result, we will need to generate significant revenues to cover these costs and
achieve profitability.
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We have entered into an agreement for the first phase of construction of a wave power station off the coast of
Santoña, Spain, as well as an operations and maintenance contract for the equipment to be installed in this first
phase. Under both contracts, our potential profitability is limited. Under the construction contract, our revenues are
limited to reimbursement for our construction costs without any mark-up and we are required to bear the first
A0.5 million of any cost overruns and to absorb certain other costs as set forth in the agreement. This contract was
amended in February 2008 to provide for customer funding of $3.7 million for the current phase of the project for
construction and deployment of one 40kW PowerBuoy and its mooring, plus procurement of the underwater
substation (pod) and underwater power transmission cables. Funding for the deployment of the pod and cables is
under discussion with the customer. We have recognized an anticipated loss under this contract of $3.7 million. This
anticipated loss at completion of the contract also reflects our decision made in the fourth quarter of fiscal year 2008
to absorb $1.9 million of additional costs of the project beyond our obligation for the initial cost overruns and
certain other costs as set forth in the agreement. This decision was based on the progress of the project to date, the
benefits to be derived from a successful initial project and the prospect of incremental contract value to be received
in connection with additional work under this contract. Our estimates of the project’s costs may increase in the
future, and we may be required to incur the additional costs to complete the project, to seek other suppliers for the
materials or services related to the cost increases or to terminate the agreement. Any of such outcomes may have a
material adverse effect on our financial condition and results of operations. Under the operations and maintenance
contract, we are paid a fixed fee for scheduled maintenance, the profits on which are required to be refunded to cover
any unscheduled maintenance fees we receive during the term of the agreement.
We do not know whether or when we will become profitable because of the significant uncertainties with
respect to our ability to successfully commercialize our PowerBuoy systems in the emerging renewable energy
market. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or
annual basis. If we are unable to achieve and then maintain profitability, the market value of our common stock may
decline.
Wave energy technology may not gain broad commercial acceptance, and therefore our revenues may not
increase, and we may be unable to achieve and then sustain profitability.
Wave energy technology is at an early stage of development, and the extent to which wave energy power
generation will be commercially viable is uncertain. Many factors may affect the commercial acceptance of wave
energy technology, including the following:
(cid:129) performance, reliability and cost-effectiveness of wave energy technology compared to conventional and
other renewable energy sources and products;
(cid:129) developments relating to other renewable energy generation technologies;
(cid:129) fluctuations in economic and market conditions that affect the cost or viability of conventional and
renewable energy sources, such as increases or decreases in the prices of oil and other fossil fuels;
(cid:129) overall growth in the renewable energy equipment market;
(cid:129) availability and terms of government subsidies and incentives to support the development of renewable
energy sources, including wave energy;
(cid:129) fluctuations in capital expenditures by utilities and independent power producers, which tend to decrease
when the economy slows and interest rates increase; and
(cid:129) the development of new and profitable applications requiring the type of remote electric power provided by
our autonomous wave energy systems.
If wave energy technology does not gain broad commercial acceptance, our business will be materially harmed
and we may need to curtail or cease operations.
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If sufficient demand for our PowerBuoy systems does not develop or takes longer to develop than we
anticipate, our revenues may decline, and we may be unable to achieve and then sustain profitability.
Even if wave energy technology achieves broad commercial acceptance, our PowerBuoy systems may not
prove to be a commercially viable technology for generating electricity from ocean waves. We have invested a
significant portion of our time and financial resources since our inception in the development of our PowerBuoy
systems. To date, we have not yet manufactured and deployed any PowerBuoy systems for commercial use. As we
begin to manufacture, market, sell and deploy our PowerBuoy systems in greater quantities, unforeseen hurdles may
be encountered that would limit the commercial viability of our PowerBuoy systems, including unanticipated
manufacturing, deployment, operating, maintenance and other costs. Our target customers and we may also
encounter technical obstacles to deploying, operating and maintaining PowerBuoy systems in quantities necessary
to generate competitively-priced electricity.
If demand for our PowerBuoy systems fails to develop sufficiently, we may be unable to grow our business or
generate sufficient revenues to achieve and then sustain profitability. In addition, demand for PowerBuoy systems in
our presently targeted markets, including coastal North America, the west coast of Europe, the coasts of Australia
and the east coast of Japan, may not develop or may develop to a lesser extent than we anticipate.
If we are not successful in commercializing our PowerBuoy system, or are significantly delayed in doing so,
our business, financial condition and results of operations could be adversely affected.
The reduction or elimination of government subsidies and economic incentives for renewable energy
sources could prevent demand for our PowerBuoy systems from developing, which in turn would
adversely affect our business, financial condition and results of operations.
Federal, state and local governmental bodies in many countries, most notably France, Spain, the United
Kingdom, Australia, Japan and the United States, have provided subsidies in the form of tariff subsidies, rebates, tax
credits and other incentives to utilities, power generators and distributors using renewable energy. However, these
incentives and subsidies generally decline over time, and many incentive and subsidy programs have specific
expiration dates. Moreover, because the market for electricity generated from wave energy is at an early stage of
development, some of the programs may not include wave energy as a renewable energy source eligible for the
incentives and subsidies.
Currently, the cost of electricity generated from wave energy, without the benefit of subsidies or other
economic incentives, substantially exceeds the price of electricity in most significant markets in the world. As a
result, the near-term growth of the market for our utility PowerBuoy systems, which are designed to feed electricity
into a local or regional power grid, depends significantly on the availability and size of government incentives and
subsidies for wave energy. As renewable energy becomes more of a competitive threat to conventional energy
providers, companies active in the conventional energy business may increase their lobbying efforts in order to
encourage governments to stop providing subsidies for renewable energy, including wave energy. We cannot predict
the level of any such efforts, or how governments may react to such efforts. The reduction, elimination or expiration
of government incentives and subsidies, or the exclusion of wave energy technology from those incentives and
subsidies, may result in the diminished competitiveness of wave energy relative to conventional and non-wave
energy renewable sources of energy. Such diminished competitiveness could materially and adversely affect the
growth of the wave energy industry, which could in turn adversely affect our business, financial condition and
results of operations.
In 2000, we entered into an agreement with Woodside, under which we received $0.6 million in exchange for
granting Woodside an option to purchase, at a 30% discount from the then-prevailing market rate, up to 500,000
metric tons of carbon emission credits we generate during the years 2008 through 2012. However, if by
December 31, 2012 we do not become entitled under applicable laws to the full amount of emission credits
covered by the option, we are obligated to return the option fee of $0.6 million, less the aggregate discount on any
emission credits sold to Woodside prior to such date. If we receive emission credits under applicable laws and fail to
sell to Woodside the credits up to the full amount of emission credits covered by the option, Woodside is entitled to
liquidated damages equal to 30% of the aggregate market value of the shortfall in emission credits (subject to a limit
on the market price of emission credits).
26
Our product development costs have been steadily increasing and are likely to increase significantly over
the next several years.
Our product development costs primarily relate to our efforts to increase the maximum rated output of our
current 40kW utility PowerBuoy system in successive stages to 500kW. Our product development costs were
$4.2 million in fiscal 2006 as compared to $6.2 million in fiscal 2007 and $8.3 million in fiscal 2008. We anticipate
that our product development costs related to the planned increase in the output of our utility PowerBuoy system
will increase significantly over the next several years.
We have invested, and will continue to invest, funds to construct demonstration wave power stations that
may generate little or no direct revenue.
We have constructed, and plan to construct in the future, demonstration wave power stations to establish the
feasibility of wave energy technology and to encourage the market adoption of our wave power stations.
Demonstration wave power stations allow potential customers to see first-hand the viability of wave energy
technology as a source of electricity. We incur significant costs in constructing and maintaining these demonstration
wave power stations, and we may generate little or no direct revenue from them.
Our PowerBuoy systems do not have a sufficient operating history to confirm how they will perform over
their estimated 30-year useful life.
We began developing and testing wave energy technology 11 years ago. However, to date we have only
manufactured 12 PowerBuoy systems for use in testing and development. The longest continuous in-ocean
deployment of our PowerBuoy system has been for 12 months. As a result, our PowerBuoy systems do not have a
sufficient operating history to confirm how they will perform over their estimated 30-year useful life. Our
technology has not been deployed commercially and we have not yet demonstrated that our engineering and test
results can be duplicated in commercial production. We have conducted and plan to continue to conduct practical
testing of our PowerBuoy system. If our PowerBuoy system ultimately proves ineffective or unfeasible, we may not
be able to engage in commercial production of our products or we may become liable to our customers for quantities
we are obligated but are unable to produce. If our PowerBuoy systems perform below expectations, we could lose
customers and face substantial repair and replacement expense which could in turn adversely affect our business,
financial condition and results of operations.
Our future success depends on our ability to increase the maximum rated power output of our utility
PowerBuoy system. If we are unable to increase the maximum rated output of our utility PowerBuoy sys-
tem, the commercial prospects for our utility PowerBuoy system would be adversely affected.
One of our goals is to increase the maximum rated output of our utility PowerBuoy system, which is currently
40kW, to 150kW in 2008 and ultimately to 500kW in 2010. Our success in meeting this objective depends on our
ability to significantly increase the power output of our PowerBuoy system in a cost-effective and timely manner
and our ability to overcome the engineering and deployment hurdles that we face, including developing design and
construction techniques that will enable the larger PowerBuoy systems to be deployed cost effectively and without
damage, and developing adjustments to the mooring system to account for the larger-sized PowerBuoy systems. We
have experienced delays in the development and deployment of our PowerBuoy system in the past, and could
experience similar delays or other difficulties in the future. The present schedule for development of the 150kW
PowerBuoy reflects management’s decision to enhance the system design to allow for improved survivability in
100-year storm wave conditions, and to work with a third-party engineering group to attain independent certi-
fication of the 150kW PowerBuoy design. If we cannot increase the power output of the PowerBuoy system, or if it
takes us longer to do so than we anticipate, we may be unable to expand our business, maintain our competitive
position, satisfy our contractual obligations or become profitable. In addition, if the cost associated with these
development efforts exceeds our projections, our results of operations will be adversely affected.
27
If we do not reach full commercial scale, we may not be able to offer a cost competitive power station
and the commercial prospects of our utility PowerBuoy system would be adversely affected.
Unless we reach full commercial scale, which we estimate to be manufacturing levels of at least 300 units of
500kW PowerBuoy systems per year, we may not be able to offer an electricity solution that competes on a non-
subsidized basis with today’s price of wholesale electricity in key markets in the United States, Europe, Japan and
Australia. If we do not reach full commercial scale, the commercial prospects for our utility PowerBuoy system
would be adversely affected.
We have not yet deployed a wave power station consisting of an array of two or more PowerBuoy systems.
If we are unable to deploy a multiple-system wave power station, our revenues may not increase, and we
may be unable to achieve and then maintain profitability.
We have not yet deployed a wave power station consisting of an array of two or more PowerBuoy systems. Our
success in developing and deploying a wave power station consisting of an array of two or more PowerBuoy systems
is contingent upon, among other things, receipt of required governmental permits, obtaining adequate financing,
successful array design implementation and finally, successful deployment and connection of the PowerBuoy
systems.
We have not conducted ocean testing or otherwise installed in the ocean a multiple-system wave power station.
In particular, unlike single-system wave power stations, multiple-system wave power stations require use of an
underwater substation to connect the cables from, and collect the electricity generated by, each PowerBuoy system
in the array. If our underwater substation does not work as we anticipate, we will need to design an alternative
system, which could delay our business plans. In addition, unanticipated issues may arise with the logistics and
mechanics of deploying and maintaining multiple PowerBuoy systems at a single site and the additional equipment
associated with these multiple-system wave power stations.
We may be unsuccessful in accomplishing any of these tasks or doing so on a timely basis. The development
and deployment of an array of PowerBuoy systems may require us to incur significant expenses for preliminary
engineering, permitting and legal and other expenses before we can determine whether a project is feasible,
economically attractive or capable of being financed.
If we are unable to deploy larger PowerBuoy systems cost effectively and without damage to the systems,
we may be unable to compete effectively.
We will need to build larger buoys in order to increase the output of our current PowerBuoy systems. The larger
buoys will be more difficult than our current buoys to deploy cost effectively and without damage. Our current
deployment methodologies, including transportation to the installation site and the mooring of the PowerBuoy
systems, will need to be revised for PowerBuoy systems with greater output. If we cannot develop cost effective
methodologies for deployment of the larger PowerBuoy systems, or if it takes us longer to do so than we anticipate,
we may not be able to deploy such systems in the time we anticipate or at all. Therefore, even if we succeed in
increasing the output of our PowerBuoy systems above 40kW, if we are unable to deploy these larger PowerBuoy
systems or encounter problems in doing so, we may be unable to expand our business, maintain our competitive
position, satisfy our contractual obligations or become profitable.
If we are not successful in completing the development of wave power stations in Spain or France, it
would materially harm our business, financial condition and results of operations.
In July 2006, we entered into an agreement for the first phase of the construction of a wave power station off the
coast of Santoña, Spain, with our customer, Iberdrola Cantabria. We refer to this agreement as the Spain
construction agreement. Iberdrola Cantabria was formed by affiliates of Iberdrola and Total, two Spanish
governmental agencies and us for the purpose of constructing and operating a wave power station off the coast
of Spain. Under the Spain construction agreement, we have agreed to manufacture and deploy by no later than
December 31, 2009 one 40kW PowerBuoy system and the ocean-based substation and infrastructure required to
connect nine additional 150kW PowerBuoy systems that together are contemplated to constitute a 1.39MW wave
power station. In February 2008, the Spain construction agreement was amended to provide for the current phase of
28
the construction of the 1.39MW wave power station to include the manufacture and deployment of one 40kW
PowerBuoy system plus the fabrication of the underwater power transmission cable and underwater substation for
all ten PowerBuoy systems. The terms of the installation of the underwater transmission cable and underwater
substation will be separately negotiated, and if so agreed, are expected to provide for additional funding for the
installation work. Under the terms of the agreement, our revenues are limited to reimbursement for our construction
costs without any mark-up. In addition, we are required to bear the first A0.5 million of any cost overruns and to
absorb certain other costs as set forth in the agreement. We have recognized an anticipated loss of $3.7 million under
this contract. Our estimates of the project’s costs may increase in the future, and we may elect to incur the additional
costs and continue the project, to seek other suppliers for the materials or services related to the cost increases or to
terminate the agreement. Any of such outcomes may have a material adverse effect on our financial condition and
results of operations. The anticipated loss of $3.7 million under the Spain construction agreement includes costs
incurred to date and our current estimate of other amounts we may be required to bear under the agreement.
In addition, because the amended Spain construction agreement does not cover the terms for deployment of the
underwater transmission cable and substation and the manufacturing and deployment of the nine additional
PowerBuoy units, we will need to enter into a subsequent contract with Iberdrola Cantabria before we complete
these elements of construction of the full wave power station. If we are unable to successfully manufacture all ten
PowerBuoy units or meet the terms of the Spain construction agreement, or if we are not able to successfully
negotiate a subsequent contract or contracts with Iberdrola Cantabria for the manufacture and deployment of the
nine additional PowerBuoy units, we may lose a material component of our current and anticipated revenue stream.
Iberdrola Cantabria has the right to terminate the agreement if we interrupt our services for more than 180 days and
do not resume within a 30-day period or if the first phase of construction is not completed by December 31, 2009 for
reasons attributable to us, or for a serious and repeated breach of a major obligation that is not cured within a 30-day
period after we receive notice of the breach. If Iberdrola Cantabria were to terminate the Spain construction
agreement for any of these reasons, we may not be able to find another company to fund development of the wave
power station. In addition, we have made guarantees to Iberdrola Cantabria associated with the current phase of
construction in respect of the quality, repair and replacement of the 40kW PowerBuoy system and ocean-based
substation and the level of power output of the 40kW PowerBuoy system.
Under our agreement with affiliates of Iberdrola and Total to study and assess the feasibility of a wave power
station off the coast of France, either of Iberdrola or Total may withdraw without further obligation. In addition, in
order to proceed with development of the France wave power station, all three parties must conclude that
development is feasible. If we proceed, Iberdrola, Total and we will form a new company for the purpose of
constructing and operating the wave power station. If either Iberdrola or Total withdraws or does not agree that
development of the wave power station is feasible, we may not be able to proceed with development of the wave
power station. In addition, if we withdraw from the France project, we will remain obligated to supply and install
equipment and provide the new company with assistance and information so that a new company can operate the
wave power station. In addition, pursuant to the France development agreement, we are restricted from developing
or building, or supplying equipment for use in, a PowerBuoy system to any other customer in France until December
2008.
If either of the Spain or France projects were cancelled or otherwise interrupted, it would adversely affect our
business, financial condition and results of operations.
If we are unable to successfully negotiate and enter into operations and maintenance contracts with our
customers on terms that are acceptable to us, our ability to diversify our revenue stream will be impaired.
An important element of our business strategy is to maximize our revenue opportunities with our existing and
future customers by seeking to enter into operations and maintenance contracts with them under which we would be
paid fees for operating and maintaining wave power stations that they have purchased from us. Even if customers
purchase our PowerBuoy systems, they may not enter into operations and maintenance contracts with us. We may
not be able to negotiate operations and maintenance contracts that provide us with any profit opportunities. Even if
we successfully negotiate and enter into such operations and maintenance contracts, our customers may terminate
them prematurely or they may not be profitable for a variety of reasons, including the presence of unforeseen
hurdles or costs. In addition, our inability to perform adequately under such operations and maintenance contracts
29
could impair our efforts to successfully market the PowerBuoy systems. Any one of these outcomes could have a
material adverse effect on our business, financial condition and results of operations.
If we are unable to fulfill our obligations under our current operations and maintenance contract in a
cost effective manner, our financial condition and results of operations could be adversely affected.
In January 2007, we entered into an agreement with Iberdrola Cantabria for the monitoring, operation and
maintenance of the 40kW PowerBuoy system and the ocean-based substation and infrastructure to be manufactured
and deployed under the Spain construction agreement. Under this operations and maintenance agreement, we are
required to provide services for two years following provisional acceptance of the PowerBuoy system and
substation and infrastructure. We are to be paid a fixed fee for scheduled maintenance, ongoing operations and
other routine services. In connection with any unscheduled repairs we perform under the operations and main-
tenance agreement, Iberdrola Cantabria and we will agree on the fees, if any, and timing, for those services. To the
extent we would otherwise have profits from the fixed fee at the end of the two-year initial term of the agreement, we
are obligated to reimburse Iberdrola Cantabria for any fees paid to us for unscheduled repairs. If the costs we
actually incur in connection with providing services under the operations and maintenance agreement exceed the
fees we receive, we will incur a loss in connection with these services, which could adversely affect our financial
condition and results of operations.
Our inability to effectively manage our growth could adversely affect our business and operations.
The scope of our operations to date has been limited, and we do not have experience operating on the scale that
we believe will be necessary to achieve profitable operations. Our current personnel, facilities, systems and internal
procedures and controls are not adequate to support our future growth. We plan to add sales, marketing and
engineering offices in additional locations, including Australia, Japan, continental Europe and the west coast of the
United States. We currently estimate that we will need to add approximately 90,000 square feet of leased space by
the end of fiscal 2011 for sales, marketing, engineering, assembly and testing in order to meet our current
manufacturing targets.
To manage the expansion of our operations, we will be required to improve our operational and financial
systems, procedures and controls, increase our manufacturing capacity and throughput and expand, train and
manage our employee base, which must increase significantly if we are to be able to fulfill our current manu-
facturing and growth plans. Our management will also be required to maintain and expand our relationships with
customers, suppliers and other third parties, as well as attract new customers and suppliers. If we do not meet these
challenges, we may be unable to take advantage of market opportunities, execute our business strategies or respond
to competitive pressures.
Problems with the quality or performance of our PowerBuoy systems could adversely affect our business,
financial condition and results of operations.
Our agreements with customers will generally include guarantees with respect to the quality and performance
of our PowerBuoy systems. For example, our agreement to complete the current phase of the construction of a
1.39MW wave power station off the coast of Santoña, Spain contains guarantees associated with this phase
regarding the quality, replacement and repair of the 40kW PowerBuoy system and ocean-based substation and the
level of power output of the 40kW PowerBuoy system.
Because of the limited operating history of our PowerBuoy systems, we have been required to make
assumptions regarding the durability, reliability and performance of the systems, and we cannot predict whether
and to what extent we may be required to perform under the guarantees that we expect to give our customers. Our
assumptions could prove to be materially different from the actual performance of our PowerBuoy systems, causing
us to incur substantial expense to repair or replace defective systems in the future. We will bear the risk of claims
long after we have sold our PowerBuoy systems and recognized revenue. Moreover, any widespread product
failures could adversely affect our business, financial condition and results of operations.
30
We currently depend on a limited number of customers for substantially all of our revenues. The loss of,
or a significant reduction in revenues from, any of these customers could significantly reduce our reve-
nues and harm our operating results.
In fiscal 2008, we generated substantially all of our revenues from three entities. The US Navy, our largest
customer, accounted for approximately 58% of our revenues during fiscal 2008, while Iberdrola and Total
accounted for 31% of our revenues. In fiscal 2007, revenues from the US Navy accounted for approximately
54% of our total revenues. Our current contract for our project in Hawaii with the US Navy expires in December
2008. We will be required to enter into additional contracts with the US Navy for this project, which will require
appropriation by the US Congress and the US Navy in order to receive additional funding. Additional funding for
our project with the US Navy may not be approved or we may not be able to negotiate future agreements with the US
Navy on acceptable terms, if at all.
Generally, we recognize revenue using the percentage-of-completion method based on the ratio of costs
incurred to total estimated costs at completion. In certain circumstances, revenue under contracts that have specified
milestones or other performance criteria may be recognized only when our customer acknowledges that such
criteria have been satisfied. In addition, recognition of revenue (and the related costs) may be deferred for fixed-
price contracts until contract completion if we are unable to reasonably estimate the total costs of the project prior to
completion. Because we currently have a small number of customers and contracts, problems with a single contract
can adversely affect our business, financial condition and results of operations.
Historically, we have relied on a small group of customers for substantially all of our revenue, and such
concentration will continue for the foreseeable future. The loss of any of our customers or their default in payment
could adversely affect our business, financial condition and results of operations.
Our relationships with our alliance partners may not be successful and we may not be successful in
establishing additional relationships, which could adversely affect our ability to commercialize our prod-
ucts and services.
An important element of our business strategy is to enter into development agreements and strategic alliances
with regional utility and energy companies committed to providing electricity from renewable energy sources. If we
are unable to reach agreements with suitable alliance partners, we may fail to meet our business objectives for the
commercialization of our PowerBuoy system. We may face significant competition in seeking appropriate alliance
partners. Moreover, these development agreements and strategic alliances are complex to negotiate and time
consuming to document. We may not be successful in our efforts to establish additional strategic relationships or
other alternative arrangements. The terms of any additional strategic relationships or other arrangements that we
establish may not be favorable to us. In addition, these relationships may not be successful, and we may be unable to
sell and market our PowerBuoy systems to these companies and their affiliates and customers in the future, or
growth opportunities may not materialize, any of which could adversely affect our business, financial condition and
results of operations.
Our investments in joint ventures could be adversely affected by our lack of sole decision-making author-
ity, our reliance on a co-venturer’s financial condition and disputes between us and our co-venturers.
It is part of our strategy to co-invest in wave power projects with third parties through joint ventures by
acquiring non-controlling interests in special purpose entities. In these situations, we will not be in a position to
exercise sole decision-making authority regarding the joint venture. Investments in joint ventures involve risks that
would not be present were a third party not involved, including the possibility that our co-venturers might become
bankrupt or fail to fund their share of required capital contributions. Our co-venturers may have economic or other
business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take
actions that are contrary to our policies or objectives. Disputes between us and our co-venturers may result in
litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing
their time and effort on our business. Consequently, actions by, or disputes with, partners or co-venturers might
result in subjecting wave power projects undertaken by the joint venture to additional risk.
31
Our targeted markets are highly competitive. We compete with other renewable energy companies and may
have to compete with larger companies that enter into the renewable energy business. If we are unable to
compete effectively, we may be unable to increase our revenues and achieve or maintain profitability.
The renewable energy industry, particularly in our targeted markets of coastal North America, the west coast of
Europe, the coasts of Australia and the east coast of Japan, is highly competitive and continually evolving as
participants strive to distinguish themselves and compete with the larger electric power industry. Competition in the
renewable energy industry is likely to continue to increase with the advent of several renewable energy technol-
ogies, including tidal and ocean current technologies. If we are not successful in manufacturing systems that
generate competitively priced electricity, we will not be able to respond effectively to competitive pressures from
other renewable energy technologies.
Moreover, the success of renewable energy generation technologies may cause larger electric utility and other
energy companies with substantial financial resources to enter into the renewable energy industry. These com-
panies, due to their greater capital resources and substantial technical expertise, may be better positioned to develop
new technologies.
Our inability to respond effectively to such competition could adversely affect our business, financial
condition and results of operations.
We have limited manufacturing experience. If we are unable to increase our manufacturing capacity in a
cost-effective manner, our business will be materially harmed.
We plan to manufacture key components of our PowerBuoy systems, including the advanced control and
generation systems. However, we have only manufactured our PowerBuoy systems in limited quantities for use in
development and testing and have little commercial manufacturing experience. Our future success depends on our
ability to significantly increase both our manufacturing capacity and production throughput in a cost-effective and
efficient manner. In order to meet our growth objectives, we will need to increase our engineering and manu-
facturing staff by over 160 people by the end of fiscal 2011. There is intense competition for hiring qualified
technical and engineering personnel, and we may not be able to hire a sufficient number of qualified engineers to
allow us to meet our growth objectives.
We may be unable to develop efficient, low-cost manufacturing capabilities and processes that will enable us to
meet the quality, price, engineering, design and production standards or production volumes necessary to
successfully commercialize our PowerBuoy systems. If we cannot do so, we may be unable to expand our
business, satisfy our contractual obligations or become profitable. Even if we are successful in developing our
manufacturing capabilities and processes, we may not be able to do so in time to meet our commercialization
schedule or satisfy the requirements of our customers.
Failure by third parties to supply or manufacture components of our products or to deploy our systems
timely or properly could adversely affect our business, financial condition and results of operations.
We are highly dependent on third parties to supply or manufacture components of our PowerBuoy systems. If,
for any reason, our third-party manufacturers or vendors are not willing or able to provide us with components or
supplies in a timely fashion, or at all, our ability to manufacture and sell many of our products could be impaired.
We do not have long-term contracts with our third-party manufacturers or vendors. If we do not develop
ongoing relationships with vendors located in different regions, we may not be successful at controlling unit costs as
our manufacturing volume increases. We may not be able to negotiate new arrangements with these third parties on
acceptable terms, if at all.
In addition, we rely on third parties, under our oversight, for the deployment and mooring of our PowerBuoy
systems. We have utilized several different deployment methods, including towing the PowerBuoy system to the
deployment location, and transporting the PowerBuoy system to the deployment location by barge or ocean
workboat. If these third parties do not properly deploy our systems, cannot effectively deploy the PowerBuoy
system on a large, commercial scale or otherwise do not perform adequately, or if we fail to recruit and retain third
32
parties to deploy our systems in particular geographic areas, our business, financial condition and results of
operations could be adversely affected.
Business activities conducted by our third-party contractors and us involve the use of hazardous materi-
als, which require compliance with environmental and occupational safety laws regulating the use of
such materials. If we violate these laws, we could be subject to significant fines, liabilities or other
adverse consequences.
Our manufacturing operations, in particular some of the activities undertaken by our third-party suppliers and
manufacturers, involve the controlled use of hazardous materials. Accordingly, our third-party contractors and we
are subject to foreign, federal, state and local laws governing the protection of the environment and human health
and safety, including those relating to the use, handling and disposal of these materials. We cannot completely
eliminate the risk of accidental contamination or injury from these hazardous materials. In the event of an accident
or failure to comply with environmental or health and safety laws and regulations, we could be held liable for
resulting damages, including damages to natural resources, fines and penalties, and any such liability could
adversely affect our business, financial condition and results of operations.
Environmental laws and regulations are complex, change frequently and have tended to become more stringent
over time. While we have budgeted for future capital and operating expenditures to maintain compliance, we cannot
assure you that environmental laws and regulations will not change or become more stringent in the future.
Therefore, we cannot assure you that our costs of complying with current and future environmental and health and
safety laws, and any liabilities arising from past or future releases of, or exposure to, hazardous substances will not
adversely affect our business, financial condition or results of operations.
If we become ineligible for or are otherwise unable to replace any contract with the US federal govern-
ment that is not extended or is terminated, our business, financial condition and results of operations will
be adversely affected.
We derive a significant portion of our revenue from US federal government contracts, which are subject to
special funding restrictions, regulatory requirements and eligibility standards and which the government may
terminate at any time or determine not to extend after their scheduled expiration. During fiscal 2007 and fiscal 2008,
we derived approximately 54% and 58%, respectively, of our total revenue from contracts with the US Navy.
US federal government contracts are also subject to contractual and regulatory requirements that may increase
our costs of doing business and could expose us to substantial contractual damages, civil fines and criminal
penalties for noncompliance. These requirements include business ethics, equal employment opportunity, envi-
ronmental, foreign purchasing, most-favored pricing and accounting provisions, among others. Payments that we
receive under US federal government contracts are subject to audit and potential refunds for at least three years after
the final contract payment is received.
The loss of federal funding designed to promote innovative research by small businesses may adversely
affect our research and development costs and revenues.
Most of our federal contracts were awarded through a special US government program called Small Business
Innovation Research, or SBIR, that is designed to promote innovative research by small businesses. The SBIR
program provides funds to qualified small businesses to further their technological research and development
activities and provides incentives to these companies to profit from commercialization of their technology. SBIR
funding represents both revenues and outside research and development investment dollars for companies that
receive it. The program is open to companies that are majority owned and controlled by individual US citizens or
permanent resident aliens, or by a parent entity that meets this standard. Our revenues from the SBIR program were
approximately $1.5 million for fiscal 2007 and $1.7 million for fiscal 2008.
As a result of the increased institutional, corporate and foreign ownership following our recent initial public
offering in the US, we are no longer eligible for the SBIR program, which may adversely affect our ability to win
future government contracts. We intend to continue to seek research and development funding from other sources,
including funding from existing government customers under non-SBIR programs. Our inability to replace SBIR
33
contracts with funds from other sources could result in reduced revenues and higher internal research and
development costs, which would adversely affect our operating results.
We market and sell, and plan to market and sell, our products in numerous international markets. If we
are unable to manage our international operations effectively, our business, financial condition and
results of operations could be adversely affected.
We market and sell, and plan to market and sell, our products in a number of foreign countries, including
France, Spain, the United Kingdom, Australia and Japan, and we are therefore subject to risks associated with
having international operations. International customers accounted for 9% of our revenues in fiscal 2006, 41% of
our revenues in fiscal 2007 and 41% of our revenues in fiscal 2008. Risks inherent in international operations
include, but are not limited to, the following:
(cid:129) changes in general economic and political conditions in the countries in which we operate;
(cid:129) unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to
renewable energy, environmental protection, permitting, export duties and quotas;
(cid:129) trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could
increase the prices of our PowerBuoy systems and make us less competitive in some countries;
(cid:129) fluctuations in exchange rates may affect demand for our PowerBuoy systems and may adversely affect our
profitability in US dollars to the extent the price of our PowerBuoy systems and cost of raw materials and
labor are denominated in a foreign currency;
(cid:129) difficulty with staffing and managing widespread operations;
(cid:129) difficulty of, and costs relating to compliance with, the different commercial and legal requirements of the
overseas markets in which we offer and sell our PowerBuoy systems;
(cid:129) inability to obtain, maintain or enforce intellectual property rights; and
(cid:129) difficulty in enforcing agreements in foreign legal systems.
Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries.
Our overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory,
economic, social and political conditions. We may not be able to develop and implement policies and strategies that
will be effective in each location where we do business, which in turn could adversely affect our business, financial
condition and results of operations.
We may not be able to raise sufficient capital to grow our business.
We have in the past needed to raise funds to operate our business, and we may need to raise additional funds to
manufacture our PowerBuoy systems in commercial quantities. If we are unable to raise additional funds when
needed, our ability to operate and grow our business could be impaired. We do not know whether we will be able to
secure additional funding or funding on terms favorable to us. Our ability to obtain additional funding will be
subject to a number of factors, including market conditions, our operating performance and investor sentiment.
These factors may make the timing, amount, terms and conditions of additional funding unattractive. If we issue
additional equity securities, our existing stockholders would experience dilution or may be subordinated to any
rights, preferences or privileges granted to the new equity holders.
Our financial results may fluctuate from quarter to quarter, which may make it difficult to predict our
future performance.
Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control.
For these reasons, comparing our financial results on a period-to-period basis may not be meaningful, and you
should not rely on our past results as an indication of our future performance. Our future quarterly and annual
expenses as a percentage of our revenues may be significantly different from those we have recorded in the past or
which we expect for the future. Our financial results in some quarters may fall below expectations. Any of these
34
events could cause our stock price to fall. Each of the risk factors listed in this “Risk Factors” section, including the
following factors, may adversely affect our business, financial condition and results of operations:
(cid:129) delays in permitting or acquiring necessary regulatory consents;
(cid:129) delays in the timing of contract awards and determinations of work scope;
(cid:129) delays in funding for or deployment of wave energy projects;
(cid:129) changes in cost estimates relating to wave energy project completion, which under percentage of completion
accounting principles could lead to significant fluctuations in revenue or to changes in the timing of our
recognition of revenue from those projects;
(cid:129) delays in meeting specified contractual milestones or other performance criteria under project contracts or in
completing project contracts that could delay the recognition of revenue that would otherwise be earned;
(cid:129) reductions in the availability or level of subsidies and incentives for renewable energy sources;
(cid:129) decisions made by parties with whom we have commercial relationships not to proceed with anticipated
projects;
(cid:129) increases in the length of our sales cycle; and
(cid:129) reductions in the efficiency of our manufacturing processes.
Currency translation and transaction risk may adversely affect our business, financial condition and
results of operations.
Our reporting currency is the US dollar, and we conduct our business and incur costs in the local currency of
most countries in which we operate. As a result, we are subject to currency translation risk. In fiscal 2007, 35% of
our revenues were generated from customers outside the United States and denominated in Euros, 4% of our
revenues were generated from outside the United States and denominated in British pound sterling and 2% of our
revenues were generated from customers outside the United States and denominated in Australian dollars and in
fiscal 2008, 31% of our revenues were generated from customers outside the United States and denominated in
Euros, and 10% of our revenues were generated from customers outside the United States and denominated in
British pound sterling. We expect a large percentage of our revenues to be generated outside the United States and
denominated in foreign currencies in the future. Changes in exchange rates between foreign currencies and the US
dollar could affect our revenues and cost of revenues, and could result in exchange losses. In addition, we incur
currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales
transaction using a different currency from our reporting currency. For example, our agreement with Iberdrola
Cantabria for the current phase of the construction of a wave power station off the coast of Santoña, Spain is
denominated in Euros, and we expect that we will enter into a number of purchase and supply contracts with local
Spanish companies, also denominated in Euros, in connection with the project. We cannot accurately predict the
impact of future exchange rate fluctuations on our results of operations. Currently, we do not engage in any
exchange rate hedging activities and, as a result, any volatility in currency exchange rates may have an immediate
adverse effect on our business, results of operations and financial condition.
Existing regulations and policies and changes to these or new regulations and policies may present tech-
nical, regulatory and economic barriers to the use of wave energy technology, which may significantly
reduce demand for our PowerBuoy systems.
The market for electricity generation equipment is heavily influenced by foreign, federal, state and local
government regulations and policies concerning the electric utility industry, as well as policies promulgated by
electric utilities. These regulations and policies often relate to electricity pricing and connection to the power grid.
In the United States and in a number of other countries, these regulations and policies currently are being modified
and may be modified again in the future. Utility company and independent power producer purchases of, or further
investment in the research and development of, alternative energy sources, including wave energy technology, could
35
be deterred by these regulations and policies, which could result in a significant reduction in the potential demand
for our PowerBuoy systems.
As the renewable energy industry continues to develop and as the generation of power from wave energy in
particular achieves commercial acceptance, we anticipate that wave energy technology and our PowerBuoy systems
and their deployment will be subject to increased oversight and regulation. We are unable to predict the nature or
extent of regulations that may be imposed or adopted. Any new government regulations or utility policies pertaining
to wave energy or our PowerBuoy systems may result in significant additional expenses to us and our customers
and, as a result, could adversely affect our business, financial condition and results of operations.
If we are unable to obtain all necessary regulatory permits and approvals, we will not be able to imple-
ment our planned projects.
Offshore development of electric power generating facilities is heavily regulated. Each of our planned projects
is subject to multiple permitting and approval requirements. With respect to our projects in Spain and France, we are
dependent upon our customers to obtain any necessary permits and approvals, and with respect to our projects in
Oregon and Cornwall, England, we are dependent on state, federal and regional government agencies for such
permits and approvals. Due to the unique nature of large scale commercial wave power stations, we would expect
our projects to receive close scrutiny by permitting agencies, approval authorities and the public, which could result
in substantial delay in the permitting process. Successful challenges by any parties opposed to our planned projects
could result in conditions limiting the project size or in the denial of necessary permits and approvals.
If we are unable to obtain necessary permits and approvals in connection with any or all of our projects, those
projects would not be implemented and our business, financial condition and results of operations would be
adversely affected. Further, we cannot assure you that we have been or will be at all times in complete compliance
with all such permits and approvals. If we violate or fail to comply with these permits and approvals, we could be
fined or otherwise sanctioned by regulators.
We face hurricane- and storm-related risks and other risks typical of a marine environment which could
adversely affect our business, financial condition and results of operations.
Our PowerBuoy systems are deployed in the ocean where they are subject to many hazards including severe
storms and hurricanes, which could damage them and result in service interruptions. Our systems are also subject to
more frequent lock-downs caused by higher waves during winter storm and hurricane seasons, which will reduce
annual energy output. We cannot predict whether we will be able to recover from our insurance providers the
additional costs that we may incur due to damage caused to our PowerBuoy systems, or whether we will continue to
be able to obtain insurance for hurricane- and storm-related damages or, if obtainable and carried, whether this
insurance will be adequate to cover our liabilities. Any future hurricane- or storm-related costs could adversely
affect our business, financial condition and results of operations.
Since our PowerBuoy systems can only be deployed in certain geographic locations, our ability to grow
our business could be adversely affected.
Our systems are designed to work in sites with average annual wave energy of at least 20kW per meter of wave
front. Not all coastal areas worldwide have appropriate natural resources for our PowerBuoy systems to harness
wave energy. Seasonal and local variations, water depth and the effect of particular locations of islands and other
geographical features may limit our ability to deploy our PowerBuoy systems in coastal areas. If we are unable to
identify and deploy PowerBuoy systems at sufficient sites near major population centers, our ability to grow our
business could be adversely affected.
If we are unable to attract and retain management and other qualified personnel, we may not be able to
achieve our business objectives.
Our success depends on the skills, experience and efforts of our senior management and other key devel-
opment, manufacturing, and sales and marketing employees. We cannot be certain that we will be able to attract,
retain and motivate such employees. The loss of the services of one or more of these employees could have a
36
material adverse effect on our business. There is a risk that we will not be able to retain or replace these key
employees. We have entered into employment agreements with Dr. George Taylor, our chief executive officer,
Charles Dunleavy, our senior vice president and chief financial officer, Mark Draper, our chief operating officer and
the chief executive officer of our UK subsidiary, and Herbert Nock, our vice president of business development and
marketing; however, the agreements permit the employees to terminate their employment with little notice.
Implementation of our expansion plans will be highly dependent upon our ability to hire and retain additional senior
executives.
In addition, our anticipated growth will require us to hire a significant number of qualified technical,
commercial and administrative personnel. In order to meet our short-term goals, we plan to add approximately
16 employees by the end of fiscal 2009, including engineers with varying areas of expertise. By the end of fiscal
2011, we expect to increase our staff significantly in order to meet our current manufacturing targets. The majority
of our new hires will be engineers with varying levels and areas of expertise, project managers and manufacturing
personnel. There is intense competition from other companies and research and academic institutions for qualified
personnel in the areas of our activities. If we cannot continue to attract and retain, on acceptable terms, the qualified
personnel necessary for the continued development of our business, we may not be able to sustain our operations or
grow at a competitive pace.
Any acquisitions that we make or joint venture agreements that we enter into, or any failure to identify
appropriate acquisition or joint venture candidates, could adversely affect our business, financial condi-
tion and results of operations.
From time to time, we evaluate potential strategic acquisitions of complementary businesses, products or
technologies, as well as consider joint ventures and other collaborative projects. We may not be able to identify
appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate any
businesses, products or technologies that we acquire. We do not have any experience with acquiring companies
or products. Any acquisition we pursue could diminish the capital resources otherwise available to us for other uses
or be dilutive to our stockholders, and could divert management’s time and resources from our core operations.
Strategic acquisitions, investments and alliances with third parties could subject us to a number of risks,
including risks associated with sharing proprietary information and loss of control of operations that are material to
our business. In addition, strategic acquisitions, investments and alliances may be expensive to implement. For
example, under the France project, our entitlement to retain our current percentage interest is subject to our ability to
make a proportionate capital investment, which we may be unable to finance. Moreover, strategic acquisitions,
investments and alliances subject us to the risk of non-performance by a counterparty, which may in turn lead to
monetary losses that materially and adversely affect our business, financial condition and results of operations.
In the event we are unable to satisfy regulatory requirements relating to internal control over financial
reporting, or if our internal controls are not effective, our business and financial results may suffer.
Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial
reports and to effectively prevent fraud. If we cannot provide reasonable assurance with respect to our financial
reports and effectively prevent fraud, our business and operating results could be harmed. Pursuant to the Sarbanes-
Oxley Act of 2002, we are required to furnish a report by management on internal control over financial reporting,
including management’s assessment of the effectiveness of such control. Internal control over financial reporting
may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error,
the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only
reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition,
projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are
subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. If we fail to maintain the adequacy of our internal
controls, including any failure to implement new or improved controls, or if we experience difficulties in their
implementation, our business and operating results could be harmed, we could fail to meet our reporting
obligations, and there could also be a material adverse effect on our stock price.
37
Risks Related to Intellectual Property
If we are unable to obtain or maintain intellectual property rights relating to our technology and prod-
ucts, the commercial value of our technology and products may be adversely affected, which could in turn
adversely affect our business, financial condition and results of operations.
Our success and ability to compete depends in part upon our ability to obtain protection in the United States
and other countries for our products by establishing and maintaining intellectual property rights relating to or
incorporated into our technology and products. We own a variety of patents and patent applications in the United
States and corresponding patents and patent applications in several foreign jurisdictions. However, we have not
obtained patent protection in each market in which we plan to compete. In addition, we do not know how successful
we would be should we choose to assert our patents against suspected infringers. Our pending and future patent
applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Even if
issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop
competitors from marketing similar products or limit the length of term of patent protection we may have for our
products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries
may diminish the value of our intellectual property or narrow the scope of our patent protection, which could in turn
adversely affect our business, financial condition and results of operations.
Our contracts with the government could negatively affect our intellectual property rights, and our ability
to commercialize our products could be impaired.
Our agreements with the US Navy help fund research and development of our PowerBuoy system. When new
technologies are developed with US federal government funding, the government obtains certain rights in any
resulting patents, technical data and software, generally including, at a minimum, a nonexclusive license autho-
rizing the government to use the invention, technical data or software for non-commercial purposes. These rights
may permit the government to disclose our confidential information to third parties and to exercise “march-in”
rights. March-in rights refer to the right of the US government to require us to grant a license to the technology to a
responsible applicant or, if we refuse, the government may grant the license itself. US government-funded
inventions must be reported to the government. US government funding must be disclosed in any resulting patent
applications, and our rights in such inventions will normally be subject to government license rights, periodic post-
contract utilization reporting, foreign manufacturing restrictions and march-in rights.
The government can exercise its march-in rights if it determines that action is necessary because we fail to
achieve practical application of the technology or because action is necessary to alleviate health or safety needs, to
meet requirements of federal regulations or to give preference to US industry. Our government-sponsored research
contracts are subject to audit and require that we provide regular written technical updates on a monthly, quarterly or
annual basis, and, at the conclusion of the research contract, a final report on the results of our technical research.
Because these reports are generally available to the public, third parties may obtain some aspects of our sensitive
confidential information. Moreover, if we fail to provide these reports or to provide accurate or complete reports, the
government may obtain rights to any intellectual property arising from the related research. Funding from
government contracts also may limit when and how we can deploy our technology developed under those contracts.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of
our technology and products could be adversely affected, which could in turn adversely affect our busi-
ness, financial condition and results of operations.
In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how,
particularly with respect to our PowerBuoy control and electricity generating systems. We generally seek to protect
this information in part by confidentiality agreements with our employees, consultants and third parties. These
agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade
secrets may otherwise become known or be independently developed by competitors.
38
If we infringe or are alleged to infringe intellectual property rights of third parties, our business, finan-
cial condition and results of operations could be adversely affected.
Our products may infringe, or be claimed to infringe, patents or patent applications under which we do not hold
licenses or other rights. Third parties may own or control these patents and patent applications in the United States
and abroad. From time to time, we receive correspondence from third parties offering to license patents to us.
Correspondence of this nature might be used to establish that we received notice of certain patents in the event of
subsequent patent infringement litigation. Third parties could bring claims against us that would cause us to incur
substantial expenses and, if successfully asserted against us, could cause us to pay substantial damages. Further, if a
patent infringement suit were brought against us, we could be forced to stop or delay manufacturing or sales of the
product or component that is the subject of the suit.
As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to
seek a license from the third party and be required to pay license fees, royalties or both. These licenses may not be
available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive,
which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be
forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement
claims, we are unable to enter into licenses on acceptable terms. This could significantly and adversely affect our
business, financial condition and results of operations.
In addition to infringement claims against us, we may become a party to other types of patent litigation and
other proceedings, including interference proceedings declared by the United States Patent and Trademark Office
and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our
products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor,
could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more
effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and
continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete
in the marketplace. Patent litigation and other proceedings may also absorb significant management time.
Risks Related to our Common Stock
Provisions in our corporate charter documents and under Delaware law may delay or prevent attempts by
our stockholders to change our management and hinder efforts to acquire a controlling interest in us.
As a result of our reincorporation in Delaware in April 2007, provisions of our certificate of incorporation and
bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may
consider favorable, including transactions in which our stockholders might otherwise receive a premium for their
shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our
management. These provisions include:
(cid:129) advance notice requirements for stockholder proposals and nominations;
(cid:129) the inability of stockholders to act by written consent or to call special meetings; and
(cid:129) the ability of our board of directors to designate the terms of and issue new series of preferred stock without
stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock
ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by
our board of directors.
The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to
amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of
directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our
shares of capital stock entitled to vote.
In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested stockholder, which is generally a person
which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period
of three years after the date of the transaction in which the person became an interested stockholder, unless the
39
business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or
prevent a change in control of our company.
We have never paid cash dividends on our common stock, and we do not anticipate paying any cash divi-
dends in the foreseeable future.
We have not paid any cash dividends on our common stock to date. We currently intend to retain our future
earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock
will be the sole source of gain for our stockholders for the foreseeable future.
Our stock price is likely to be volatile, and purchasers of our common stock could incur substantial losses.
The market price of our common stock may fluctuate significantly in response to factors that are beyond our
control. The stock market in general has recently experienced extreme volatility that has often been unrelated or
disproportionate to the operating performance of particular companies. These broad market fluctuations could
result in fluctuations in the price of our common stock, which could cause purchasers of our common stock to incur
substantial losses. The market price for our common stock may be influenced by many factors, including:
(cid:129) the success of competitive products or technologies;
(cid:129) regulatory developments in the United States and foreign countries;
(cid:129) developments or disputes concerning patents or other proprietary rights;
(cid:129) the recruitment or departure of key personnel;
(cid:129) quarterly or annual variations in our financial results or those of companies that are perceived to be similar to
us;
(cid:129) market conditions in the conventional and renewable energy industries and issuance of new or changed
securities analysts’ reports or recommendations;
(cid:129) the failure of securities analysts to cover our common stock or changes in financial estimates by analysts;
(cid:129) the inability to meet the financial estimates of analysts who follow our common stock;
(cid:129) investor perception of our company and of the renewable energy industry; and
(cid:129) general economic, political and market conditions.
Provisions in our bylaws will require disclosure of information by shareholders that would not otherwise
be required to be disclosed under applicable US state or US federal laws.
In accordance with the rules of the AIM market of the London Stock Exchange, we are required to disclose
information regarding beneficial owners of three percent or more of our outstanding common stock to the AIM
market. In order to allow us to comply with the AIM rules, our bylaws contain a provision requiring any beneficial
owner of three percent or more of our outstanding common stock to notify us of his or her shareholdings, as well as
of any change in his or her beneficial ownership of one percent or more of our outstanding common stock.
Comparatively, none of the US state or US federal laws that are applicable to us or the rules of the SEC or the
Nasdaq Global Market require stockholders to report this beneficial ownership information to us or us to disclose
this information to the public or a regulatory body. We do not intend to make any such information public, unless
required by law or the rules of the AIM market, the SEC or the Nasdaq Global Market.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
40
ITEM 2. PROPERTIES
Our corporate headquarters are located in Pennington, New Jersey, where we occupy approximately
22,000 square feet under a lease expiring on April 30, 2013. We use these facilities for administration, research
and development, as well as assembly and testing of the generators and control models.
We also have an office and warehouse facilities in Warwick, United Kingdom, where we occupy 3,840 square
feet under a lease expiring on January 1, 2009. Twelve employees, all members of the executive, engineering,
administration and business development teams, operate out of this office, which serves as a hub for our European
presence.
We plan to add sales, marketing and engineering offices in additional locations, including Australia, Japan,
continental Europe and the west coast of the United States. We currently estimate that we will need to add
approximately 90,000 square feet of leased space by the end of fiscal 2011 for sales, marketing, engineering,
assembly and testing in order to meet our current manufacturing targets.
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the
outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these
matters will have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Price Information and Stockholders
Our common stock has been listed on the Nasdaq Global Market since April 24, 2007 under the symbol
“OPTT” and on the AIM market of the London Stock Exchange since October 2003 under the symbol “OPT.” As of
June 30, 2008, there were 550 registered holders of our common stock.
The following table sets forth the high and the low sale prices of our common stock as quoted by the Nasdaq
Global Market for the period indicated.
Nasdaq Global
Market
High
Low
Year Ended April 30, 2008
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17.85
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.82
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18.26
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14.14
Year Ended April 30, 2007
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.00
$13.87
$11.74
$11.50
$ 9.73
$14.25
The following table sets forth, for the periods indicated, the high and low closing sale prices for our common
stock on the AIM market as reported by the London Stock Exchange. The sales prices have been adjusted to give
effect to a one-for-ten reverse stock split of our common stock that was effected on April 20, 2007. The sales prices
41
for our shares of common stock on the AIM market are quoted in pound sterling (£), the lawful currency of the
United Kingdom.
AIM Market
High
Low
Year Ended April 30, 2008
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended April 30, 2007
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £10.00
£8.90
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
£9.05
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £12.35
£8.85
£8.15
£8.45
£6.95
£7.00
£5.80
£5.83
£4.90
£6.60
£6.15
£5.35
£8.05
Dividend Policy
We have never declared or paid any cash dividends on our common stock, and we do not currently anticipate
declaring or paying cash dividends on our common stock in the foreseeable future. We currently intend to retain all
of our future earnings, if any, to finance the growth and development of our business. Any future determination
relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number
of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual
restrictions and covenants and other factors that our board of directors may deem relevant.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds
On April 30, 2007, we sold 5,000,000 shares of our common stock in our initial public offering in the United
States at a price of $20.00 per share, pursuant to a registration statement on Form S-1 (File No. 333-138595), which
was declared effective by the SEC on April 24, 2007. The managing underwriters in the offering were UBS
Securities LLC, Banc of America Securities LLC, and Bear, Stearns & Co., Inc. The underwriting discounts and
commissions and offering expenses payable by us aggregated $10.1 million, resulting in net proceeds to us of
$89.9 million.
From the effective date of the registration statement through April 30, 2008, we used $0.6 million to construct
demonstration wave power stations, $3.7 million to fund the continued development and commercialization of our
PowerBuoy system, $1.7 million to expand our sales and marketing capabilities and $0.2 million to fund the
expansion of assembly, test and field service facilities. We have invested the balance of the net proceeds from the
offering in short- and long-term, investment grade, interest-bearing instruments, in accordance with our investment
policy. We have not used any of the net proceeds from the offering to make payments, directly or indirectly, to any
director or officer of ours, or any of their associates, to any person owning ten percent or more of our common stock
or to any affiliate of ours. There has been no material change in our planned use of the balance of the net proceeds
from the offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the
Securities Act of 1933.
42
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data in conjunction with our consolidated
financial statements and the related notes appearing at the end of this Annual Report and the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report. The
selected consolidated financial data have been derived from our audited consolidated financial statements which are
included elsewhere in this Annual Report, or from audited consolidated financial statements not included in this
Annual Report.
2004
2005
2006
2007
2008
Fiscal Years Ended April 30,
Consolidated Statement of Operations
Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . .
$ 4,713,202 $ 5,365,235
5,170,521
4,319,850
$ 1,747,715
2,059,318
$ 2,531,315
3,983,742
$ 4,772,017
7,960,042
Gross profit (loss) . . . . . . . . . . . . . . . . . .
393,352
194,714
(311,603)
(1,452,427)
(3,188,025)
Operating expenses:
Product development costs . . . . . . . . . . . .
Selling, general and administrative costs . .
255,958
1,745,955
904,618
2,553,911
4,224,997
3,190,687
6,219,893
4,893,580
8,255,123
7,732,577
Total operating expenses . . . . . . . . . . . .
2,001,913
3,458,529
7,415,684
11,113,473
15,987,700
Operating loss . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest income, net . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . .
Foreign exchange gain (loss) . . . . . . . . . . .
(1,608,561)
(3,263,815)
(7,727,287)
(12,565,900)
(19,175,725)
555,717
(3,500,096)(1)
1,585,345
1,297,156
1,545
1,507,145
1,408,361
74,294
(978,242)
1,389,702
13,906
1,523,527
4,434,844
—
84,158
Loss before incomes taxes . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . .
(2,967,595)
118,119
(457,969)
29,335
(7,222,874)
143,963
(9,638,765)
—
(14,656,723)
—
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2,849,476) $ (428,634) $(7,078,911) $ (9,638,765) $(14,656,723)
Basic and diluted net loss per share . . . . . .
$
(0.71) $
(0.08) $
(1.37) $
(1.83) $
(1.44)
Basic and diluted weighted average
shares outstanding . . . . . . . . . . . . . . . .
4,037,501
5,135,550
5,162,340
5,260,794
10,200,729
Consolidated Balance Sheet Data:
Cash, cash equivalents and
2004
2005
As of April 30,
2006
2007
2008
certificates of deposit . . . . . . . . . $ 39,565,574(2) $ 38,787,176
37,903,207
—
41,596,387
Working capital . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . .
Long-term debt, net of current
38,422,395
—
40,747,479
$ 32,439,365
30,886,029
—
33,996,138
$115,895,619(3) $ 88,836,304
85,870,307
12,233,437
107,550,965
111,187,195
—
119,711,546
portion . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . .
250,000
(21,124,608)
37,853,246
245,844
(21,553,242)
37,836,531
233,959
(28,632,153)
31,066,704
231,585
(38,270,918)
112,541,209
188,784
(52,927,641)
100,098,609
(1) Other expense in fiscal 2004 resulted from a one time charge incurred at the time of our stock offering on the
AIM market in October 2003 relating to a 1999 agreement between us and Tyco Electronics Corp.
(2) On October 31, 2003, we completed our offering on the AIM market resulting in net proceeds to us of
$38.3 million.
43
(3) On April 30, 2007, we completed our initial public offering in the United States resulting in net proceeds to us of
$89.9 million.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations
together with our consolidated financial statements and the related notes and other financial information included
elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth
elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and
related financing, includes forward-looking statements that involve risks and uncertainties. You should review the
“Risk Factors” section of this Annual Report 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.
Overview
We develop and are commercializing proprietary systems that generate electricity by harnessing the renewable
energy of ocean waves. Our PowerBuoy systems use proprietary technologies to convert the mechanical energy
created by the rising and falling of ocean waves into electricity. We currently offer two PowerBuoy products, which
consist of our utility PowerBuoy system and our autonomous PowerBuoy system.
We market our utility PowerBuoy system, which is designed to supply electricity to a local or regional power
grid, to utilities and other electrical power producers seeking to add electricity generated by wave energy to their
existing electricity supply. We market our autonomous PowerBuoy system, which is designed to generate power for
use independent of the power grid, to customers that require electricity in remote locations. We believe there are a
variety of potential applications for our autonomous PowerBuoy system, including sonar and radar surveillance,
tsunami warning, oceanographic data collection, offshore platforms and offshore aquaculture. We also offer our
customers operations and maintenance services for our PowerBuoy systems, which are expected to provide a source
of recurring revenues.
We were incorporated in New Jersey in April 1984, began commercial operations in 1994, and were re-
incorporated in Delaware in 2007. We currently have six wholly-owned subsidiaries, which include Ocean Power
Technologies Ltd., Reedsport OPT Wave Park LLC, Oregon Wave Energy Partners I, LLC, Oregon Wave Energy
Partners II, LLC, California Wave Energy Partners I, and Fairhaven OPT Ocean Power LLC, and we own
approximately 88% of the ordinary shares of Ocean Power Technologies (Australasia) Pty Ltd. Our revenues have
been generated from research contracts and development and construction contracts relating to our wave energy
technology. The development of our technology has been funded by capital we raised and by development
engineering contracts we received starting in fiscal 1995. In fiscal 1996, we received the first of several research
contracts with the US Navy to study the feasibility of wave energy. As a result of those research contracts, we
entered into our first development and construction contract with the US Navy in fiscal 2002 under a still on-going
project for the development and construction of a grid-connected wave power station at the US Marine Corps Base
in Oahu, Hawaii. We generated our first revenue relating to our autonomous PowerBuoy system from contracts with
Lockheed Martin Corporation in fiscal 2003, and we entered into our first development and construction contract
with Lockheed Martin in fiscal 2004 for the development and construction of a prototype demonstration auton-
omous PowerBuoy system. In fiscal 2005, we entered into a development agreement with an affiliate of Iberdrola
S.A., a large electric utility company located in Spain and one of the largest renewable energy producers in the
world, and other parties to jointly study the possibility of developing a wave power station off the coast of northern
Spain. An affiliate of Total S.A., which is one of the world’s largest oil and gas companies, joined the development
agreement in June 2005. In January 2006, we completed the assessment phase of the project, and in July 2006 we
entered into an agreement with Iberdrola Energias Marinas de Cantabria, S.A. to complete the first phase of the
construction of a 1.39MW wave power station. In addition, we have entered into a contract with affiliates of
Iberdrola and Total to assess the viability of a 2 to 5MW power station off the coast of France.
44
In 2007, we received a $1.8 million contract from the Scottish Executive for the construction of a 150kW
PowerBuoy demonstration system at Orkney, Scotland. This project is in progress, and the PowerBuoy is expected
to be ready for deployment in 2009. In June 2007, we received a $1.7 million contract from the US Navy to provide
our PowerBuoy technology to a unique program for data gathering in the ocean. Under this 18-month program, the
US Navy will conduct an ocean test of our autonomous PowerBuoy as the power source for the Navy’s Deep Water
Acoustic Detection System. In August 2007, we announced the award of a $0.5 million contract from PNGC Power,
an Oregon-based electric power cooperative, providing funding toward the fabrication and installation of a 150kW
PowerBuoy system off the coast of Oregon. As of April 30, 2008, our backlog was $5.5 million, an increase of
$0.3 million from the year ended April 30, 2007.
Our fiscal year ends on April 30. For fiscal 2008, we generated revenues of $4.8 million and incurred a net loss
of $14.7 million, and for fiscal 2007 we generated revenues of $2.5 million and incurred a net loss of $9.6 million.
As of April 30, 2008, our accumulated deficit was $52.9 million. We have not been profitable since inception, and
we do not know whether or when we will become profitable because of the significant uncertainties with respect to
our ability to successfully commercialize our PowerBuoy systems in the emerging renewable energy market. Since
fiscal 2002, the US Navy has accounted for a significant portion of our revenues. We expect that over time, revenues
derived from utilities and other non-government commercial customers will increase more rapidly than sales to
government customers and will, within a few years, represent the majority of our revenues.
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
We have historically generated revenues primarily from the development and construction of our PowerBuoy
systems for demonstration purposes and, to a lesser extent, from customer-sponsored research and development.
For fiscal 2007 and 2008, we derived approximately 91% and 89%, respectively, of our revenues from government
and commercial development and construction contracts and 9% and 11%, respectively, of our revenues from
customer-sponsored research and development. Generally, we recognize revenue using the percentage-of-com-
pletion method based on the ratio of costs incurred to total estimated costs at completion. In certain circumstances,
revenue under contracts that have specified milestones or other performance criteria may be recognized only when
our customer acknowledges that such criteria have been satisfied. In addition, recognition of revenue (and the
related costs) may be deferred for fixed-price contracts until contract completion if we are unable to reasonably
estimate the total costs of the project prior to completion. Because we have a small number of contracts, revisions to
the percentage of completion determination or delays in meeting performance criteria or in completing projects
may have a significant effect on our revenue for the periods involved.
Under our agreement for the current phase of construction of a wave power station off the coast of Santoña,
Spain, our revenues are limited to reimbursement for our construction costs without any mark-up and we are
required to bear a portion of any cost overruns and to absorb certain other costs as set forth in the agreement. During
the fourth quarter of fiscal 2008, we made the decision to absorb additional costs related to the current phase of the
project beyond our obligation for the initial cost overruns and certain other costs as set forth in the agreement. This
decision was based primarily on the progress of the project to date, the benefits to be derived from a successful
initial project and the prospect of incremental contract value to be received in connection with additional work
under this contract.
Our revenues increased in each of fiscal 2007 and 2008. The revenue increase reflected a higher level of
activity in connection with our Spain construction contract, our contracts with the US Navy, and our contract for the
construction, installation and in-ocean demonstration of our latest 150kW PowerBuoy that will be installed at the
European Marine Energy Centre (EMEC) at Orkney, Scotland.
The US Navy has been our largest customer since fiscal 2002. The US Navy accounted for approximately 58%
of our revenues in fiscal 2008, approximately 54% of our revenues in fiscal 2007 and approximately 61% of our
45
revenues in fiscal 2006. We anticipate that, if our commercialization efforts are successful, the relative contribution
of the US Navy to our revenue will decline in the future.
We currently focus our sales and marketing efforts on coastal North America, the west coast of Europe, the
coasts of Australia and the east coast of Japan. For both fiscal 2007 and 2008, we derived 41%, of our revenues from
outside the United States. The following table provides information regarding the breakdown of our revenues by
geographical location of our customers for fiscal years 2006, 2007 and 2008:
Customer Location
Year Ended
April 30,
2006
Percentage of Revenues
Year Ended
April 30,
2007
Year Ended
April 30,
2008
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Australia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91%
9
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
59%
39
2
100%
59%
41
—
100%
Cost of revenues
Our cost of revenues consists primarily of incurred material, labor and manufacturing overhead expenses, such
as engineering expense, equipment depreciation and maintenance and facility related expenses, and includes the
cost of PowerBuoy parts and services supplied by third-party suppliers. Cost of revenues also includes PowerBuoy
system delivery and deployment expenses and an anticipated loss at completion on our contract for a wave power
station off the coast of Spain.
We operated at a gross loss of $3.2 million in 2008, $1.5 million in fiscal 2007, and $0.3 million in fiscal 2006.
Our ability to generate a gross profit will depend on the nature of future contracts, our success at increasing sales of
our PowerBuoy systems and on our ability to manage costs incurred on fixed price commercial contracts.
Product development costs
Our product development costs consist of salaries and other personnel-related costs and the costs of products,
materials and outside services used in our product development and unfunded research activities. Our product
development costs primarily relate to our efforts to increase the output of our utility PowerBuoy system, including
the 150kW PowerBuoy system and, to a lesser extent, to our research and development of new products, product
applications and complementary technologies. We expense all of our product development costs as incurred, except
for external patent costs, which we capitalize and amortize over a 17-year period commencing with the issuance
date of each patent.
Our product development costs increased significantly in each of fiscal 2006, 2007 and 2008 as a result of the
development of our current 40kW utility PowerBuoy system, which was introduced in fiscal 2006, and also
development of our 150kW PowerBuoy. We expect our product development costs to increase in absolute dollars as
we continue to increase the output and efficiency of our PowerBuoy systems.
We introduced our current 40kW PowerBuoy system in fiscal 2006. One system was deployed off the coast of
New Jersey from October 2005 to October 2006, when it was removed from the ocean for routine maintenance and
diagnostic testing. This system was redeployed off the coast of New Jersey in September 2007. Another 40kW
system was deployed and tested in Hawaii for the US Navy project during the month of June 2007. Work is currently
in progress on the design, construction and installation of two 150kW PowerBuoy systems in connection with
projects in the Orkney Islands, Scotland and Oregon.
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
46
PowerBuoy systems and costs for executive, accounting and administrative personnel, professional fees and other
general corporate expenses.
Our selling, general and administrative costs increased in fiscal 2006, 2007 and 2008. This increase is due to
the expansion of our sales and marketing capabilities, including increased headcount, and as a result of our
becoming a public company in the United States in April 2007. We expect our selling, general and administrative
costs will continue to increase as we further expand our sales and marketing capabilities.
Interest income, net
Interest income, net consists primarily of interest received on cash and cash equivalents, investments in
commercial bank-issued certificates of deposit and US Treasury bills. Prior to April 30, 2007, most of our cash,
cash equivalents and bank-issued certificates of deposit resulted from the remaining proceeds of our October 2003
offering on the AIM market. On April 30, 2007, we completed our initial public offering in the United States, which
produced net proceeds of $89.9 million. Total cash, cash equivalents, certificates of deposit and long-term investments
were $101.1 million as of April 30, 2008, $115.9 million as of April 30, 2007 and $32.4 million as of April 30, 2006.
Interest income in fiscal 2008 increased significantly over prior years due to the increase in invested cash.
Foreign exchange gain (loss)
We transact business in various countries and have exposure to fluctuations in foreign currency exchange rates.
Foreign exchange gains and losses arise in the translation of foreign-denominated assets and liabilities, which may
result in realized and unrealized gains or losses from exchange rate fluctuations. Since we conduct our business in US
dollars and our functional currency is the US dollar, our main foreign exchange exposure, if any, results from changes
in the exchange rate between the US dollar and the British pound sterling, the Euro and the Australian dollar.
We invest in certificates of deposit and maintain cash accounts that are denominated in British pounds, Euros
and Australian dollars. These foreign denominated certificates of deposit and cash accounts had a balance of
$9.6 million as of April 30, 2008 and $15.6 million as of April 30, 2007, compared to our total certificates of
deposits, long-term investments and cash account balances of $101.1 million as of April 30, 2008 and $115.9 million
as of April 30, 2007. These foreign currency balances are translated at each month end to our functional currency,
the US dollar, and any resulting gain or loss is recognized in our results of operations.
In addition, a portion of our operations is conducted through our subsidiaries in countries other than the United
States, specifically Ocean Power Technologies Ltd. in the United Kingdom, the functional currency of which is the
British pound sterling, and Ocean Power Technologies (Australasia) Pty Ltd. in Australia, the functional currency of
which is the Australian dollar. Both of these subsidiaries have foreign exchange exposure that results from changes
in the exchange rate between their functional currency and other foreign currencies in which they conduct business.
All of our international revenues for the years ended April 30, 2007 and 2008 were recorded in Euros, British
pounds or Australian dollars.
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.
Income tax benefit
As of April 30, 2008, we had federal and foreign research and development tax credits of $1.8 million and
federal and foreign net operating loss carryforwards of $47.5 million to offset future taxable income. If not utilized,
the credit carryforwards and net operating loss carryforwards will expire at various dates through 2028. We may not
achieve profitability in time to utilize the tax credit and net operating loss carryforwards in full or at all. In addition,
the future utilization of our net operating loss carryforwards may be limited based upon changes in ownership,
including changes resulting from our United States offering in April 2007 and the AIM offering in 2003, pursuant to
regulations promulgated under the Internal Revenue Code. These limitations may result in the expiration of net
47
operating loss and credit carryforwards prior to utilization. As discussed in Note 13 to our consolidated financial
statements included in this Annual Report, we have established a valuation allowance for our net deferred tax assets,
which were $13.2 million as of April 30, 2007 and $19.5 million as of April 30, 2008.
In 2006, we sold a portion of our New Jersey state net operating losses and our New Jersey research and
development credits under a program offered by the State of New Jersey, and recognized an income tax benefit of
$0.1 million in fiscal 2006. Because we believe we are no longer eligible to participate in this program, we did not
sell in fiscal 2007 or 2008 and do not in the future expect to sell any additional New Jersey state net operating loss
carryforward or research and development credits.
Results of Operations
Fiscal Years Ended April 30, 2007 and 2008
The following table contains statement of operations information, which serves as the basis of the discussion of
our results of operations for the years ended April 30, 2007 and 2008:
Fiscal Year Ended
April 30, 2007
Fiscal Year Ended
April 30, 2008
Change 2008 Period
to 2007 Period
Amount
As a % of
Revenues
Amount
As a % of
Revenues
$ Change
% Change
Revenues . . . . . . . . . . . . . . . . . $ 2,531,315
3,983,742
Cost of revenues . . . . . . . . . . . .
100% $ 4,772,017
7,960,042
157
100% $ 2,240,702
3,976,300
167
89%
100
Gross loss . . . . . . . . . . . . . . . . .
(1,452,427)
(57)
(3,188,025)
(67)
(1,735,598)
119
6,219,893
246
8,255,123
173
2,035,230
Operating expenses:
Product development costs . . .
Selling, general and
administrative costs . . . . . .
4,893,580
Total operating expenses . . . . . .
11,113,473
Operating loss . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . .
Foreign exchange gain . . . . . . .
Loss before income taxes . . . . .
Income tax benefit . . . . . . . . . .
(12,565,900)
1,389,702
13,906
1,523,527
(9,638,765)
—
193
439
(496)
55
1
60
(380)
—
7,732,577
15,987,700
(19,175,725)
4,434,844
—
84,158
(14,656,723)
—
162
335
(402)
93
—
2
(307)
—
2,838,997
4,874,227
(6,609,825)
3,045,142
(13,906)
(1,439,369)
(5,017,958)
—
33
58
44
53
219
(100)
(94)
52
—
Net loss . . . . . . . . . . . . . . . . . . $ (9,638,765)
(380)% $(14,656,723)
(307)% $(5,017,958)
52%
Revenues
Revenues increased by $2.2 million in fiscal 2008, or 89%, to $4.8 million as compared to $2.5 million in fiscal
2007. The increase in revenues was primarily attributable to the following factors:
(cid:129) Revenues relating to our utility PowerBuoy system increased by $1.3 million due to an increase in on-going
work on our Hawaii project for the US Navy, work on the first phase of construction of a 1.39MW wave
power station off the coast of Spain and work on the design, manufacture and installation of an OPT wave
power station consisting of a single 150kW PowerBuoy device in Orkney, Scotland.
(cid:129) Revenues relating to our autonomous PowerBuoy system increased by $0.9 million as a result of work on our
$1.7 million contract with the US Navy to provide our PowerBuoy technology to a program for data
gathering in the ocean.
48
Cost of revenues
Cost of revenues increased by $4.0 million, or 100%, to $8.0 million in fiscal 2008, as compared to
$4.0 million in fiscal 2007. This increase in cost of revenues reflected the higher level of activity on revenue-
bearing contracts of approximately $1.6 million, and the recognition of an additional $2.4 million of anticipated loss
at completion on our contract for a wave power station off the coast of Spain. The additional anticipated loss was
recognized based on a change in estimated costs associated with this contract and our decision in the fourth quarter
of fiscal 2008 to absorb an additional $1.9 million in costs beyond our contractual obligation for initial cost overruns
and certain other costs as set forth in the agreement.
Product development costs
Product development costs increased $2.0 million, or 33%, to $8.3 million in fiscal 2008, as compared to
$6.2 million in fiscal 2007. The substantial increase in product development costs was primarily attributable to our
efforts to increase the power output of our utility PowerBuoy system, including the 150kW PowerBuoy system. We
anticipate that our product development costs related to the planned increase in the output of our utility PowerBuoy
system will increase significantly over the next several years and that the amount of these expenditures will not
necessarily be affected by the level of revenue generated over that time period.
Selling, general and administrative costs
Selling, general and administrative costs increased $2.8 million, or 58%, to $7.7 million in fiscal 2008, as
compared to $4.9 million in fiscal 2007. The increase was primarily attributable to an increase of $0.5 million
related to additional marketing expenses and consulting costs, $1.8 million in professional fees, franchise taxes and
costs incurred as a result of our becoming a public company in the United States, and $0.5 million in additional
payroll and incentive-based costs relating to company growth.
Interest income
Interest income increased by $3.0 million to $4.4 million in fiscal 2008, compared to $1.4 million in fiscal
2007, due to the investment of the net proceeds of $89.9 million from our United States initial public offering on
April 30, 2007.
Foreign exchange gain
Foreign exchange gain was $0.1 million in fiscal 2008, compared to a foreign exchange gain of $1.5 million in
fiscal 2007. The difference was primarily attributable to the relative change in value of the British pound compared
to the US dollar during the two periods.
49
Fiscal Years Ended April 30, 2006 and 2007
The following table contains statement of operations information, which serves as the basis of the discussion of
our results of operations for the years ended April 30, 2006 and 2007:
Fiscal Year Ended
April 30, 2006
Amount
As a % of
Revenues
Fiscal Year Ended
April 30, 2007
Amount
As a % of
Revenues
Change 2007 Period
to 2006 Period
$ Change
% Change
Revenues . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . .
$ 1,747,715
2,059,318
100% $ 2,531,315
3,983,742
117
100% $
157
783,600
1,924,424
45%
93
Gross loss. . . . . . . . . . . . . . . . . .
(311,603)
(18)
(1,452,427)
(57)
(1,140,824)
366
Operating expenses:
Product development costs. . . .
Selling, general and
4,224,997
242
6,219,893
246
1,994,896
administrative costs . . . . . . .
3,190,687
Total operating expenses . . . . . . .
7,415,684
Operating loss. . . . . . . . . . . . . . .
Interest income, net
. . . . . . . . . .
Other income . . . . . . . . . . . . . . .
Foreign exchange (loss) gain . . . .
Loss before income taxes . . . . . .
Income tax benefit . . . . . . . . . . .
(7,727,287)
1,408,361
74,294
(978,242)
(7,222,874)
143,963
183
425
(442)
81
4
(56)
(413)
8
4,893,580
11,113,473
(12,565,900)
1,389,702
13,906
1,523,527
(9,638,765)
—
193
439
(496)
55
1
60
(380)
—
1,702,893
3,697,789
(4,838,613)
(18,659)
(60,388)
2,501,769
(2,415,891)
(143,963)
47
53
50
63
(1)
(81)
256
33
(100)
Net loss . . . . . . . . . . . . . . . . . . .
$(7,078,911)
(405)% $ (9,638,765)
(380)% $(2,559,854)
36%
Revenues
Revenues increased by $0.8 million in fiscal 2007, or 45%, to $2.5 million as compared to $1.7 million in fiscal
2006. The increase in revenues was primarily attributable to the following factors:
(cid:129) Revenues relating to our utility PowerBuoy system increased by $1.1 million due to work that commenced
on the first phase of construction of a 1.39MW wave power station off the coast of Spain, increased revenues
relating to our US Navy project in Hawaii from a higher activity level, and work that commenced on the
design, manufacture and installation of an OPT wave power station consisting of a single 150kW PowerBuoy
device in Orkney, Scotland.
(cid:129) Revenues relating to our autonomous PowerBuoy system decreased by $0.3 million primarily as a result of
the completion of a development and construction contract with Lockheed Martin in the fiscal year ended
April 30, 2006.
Cost of revenues
Cost of revenues increased by $1.9 million, or 93%, to $4.0 million in fiscal 2007, as compared to $2.1 million
in fiscal 2006. The decrease in gross profit in fiscal 2007 was primarily due to an anticipated loss of $1.3 million that
was recognized in fiscal 2007 on our contract for a wave power station off the coast of Spain, partially offset by an
increase in gross profit recognized in connection with our US Navy project in Hawaii. The anticipated loss of
$1.3 million was recognized based on a change in estimated costs associated with this contract. In addition,
$0.3 million of compensation expense was recorded as cost of revenues under Statement of Financial Accounting
Standards, or SFAS, No. 123 (revised 2004), Share-Based Payment, or SFAS No. 123R, which requires companies
to recognize compensation expense for all stock-based payments to employees. Because we adopted SFAS No. 123R
effective May 1, 2006, we did not record similar compensation expense in fiscal 2007.
50
Product development costs
Product development costs increased $2.0 million, or 47%, to $6.2 million in fiscal 2007, as compared to
$4.2 million in fiscal 2006. The substantial increase in product development costs was primarily attributable to our
efforts to increase the power output of our utility PowerBuoy system, including the 150kW PowerBuoy system. In
addition, we recorded $0.3 million of compensation expense as product development costs under SFAS No. 123R.
Because we adopted SFAS No. 123R effective May 1, 2006, we did not record similar compensation expense in
fiscal 2007. As a percentage of revenues, product development costs increased slightly to 246% in fiscal 2007 from
242% in fiscal 2006.
Selling, general and administrative costs
Selling, general and administrative costs increased $1.7 million, or 53%, to $4.9 million in fiscal 2007, as
compared to $3.2 million in fiscal 2006. The increase was primarily attributable to an increase of $0.4 million
related to additional marketing expenses and consulting costs, $0.3 million in professional fees, $0.5 million in
employee incentive-based compensation and $0.5 million of compensation expense recorded under SFAS No. 123R.
Because we adopted SFAS No. 123R effective May 1, 2006, we did not record similar compensation expense in
fiscal 2007.
Interest income, net
Interest income, net remained relatively flat at $1.4 million in fiscal 2007, compared to fiscal 2006, due to a
reduction in the balance of our cash, cash equivalents and certificates of deposit between the two periods (before
giving effect to the receipt of the net proceeds of our United States initial public offering on April 30, 2007), offset
by higher interest rates during fiscal 2007.
Foreign exchange (loss) gain
Foreign exchange gain was $1.5 million in fiscal 2007, compared to a foreign exchange loss of $1.0 million in
fiscal 2006. The difference was primarily attributable to the relative change in value of the British pound compared
to the US dollar during the two periods.
Income tax benefit
During fiscal 2007, we recorded no income tax benefit, compared to an income tax benefit of $0.1 million
recorded in fiscal 2006. The income tax benefit recorded in fiscal 2006 resulted from our sale of New Jersey state net
operating losses and research and development credits under a program offered by the State of New Jersey. Because
we believe we are no longer eligible to participate in this program, we did not sell any New Jersey state net operating
losses or research and development credits in fiscal 2007, nor do we expect to sell any in the future.
Liquidity and Capital Resources
Since our inception, the cash flows from customer revenues have not been sufficient to fund our operations and
provide the capital resources for the planned growth of our business. For the three years ended April 30, 2008, our
revenues were $9.1 million, our net losses were $31.4 million and our net cash used in operating activities was
$26.1 million. Over that same period, we raised $90.4 million in financing activities, including $89.9 million from
the closing of our United States initial public offering on April 30, 2007.
At April 30, 2008, our total cash, cash equivalents, certificates of deposit, and long-term investments were
$101.1 million. Our cash and cash equivalents are highly liquid investments with maturities of three months or less
at the date of purchase and consist primarily of time deposits with large commercial banks, Treasury bills and an
investment in a money market fund. Long-term investments consists of a US Treasury bill having a maturity in
excess of one year.
The primary drivers of our cash flows have been our ability to generate revenues and decrease losses related to
our contracts, as well as our ability to obtain and invest the capital resources needed to fund our development.
51
Net cash used in operating activities was $13.7 million for fiscal 2008 and $7.5 million for fiscal 2007. The
change was the result of an increase in net loss of $5.0 million, an increase in non-cash charges of $2.2 million, and a
decrease in cash provided by operating assets and liabilities of $3.3 million. The change in non-cash charges was
primarily due to a reduction in foreign exchange gains of $1.4 million due to a smaller increase in the value of the
British pound against the US dollar, and an increase in stock option expense of $0.8 million. The decrease in cash
provided by operating assets and liabilities was primarily the result of increases in accounts payable and accrued
expenses in fiscal 2007 of $3.4 million, an increase in other current assets during fiscal 2008 of $0.9 million, and an
increase in unearned revenue during fiscal 2008 of $0.7 million. The increase in accounts payable and accrued
expenses during fiscal 2007 was primarily related to increases in employee incentive payments and an accrual for an
anticipated loss at completion on our contract for a wave power station off the coast of Spain. The increase in other
current assets during fiscal 2008 was primarily due to prepayments of certain insurance premiums, increased
interest receivable on invested cash, and deposits related to our operations. The increase in unearned revenues in
fiscal 2008 resulted from billings in excess of revenues earned on two contracts.
Net cash used in investing activities was $4.4 million for fiscal 2008 and $9.3 million for fiscal 2007. The
change was primarily the result of a net decrease in purchases of securities with maturities longer than 90 days
during fiscal 2008. Also, there was an addition to restricted cash, related to a bank credit facility, of $1.0 million
during fiscal 2007.
Net cash used in financing activities was $0.6 million in fiscal 2008. In fiscal 2007, financing activities
provided $90.8 million in cash, primarily as a result of the net proceeds from our initial public offering in the United
States.
We expect to devote substantial resources to continue our development efforts for our PowerBuoy systems and
to expand our sales, marketing and manufacturing programs associated with the commercialization of the
PowerBuoy system. Our future capital requirements will depend on a number of factors, including:
(cid:129) the cost of development efforts for our PowerBuoy systems;
(cid:129) the success of our commercial relationships with Iberdrola, Total and the US Navy;
(cid:129) the cost of manufacturing activities;
(cid:129) the cost of commercialization activities, including demonstration projects, product marketing and sales;
(cid:129) our ability to establish and maintain additional commercial relationships;
(cid:129) the implementation of our expansion plans, including the hiring of new employees;
(cid:129) potential acquisitions of other products or technologies; and
(cid:129) the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other
patent-related costs.
We believe that our current cash and cash equivalents and certificates of deposit will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures at least through fiscal 2009. If existing resources
are insufficient to satisfy our liquidity requirements or if we acquire or license rights to additional product
technologies, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional
equity or convertible securities could result in dilution to our stockholders. If additional funds are raised through the
issuance of debt securities, these securities could have rights senior to those associated with our common stock and
could contain covenants that would restrict our operations. Financing may not be available in amounts or on terms
acceptable to us. If we are unable to obtain required financing, we may be required to reduce the scope of our
planned product development and marketing efforts, which could harm our financial condition and operating
results.
Contractual Obligations
Our major outstanding contractual obligations relate to our facilities leases. We have summarized in the table
below our fixed contractual cash obligations as of April 30, 2008.
52
Payments Due by Period
One to
Three Years
Less than
One Year
Four to
Five Years
More than
Five Years
Total
Long-term debt . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . .
$ 232,000
1,182,000
$ 43,000
271,000
(1)
$477,000
(1)
$227,000
$
—
207,000
Total . . . . . . . . . . . . . . . . . . . . . . .
$1,414,000
$314,000
$477,000
$227,000
$207,000
(1) Our long-term debt consists of an interest-free loan from the New Jersey Economic Development Authority.
The amounts to be repaid each year are determined as a percentage of revenues we receive in that year from our
customer contracts that meet criteria specified in the loan agreement, with any remaining amount due on
January 15, 2012.
Off-Balance Sheet Arrangements
Since inception we have not engaged in any off-balance sheet financing activities.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations set forth above are based on our
consolidated financial statements, which have been prepared in accordance with US generally accepted accounting
principles. The preparation of these consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our
estimates and judgments, including those described below. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances. These estimates and
assumptions form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.
We believe the following accounting policies require significant judgment and estimates by us in the
preparation of our consolidated financial statements.
Revenue recognition and unearned revenues
Generally, we recognize revenue using the percentage-of-completion method based on the ratio of costs
incurred to total estimated costs at completion. In certain circumstances, revenue under contracts that have specified
milestones or other performance criteria may be recognized only when our customer acknowledges that such
criteria have been satisfied. In addition, recognition of revenue (and the related costs) may be deferred for fixed-
price contracts until contract completion if we are unable to reasonably estimate the total costs of the project prior to
completion. Because we have a small number of contracts, revisions to the percentage of completion estimate or
delays in meeting performance criteria or in completing projects may have a significant effect on our revenue for the
periods involved.
Upon anticipating a loss on a contract, we recognize the full amount of the anticipated loss in the current
period. We had loss reserves of $2.1 million as of April 30, 2008 and $1.8 million as of April 30, 2007 related to two
contracts. In fiscal 2008, we recognized a loss of $2.4 million on our contract for a wave power station off the coast
of Spain. The additional anticipated loss was recognized based on a change in estimated costs associated with this
contract and our decision in the fourth quarter to absorb an additional $1.9 million in costs beyond our obligation for
initial cost overruns and certain other costs as set forth in the agreement.
Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed.
Unbilled receivables are normally billed and collected within one year. Billings made on contracts are recorded
as a reduction in unbilled receivables, and to the extent that those billings exceed costs incurred plus applicable
profit margin, they are recorded as unearned revenues.
53
Stock-based compensation
In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123R, which requires
companies to recognize compensation expense for all stock-based payments to employees, including grants of
employee stock options, in their statement of operations based on the fair value of the awards. We adopted
SFAS No. 123R effective May 1, 2006 using the modified prospective method. Under this method, compensation
cost is recognized for all share-based payments granted subsequent to April 30, 2006, awards modified after April 30,
2006, and the remaining portion of the fair value of unvested awards at April 30, 2006. Prior to May 1, 2006, we used
the intrinsic value method to determine values used in our pro forma stock-based compensation disclosures.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, which provides guidance
regarding the implementation of SFAS No. 123R. In particular, SAB 107 provides guidance regarding assumptions
used in stock-based compensation valuation models, the classification of stock-based compensation expense, the
capitalization of stock-based compensation costs and disclosures in filings with the SEC.
Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the date
of grant using any valuation model requires judgment. We use the Black-Scholes option pricing model to estimate
the fair value of employee stock options, as permitted by the provisions of SFAS No. 123R. Option pricing models,
including the Black-Scholes model, require the use of input assumptions, including expected volatility, expected
term and the expected dividend rate. Because our stock has been publicly traded in the United States only since
April 2007, we do not have a significant observable share-price volatility for the United States capital markets;
therefore, we estimate our expected volatility based on that of what we consider to be similar publicly-traded
companies and expect to continue to do so until such time as we have adequate historical data from our traded share
price in the United States. We did not estimate our expected volatility based on the price of our common stock on the
AIM market of the London Stock Exchange on which our shares have traded since October 2003, because we do not
believe, based on the historically low trading volume of our shares on that market, that the volatility of our common
stock on the AIM market is an appropriate indicator of the expected volatility of our common stock. Prior to fiscal
2007, we estimated the expected term of our options using our best estimate of the period of time from the grant date
that we expect the options to remain outstanding. Beginning in fiscal 2007, we estimate the expected term using the
average midpoint between the vesting terms and the contractual terms of our options as permitted by SAB 107. If we
determine another method to estimate expected volatility or expected term is more reasonable than our current
methods, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the
fair value calculated for future stock-based awards could change significantly. Higher volatility and longer expected
terms have a significant impact on the value of stock-based compensation determined at the date of grant. The
expected dividend rate is not as significant to the calculation of fair value of our stock-based awards.
In addition, SFAS No. 123R requires us to develop an estimate of the number of stock-based awards that will
be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate can have a significant
effect on reported stock-based compensation. If the actual forfeiture rate is higher than the estimated forfeiture rate,
then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense
recognized in the consolidated financial statements during the quarter of the change. If the actual forfeiture rate is
lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which
will result in an increase to the expense recognized in the consolidated financial statements. These adjustments
affect our cost of revenues, product development costs and selling, general and administrative costs. Through the
year ended April 30, 2008, the effect of forfeiture adjustments on our consolidated financial statements has been
insignificant. The expense we recognize in future periods could differ significantly from the current period and/or
our forecasts due to adjustments in the assumed forfeiture rates.
As a result of the adoption of SFAS No. 123R, we recorded stock compensation expense related to employees
of $1.1 million and $1.8 million in fiscal 2007 and 2008, respectively.
Income taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this
method, we determine deferred tax assets and liabilities based upon the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities, as well as credit and net operating loss carryforwards,
54
using enacted tax rates in effect for the year in which such items are expected to affect taxable income. The tax
consequences of most events recognized in the current year’s financial statements are included in determining
income taxes currently payable. However, because tax laws and financial accounting standards differ in their
recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise
between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or
liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of
assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a
liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future
years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a
deferred tax asset or deferred tax liability. We then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a
valuation allowance. As discussed in Note 13 to our consolidated financial statements included in this Annual
Report, we have established a valuation allowance for our net deferred tax assets, which were $13.2 million as of
April 30, 2007 and $19.5 million as of April 30, 2008.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a framework
for reporting fair value and expands disclosures about fair value measurements. SFAS No. 157 as issued is effective
for fiscal years beginning after November 15, 2007. On February 12, 2008, FASB Staff Position No. FAS 157-2,
Effective Date of FASB Statement No. 157, was issued, which delays the effective date to fiscal years beginning after
November 15, 2008 for certain nonfinancial assets and liabilities. We are currently evaluating the impact of
adopting SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 allows companies to elect to measure certain assets and liabilities at fair value and is
effective for fiscal years beginning after November 15, 2007. This standard is not expected to have any impact on
our financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R),
which establishes the principles and requirements for how an acquirer recognizes the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquirer at the acquisition date, measured at their fair values as of that
date, with limited exceptions. This statement applies to business combinations for which the acquisition date is after
the beginning of the first annual reporting period beginning after December 15, 2008. Earlier adoption is not
permitted. We will adopt SFAS No. 141R upon its effective date as appropriate for any future business combinations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be recorded as equity in the consolidated financial
statements. This statement also requires that consolidated net income shall be adjusted to include the net income
attributed to the noncontrolling interest. Disclosure on the face of the statement of operations of the amounts of
consolidated net income attributable to the parent and to the noncontrolling interest is required. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. This standard is not
expected to have any impact on our financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We generally place our investments in money market funds, Treasury bills and certificates of deposit with
maturities of less than one year. We actively manage our portfolio of cash equivalents, short-term investments and
long-term investments, but in order to ensure liquidity, we will only invest in instruments with high credit quality
where a secondary market exists. We have not held and do not hold any derivatives related to our interest rate
exposure. Due to the average maturity and conservative nature of our investment portfolio, a change in interest rates
would not have a material effect on the value of the portfolio. We do not have market risk exposure on our long-term
debt because it consists of an interest-free loan from the New Jersey Board of Public Utilities.
55
Management estimates that had the average yield on our cash, cash equivalents, certificates of deposit and
long- term investments decreased by 100 basis points, our interest income for the year ended April 30, 2008 would
have decreased by $1.1 million. This estimate assumes that the decrease occurred on the first day of fiscal 2008 and
reduced the yield of each investment by 100 basis points. The impact on our future interest income of future changes
in investment yields will depend largely on the gross amount of our cash, cash equivalents, and investments.
We transact business in various countries and have exposure to fluctuations in foreign currency exchange rates.
Foreign exchange gains and losses arise in the translation of foreign-denominated assets and liabilities, which may
result in realized and unrealized gains or losses from exchange rate fluctuations. Since we conduct our business in US
dollars and our functional currency is the US dollar, our main foreign exchange exposure, if any, results from changes
in the exchange rate between the US dollar and the British pound sterling, the Euro and the Australian dollar.
We invest in certificates of deposit and maintain cash accounts that are denominated in British pounds, Euros
and Australian dollars. These foreign denominated certificates of deposit and cash accounts had a balance of
$9.6 million as of April 30, 2008 and $15.6 million as of April 30, 2007, compared to our total certificates of
deposits, long-term investments and cash account balances of $101.1 million as of April 30, 2008 and $115.9 million
as of April 30, 2007. These foreign currency balances are translated at each month end to our functional currency,
the US dollar, and any resulting gain or loss is recognized in our results of operations.
In addition, a portion of our operations is conducted through our subsidiaries in countries other than the United
States, specifically Ocean Power Technologies Ltd. in the United Kingdom, the functional currency of which is the
British pound sterling, and Ocean Power Technologies (Australasia) Pty Ltd. in Australia, the functional currency of
which is the Australian dollar. Both of these subsidiaries have foreign exchange exposure that results from changes
in the exchange rate between their functional currency and other foreign currencies in which they conduct business.
All of our international revenues for the year ended April 30, 2008 were recorded in Euros, British pounds or
Australian dollars. If the foreign currency exchange rates had fluctuated by 10% as of April 30, 2008, the impact on
our foreign exchange gains and losses would have been $1.0 million.
We currently do not hedge 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are listed in Item 15 — “Exhibits and
Financial Statement Schedules” of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The company, under the supervision and with the participation of its management, including the Chief
Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the company’s disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)) as of April 30, 2008 (the “Evaluation Date”). Based on such
evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the Evaluation
Date, the company’s disclosure controls and procedures are effective, and are reasonably designed to ensure that all
material information relating to the company required to be included in the company’s reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the SEC.
56
The annual report of management on the company’s internal control over financial reporting is provided under
“Financial Statements and Supplementary Data” on page F-2.
The attestation report of KPMG LLP, the company’s independent registered public accounting firm, regarding
the company’s internal control over financial reporting is provided under “Financial Statements and Supplementary
Data” on page F-4.
During the quarter ended April 30, 2008, there were no changes in the company’s internal control over
financial reporting that materially affected, or are reasonably likely to materially affect, such internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to this item is set forth in the Proxy Statement for the 2008 Annual Meeting of
Stockholders (the “Proxy Statement”) under the headings “Election of Directors,” “Executive Officers,” “Sec-
tion 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics and Business Conduct,” and “Corporate
Governance and Board Matters,” and is incorporated herein by reference. The Proxy Statement will be filed with the
SEC within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is set forth in the Proxy Statement under the headings “Executive
Compensation” and “Director Compensation,” and is incorporated herein by reference. The Proxy Statement will be
filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information with respect to this item is set forth in the Proxy Statement under the headings “Security
Ownership of Certain Beneficial Owners and Management” and “Executive Compensation,” and is incorporated
herein by reference. The Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year
covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information with respect to this item is set forth in the Proxy Statement under the headings “Certain
Relationships and Related Party Transactions” and “Corporate Governance and Board Matters,” and is incorporated
herein by reference. The Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year
covered by this Form 10-K.
57
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this item is set forth in the Proxy Statement under the heading “Ratification of the
Selection of Independent Registered Public Accounting Firm,” and is incorporated herein by reference. The Proxy
Statement will be filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements: See Index to Consolidated Financial Statements on page F-1.
(3) Exhibits: See Exhibits Index on pages 60 to 61.
58
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: July 14, 2008
OCEAN POWER TECHNOLOGIES, INC.
By: /s/ GEORGE W. TAYLOR
George W. Taylor
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/
/s/
/s/
/s/
/s/
/s/
GEORGE W. TAYLOR
George W. Taylor
SEYMOUR S. PRESTON III
Seymour S. Preston III
CHARLES F. DUNLEAVY
Charles F. Dunleavy
ERIC A. ASH
Eric A. Ash
THOMAS J. MEANEY
Thomas J. Meaney
PAUL F. LOZIER
Paul F. Lozier
Director, Chief Executive Officer
(Principal Executive Officer)
July 14, 2008
Chairman of the Board of Directors
July 14, 2008
Director, Chief Financial Officer,
Senior Vice President, Treasurer and
Secretary (Principal Financial Officer
and Principal Accounting Officer)
Director
Director
Director
July 14, 2008
July 14, 2008
July 14, 2008
July 14, 2008
59
Exhibit
Number
3.1
3.2
4.1
10.1+
10.2+
10.3+
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Exhibits Index
Description
Restated Certificate of Incorporation of the registrant (incorporated by reference from Exhibit 3.1 to
Form 10-Q filed September 14, 2007)
Amended and Restated Bylaws of the registrant (incorporated by reference from Exhibit 3.1 to Form 10-Q
filed September 14, 2007)
Specimen certificate of common stock (incorporated by reference from Exhibit 4.1 to Form S-1/A filed
March 19, 2007)
Engineering, Procurement and Construction of a Wave Energy Power Plant at “Punta del Pescador”
(Santoña, Spain), dated July 27, 2006, between Iberdrola Energias Marinas de Cantabria, S.A. and Ocean
Power Technologies Limited (incorporated by reference from Exhibit 10.1 to Form S-1 filed
November 13, 2006)
Contract Number N00014-05-C-0384, dated September 20, 2005, between the Office of Naval Research,
U.S. Navy and Ocean Power Technologies, Inc., as amended by the Amendment of Solicitation/
Modification of Contract dated March 22, 2007 (incorporated by reference from Exhibit 10.2 to
Form S-1 filed November 13, 2006)
Contract Number N00014-02-C-0053, dated February 8, 2002, between the Office of Naval Research,
U.S. Navy and Ocean Power Technologies Inc., as modified (incorporated by reference from Exhibit 10.3
to Form S-1 filed November 13, 2006)
Option Agreement for Purchase of Emissions Credits, dated November 24, 2000 between Ocean Power
Technologies, Inc. and its affiliates and Woodside Sustainable Energy Solutions Pty. Ltd. (incorporated by
reference from Exhibit 10.4 to Form S-1 filed November 13, 2006)
1994 Stock Option Plan (incorporated by reference from Exhibit 10.4 to Form S-1 filed November 13,
2006)*
Incentive Stock Option Plan (incorporated by reference from Exhibit 10.6 to Form S-1 filed November 13,
2006)*
2001 Stock Plan (incorporated by reference from Exhibit 10.7 to Form S-1 filed November 13, 2006)*
2006 Stock Incentive Plan (incorporated by reference from Exhibit 10.8 to Form S-1/A filed March 19,
2007)*
Amended and Restated Voting and Right of First Refusal Agreement, dated April 18, 2005, between
Ocean Power Technologies, Inc., George W. Taylor and JoAnne E. Burns (incorporated by reference from
Exhibit 10.9 to Form S-1 filed November 13, 2006)
Agreement to Refinance, dated November 14, 1993 between Joseph R. Burns, Michael Y. Epstein, George
W. Taylor and Ocean Power Technologies, Inc. (incorporated by reference from Exhibit 10.10 to Form S-1
filed November 13, 2006)
Employment Agreement, dated October 23, 2003, between Charles F. Dunleavy and Ocean Power
Technologies, Inc. (incorporated by reference from Exhibit 10.11 to Form S-1 filed November 13, 2006)*
Employment Agreement, dated October 23, 2003, between George W. Taylor and Ocean Power
Technologies, Inc. (incorporated by reference from Exhibit 10.12 to Form S-1 filed November 13, 2006)*
Consultant Agreement, dated August 1, 1999, between Thomas J. Meaney and Ocean Power
Technologies, Inc. (incorporated by reference from Exhibit 10.13 to Form S-1 filed November 13, 2006)
Employment Agreement, dated September 9, 2004, between Mark R. Draper and Ocean Power
Technologies Ltd. (incorporated by reference from Exhibit 10.14 to Form S-1 filed November 13, 2006)*
Employment Agreement, dated September 30, 2005, between John A. Baylouny and Ocean Power
Technologies, Inc. (incorporated by reference from Exhibit 10.15 to Form S-1 filed November 13, 2006)*
60
Exhibit
Number
10.16
10.17
10.18
Description
Lease Agreement, dated August 30, 2005 between Ocean Power Technologies, Inc. and Reed Road
Industrial Park LLC #1, as amended on January 27, 2006 (incorporated by reference from Exhibit 10.16 to
Form S-1 filed November 13, 2006)
Lease, dated January 15, 2007, between University of Warwick Science Park Innovation Centre Limited
and Ocean Power Technologies Ltd. (incorporated by reference from Exhibit 10.17 to Form S-1/A filed
March 19, 2007)
Agreement for Renewable Energy Economic Development Grants, dated November 3, 2003, between
State of New Jersey Board of Public Utilities and Ocean Power Technologies, Inc. (incorporated by
reference from Exhibit 10.18 to Form S-1/A filed March 19, 2007)
10.19+ Contract for the Development and Application of a Sea Wave Energy Generation System in France, dated
as of June 17, 2005, between Iberdrola Energias Renovables II, S.A. Sociedad Unipersonal, Total Energie
Development SA, Ocean Power Technologies Ltd. and Ocean Power Technologies, Inc. (incorporated by
reference from Exhibit 10.19 to Form S-1/A filed March 19, 2007)
Contract Number DM259735, dated September 17, 2005 between Lockheed Martin Corporation
Inc., as modified
Maritime Systems and Sensors
(incorporated by reference from Exhibit 10.20 to Form S-1/A filed March 19, 2007)
(MS2) and Ocean Power Technologies,
10.20
10.21 Marketing Cooperation Agreement, dated September 9, 2006, between Ocean Power Technologies, Inc.
and Lockheed Martin Corporation through its Maritime Systems and Sensors business unit (incorporated
by reference from Exhibit 10.21 to Form S-1/A filed April 10, 2007)
10.22+ Contract Number N00014-07-C-0617, dated May 24, 2007, between the Office of Naval Research, U.S.
Navy and Ocean Power Technologies, Inc. (incorporated by reference from Exhibit 99.1+ to Form 8K
filed June 8, 2007)
Amendment to Contract for the Development and Application of a Sea Wave Energy Generating System
in France, dated as of April 2, 2007, between Iberdrola Energias Renovables, S.A.S., Total Energie
Development, S.A., Ocean Power Technologies Ltd. and Ocean Power Technologies, Inc. (incorporated
by reference from Exhibit 10.1 to Form 10-Q filed September 14, 2007)
10.23
10.24 Modification of Contract, dated September 13, 2007, modifying Contract Number N00014-02-C-0053,
between the Office of Naval Research, U.S. Navy and Ocean Power Technologies, Inc., as modified
(incorporated by reference from Exhibit 10.1 to Form 10-Q filed December 17, 2007)
10.27
10.26
10.25 Modification of Contract, dated September 26, 2007, modifying Contract Number N00014-05-C-0384,
between the Office of Naval Research, U.S. Navy and Ocean Power Technologies, Inc., as modified.
(incorporated by reference from Exhibit 10.2 to Form 10-Q filed December 17, 2007
Employment Agreement, dated December 21, 2007, between Herbert T. Nock and Ocean Power
Technologies, Inc.*
Addendum to the Agreement for the Engineering, Procurement and Construction of a Wave Energy Power
Plant at “Punta del Pescador” (Santoña, Spain), between Iberdrola Energias Marinas de Cantabria, S.A.
and Ocean Power Technologies Limited, dated February 18, 2008
Lease, dated February 1, 2008, between KUC Properties Limited and Ocean Power Technologies Ltd.
Subsidiaries of the registrant (incorporated by reference from Exhibit 21.1 to Form S-1/A filed March 19,
2007)
Consent of KPMG LLP
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
23.1
31.1
31.2
32.1
32.2
10.28
21.1
+ Confidential treatment requested as to certain portions, which portions have been omitted and filed separately
with the SEC.
* Management contract or compensatory plan or arrangement
61
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Reports of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets, April 30, 2007 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations, Years ended April 30, 2006, 2007 and 2008. . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss, Years ended April 30, 2006,
2007 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows, Years ended April 30, 2006, 2007 and 2008 . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
F-2
F-3
F-5
F-6
F-7
F-8
F-9
F-1
Reports of Management
Management’s Report on Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared by the Company’s management in
conformity with generally accepted accounting principles to reflect the financial position of the Company and its
operating results. The financial information appearing throughout this Annual Report is consistent with the consolidated
financial statements. Management is responsible for the information and representations in such consolidated financial
statements, including the estimates and judgments required for their preparation. The consolidated financial statements
have been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which
appears herein.
The Audit Committee of the Board of Directors, which is composed entirely of directors who are not officers or
employees of the Company, meets regularly with management and the independent registered public accounting firm.
The independent registered public accounting firm has had, and continues to have, direct access to the Audit Committee
without the presence of other management personnel, and have been directed to discuss the results of their audit work and
any matters they believe should be brought to the Committee’s attention. The independent registered public accounting
firm reports directly to the Audit Committee.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States of America. The Company’s internal
control over financial reporting includes those policies and procedures that:
(cid:129) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the Company;
(cid:129) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the
Company; and
(cid:129) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting
as of April 30, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this
assessment using those criteria, management concluded that the Company’s internal control over financial reporting was
effective as of April 30, 2008.
The effectiveness of the Company’s internal control over financial reporting as of April 30, 2008 has been audited
by KPMG LLP, an independent registered public accounting firm, as stated in their report, which appears herein.
/s/ GEORGE W. TAYLOR
George W. Taylor
Chief Executive Officer
/s/ CHARLES F. DUNLEAVY
Charles F. Dunleavy
Chief Financial Officer
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Ocean Power Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Ocean Power Technologies, Inc. and
subsidiaries as of April 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’
equity and comprehensive loss, and cash flows for each of the years in the three-year period ended April 30, 2008.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Ocean Power Technologies, Inc. and subsidiaries as of April 30, 2008 and 2007, and the
results of their operations and their cash flows for each of the years in the three-year period ended April 30, 2008, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective May 1, 2006, the Company adopted
the fair value method of accounting for stock-based compensation as required by Statement of Financial
Accounting Standards No. 123R, Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Ocean Power Technologies, Inc.’s internal control over financial reporting as of April 30, 2008,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated July 14, 2008 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
July 14, 2008
F-3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Ocean Power Technologies, Inc.:
We have audited Ocean Power Technologies, Inc.’s internal control over financial reporting as of April 30,
3008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Ocean Power Technologies, Inc.’s management
is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Ocean Power Technologies, Inc. maintained, in all material respects, effective internal control
over financial reporting as of April 30, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Ocean Power Technologies, Inc. and subsidiaries as of April 30,
2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss,
and cash flows for each of the years in the three-year period ended April 30, 2008, and our report dated July 14, 2008
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
July 14, 2008
F-4
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents, net of accumulated amortization of $176,840 and $204,585,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
April 30,
2007
2008
$107,505,473
8,390,146
865,081
313,080
441,342
117,515,122
387,923
88,836,304
—
1,728,637
577,452
1,375,249
92,517,642
628,454
597,280
983,376
717,288
1,123,848
— 12,233,437
330,296
227,845
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$119,711,546
107,550,965
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,708,408
4,593,413
—
26,106
6,327,927
231,585
10,825
600,000
1,457,575
4,490,008
699,752
—
6,647,335
188,784
16,237
600,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,170,337
7,452,356
Commitments and contingencies (note 14)
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 5,000,000 shares, none issued
or outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.001 par value; authorized 105,000,000 shares, issued and
outstanding 10,186,254 and 10,210,354 shares, respectively . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
10,186
150,842,671
(38,270,918)
(40,730)
10,210
153,057,265
(52,927,641)
(41,225)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,541,209
100,098,609
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
$119,711,546
107,550,965
See accompanying notes to consolidated financial statements.
F-5
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
2006
Year Ended April 30,
2007
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,747,715
2,059,318
2,531,315
3,983,742
2008
4,772,017
7,960,042
Gross loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(311,603)
(1,452,427)
(3,188,025)
Operating expenses:
Product development costs. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative costs . . . . . . . . . . . . . . . . .
4,224,997
3,190,687
6,219,893
4,893,580
8,255,123
7,732,577
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,415,684
11,113,473
15,987,700
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,727,287)
1,408,361
74,294
(978,242)
(7,222,874)
143,963
(12,565,900)
1,389,702
13,906
1,523,527
(19,175,725)
4,434,844
—
84,158
(9,638,765)
—
(14,656,723)
—
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(7,078,911)
(9,638,765)
(14,656,723)
Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . .
$
(1.37)
(1.83)
(1.44)
Weighted average shares used to compute basic and diluted net
loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,162,340
5,260,794
10,200,729
See accompanying notes to consolidated financial statements.
F-6
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
options . . . . . . . . . . . . . . . . . . . . .
17,166
Balance, May 1, 2005 . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation
adjustment . . . . . . . . . . . . . . . . . .
Total comprehensive loss . . . . . . . .
Compensation related to stock option
grants issued to employees . . . . . . .
Compensation related to stock option
grants issued for services . . . . . . . .
Shares issued for amounts received in
prior years . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock
Balance, April 30, 2006 . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation
adjustment . . . . . . . . . . . . . . . . . .
Total comprehensive loss . . . . . . . .
Compensation related to stock option
grants issued to employees . . . . . . .
Compensation related to stock option
grants issued for services . . . . . . . .
Adjustment for reverse stock split
rounding . . . . . . . . . . . . . . . . . . . .
Sale of common stock, net of
Common Shares
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Stockholders’
Equity
5,151,221 $ 5,151
—
—
59,423,955 (21,553,242)
— (7,078,911)
(39,333)
—
37,836,531
(7,078,911)
—
—
—
—
7,242
7,242
—
—
2,732
—
—
3
17
44,000
85,139
49,997
122,686
—
—
—
—
(7,071,669)
44,000
85,139
50,000
122,703
—
—
—
—
5,171,119
—
5,171
—
59,725,777 (28,632,153)
— (9,638,765)
(32,091)
—
31,066,704
(9,638,765)
—
—
—
—
(8,639)
(8,639)
—
—
(9)
— 1,082,181
—
—
70,235
—
(9,647,404)
1,082,181
70,235
—
89,903,819
65,674
—
—
—
—
—
—
—
—
—
—
issuance costs . . . . . . . . . . . . . . . .
5,000,000
5,000
89,898,819
Proceeds from exercise of stock
options . . . . . . . . . . . . . . . . . . . . .
15,144
15
65,659
Balance, April 30, 2007 . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation
adjustment . . . . . . . . . . . . . . . . . .
Total comprehensive loss . . . . . . . .
Compensation related to stock option
grants issued to employees . . . . . . .
Compensation related to stock option
grants issued for services . . . . . . . .
Proceeds from exercise of stock
10,186,254
—
10,186 150,842,671 (38,270,918)
— (14,656,723)
—
(40,730)
112,541,209
— (14,656,723)
—
—
—
—
(495)
(495)
—
—
— 1,788,841
—
24
137,982
287,771
—
—
—
(14,657,218)
1,788,841
137,982
287,795
—
—
—
options . . . . . . . . . . . . . . . . . . . . .
24,100
Balance, April 30, 2008 . . . . . . . . . .
10,210,354 $10,210 153,057,265 (52,927,641)
(41,225)
100,098,609
See accompanying notes to consolidated financial statements.
F-7
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended April 30,
2007
2006
2008
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,078,911)
Adjustments to reconcile net loss to net cash used in operating
(9,638,765) (14,656,723)
activities:
Foreign exchange (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense related to stock option grants . . . . . . . . .
Realization of deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
978,242
233,132
—
129,139
(75,000)
—
(1,523,527)
269,075
24,572
1,152,416
—
10,825
(84,158)
241,721
—
1,926,823
—
5,412
668,424
611,037
161,505
—
(632,778)
(121,840)
(2,383)
57,803
(827,287)
(95,896)
(99,436)
—
1,233,484
2,126,616
(14,405)
(85,470)
(878,643)
(270,136)
(918,380)
(76,571)
(122,323)
496,838
699,752
(26,106)
Net cash used in operating activities . . . . . . . . . . . . . . . . . .
(5,071,630)
(7,467,798) (13,662,494)
Cash flows from investing activities:
Purchases of certificates of deposit. . . . . . . . . . . . . . . . . . . . . . . . .
Maturities of certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of long-term investments . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of patent costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(62,677,400) (55,187,304)
87,397,606
—
— (983,376)
(107,271)
(217,763)
(122,001)
(8,968,170)
47,279,314 17,358,316
— (12,233,437)
—
(419,835)
(112,705)
(27,714)
(330,047)
(57,396)
(30,747)
Net cash provided by (used in) investing activities . . . . . . . .
24,302,016
(9,338,401)
(4,403,545)
Cash flows from financing activities:
Sale of common stock, net of issuance costs . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . .
— 90,773,935
65,674
90,839,609
122,703
122,703
(870,116)
287,795
(582,321)
Effect of exchange rate changes on cash and cash equivalents . . . . . .
(980,694)
1,514,854
(20,809)
Net increase (decrease) in cash and cash equivalents . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . .
18,372,395
13,584,814
75,548,264 (18,669,169)
31,957,209 107,505,473
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . $ 31,957,209 107,505,473 88,836,304
Supplemental disclosure of noncash investing and financing activities:
Issuance of shares in connection with amounts received in prior
years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capitalized patent costs financed through accounts . . . . . . . . . . . . .
Stock issuance costs financed through accounts payable and
accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized equipment costs financed through accounts payable . . .
50,000
—
—
30,343
—
—
870,116
—
—
35,048
—
36,964
See accompanying notes to consolidated financial statements.
F-8
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Background
Ocean Power Technologies, Inc. (the Company) was incorporated on April 19, 1984 in the State of New Jersey,
commenced active operations in 1994 and re-incorporated in the State of Delaware in April 2007. The Company
develops and is commercializing proprietary systems that generate electricity by harnessing the renewable energy
of ocean waves. The Company markets and sells its products in the United States and internationally.
(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.
In addition, the Company evaluates its relationships with other entities to identify whether they are variable
interest entities as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46(R), Consol-
idation of Variable Interest Entities (FIN 46R), and to assess whether it is the primary beneficiary of such entities. If
the determination is made that the Company is the primary beneficiary, then that entity is included in the
consolidated financial statements in accordance with FIN 46R.
(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 and the disclosure of
contingent 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 the
recoverability of the carrying amount of property and equipment and patents; valuation allowances for receivables
and deferred income tax assets; and percentage of completion of customer contracts for purposes of revenue
recognition. Actual results could differ from those estimates.
(c) Revenue Recognition
The Company recognizes revenue on government and commercial contracts under the percentage-of-com-
pletion method. The percentage of completion is determined by relating the costs incurred to date to the estimated
total costs. The cumulative effects resulting from revisions of estimated total contract costs and revenues are
recorded in the period in which the facts requiring revision become known. Upon anticipating a loss on a contract,
the Company recognizes the full amount of the anticipated loss in the current period. During the years ended
April 30, 2007 and 2008, the Company recorded provisions of approximately $1,290,000 and $2,370,000,
respectively, related to anticipated losses on contracts. Reserves related to loss contracts in the amounts of
approximately $1,780,000 and $2,070,000 are included in accrued expenses in the accompanying consolidated
balance sheets as of April 30, 2007 and 2008, respectively.
Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed.
Unbilled receivables are normally billed and collected within one year. Billings made on contracts are recorded
as a reduction of unbilled receivables, and to the extent that such billings exceed costs incurred plus applicable profit
margin, they are recorded as unearned revenues.
(d) Cash Equivalents
Cash equivalents consist of investments in short-term financial instruments with maturities of three months or
less from the date of purchase. Cash and cash equivalents include $13,254,000 and $15,617,000 of certificates of
deposit with an initial term of less than three months at April 30, 2007 and 2008, respectively, and $93,000,000 and
F-9
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
$1,251,000 invested in a money market fund as of April 30, 2007 and 2008, respectively. In addition, $70,881,000
was invested in short-term Treasury bills as of April 30, 2008.
(e) Restricted Cash and Credit Facility
The Company had $983,376 and $1,123,848 of restricted cash as of April 30, 2007 and 2008, respectively. The
cash is restricted under the terms of a security agreement (the Agreement) between Ocean Power Technologies, Inc
and Barclays Bank. Under the Agreement, this cash is on deposit at Barclays Bank and serves as security for letters
of credit that are expected to be issued by Barclays Bank on behalf of Ocean Power Technologies Ltd., under a
A800,000 credit facility established by Barclays Bank for Ocean Power Technologies Ltd. The credit facility is for
the issuance of letters of credit and bank guarantees, and carries a fee of 1% per annum of the amount of any such
obligations issued by Barclays Bank. The credit facility does not have an expiration date, and is cancelable at the
discretion of the bank.
(f) Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation and
amortization is calculated using the straight-line method over the estimated useful lives (three to seven years) of the
assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated
useful life of the asset or the remaining lease term. Expenses for maintenance and repairs are charged to operations
as incurred. Depreciation was $213,374, $247,515 and $213,977 for the years ended April 30, 2006, 2007 and 2008,
respectively.
(g) Foreign Exchange Gains and Losses
The Company has invested in certain certificates of deposit and has maintained cash accounts that are
denominated in British pound sterling, Euros and Australian dollars. Such certificates of deposit and cash accounts
had a balance of approximately $15,646,000 and $9,646,000 as of April 30, 2007 and 2008, respectively. Such
positions may result in realized and unrealized foreign exchange gains or losses from exchange rate fluctuations,
which are included in foreign exchange gain (loss) on the accompanying consolidated statements of operations.
(h) Patents
External costs related to the filing of patents, including legal and filing fees, are capitalized. Amortization is
calculated using the straight-line method over the life of the patents (17 years). Expenses for the development of
technology are charged to operations as incurred. Amortization expense was $19,758, $21,560 and $27,744 for the
years ended April 30, 2006, 2007 and 2008, respectively. Amortization expense for the next five fiscal years related
to amounts capitalized for patents as of April 30, 2008 is estimated to be approximately $28,000 per year.
(i) Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment and purchased
intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, then an
impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and
liability sections of the consolidated balance sheet. The Company reviewed its long-lived assets for indicators of
F-10
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
impairment in accordance with SFAS No. 144 and determined that no impairment review was necessary for the
years ended April 30, 2006, 2007 or 2008.
(j) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of
cash balances, bank certificates of deposit and trade receivables. The Company invests its excess cash in highly
liquid investments (principally short-term bank deposits, Treasury bills and a money market fund) and does not
believe that it is exposed to any significant risks related to its cash accounts, money market fund or certificates of
deposit.
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 the periods indicated:
Customer
Years Ended April 30,
2006
2008
2007
US Navy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61% 54% 58%
Iberdrola and Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9% 35% 31%
Lockheed Martin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22% —% —%
The loss of, or a significant reduction in revenues from, any of the current customers could significantly impact
the Company’s financial position or results of operations. The Company does not require collateral from its
customers.
(k) 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 outstanding during the period. Due to the Company’s net losses,
potentially dilutive securities, consisting of outstanding stock options, were excluded from the diluted loss per share
calculation due to their anti-dilutive effect.
In computing diluted net loss per share, 1,205,030, 1,303,574, and 1,445,302 options to purchase shares of
common stock were excluded from the computations for the years ended April 30, 2006, 2007 and 2008,
respectively.
F-11
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(l) Stock-Based Compensation
Prior to May 1, 2006, the Company applied the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations
including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, to
account for its fixed plan stock options. Under this method, compensation expense was recorded only if on the date
of grant the market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-
Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure,
established accounting and disclosure requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As permitted by existing accounting standards, the Company elected to continue to
apply the intrinsic value-based method of accounting described above, and adopted only the disclosure require-
ments of SFAS No. 123, as amended. The following table illustrates the effect on net loss if the fair value-based
method had been applied to all outstanding and unvested awards in the period presented:
Net loss, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add stock-based employee compensation expense included in reported net loss . . . . . .
Deduct total stock-based employee compensation expense determined under fair
Year Ended
April 30, 2006
$(7,078,911)
44,000
value-based method for all awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(680,000)
Pro forma net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(7,714,911)
Basic and diluted net loss per share, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net loss per share, pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(1.37)
(1.49)
In accordance with SFAS No. 123, as amended by SFAS No. 148, the fair value of option grants is estimated on
the date of grant using the Black-Scholes option pricing model for pro forma disclosure purposes with the following
weighted-average assumptions used for grants: dividend yield of 0%; risk-free interest rate of 4.9%; an expected
option life of 9.3 years; and volatility of 72% for the year ended April 30, 2006. These assumptions were used to
determine the weighted average per share fair value of $10.20 for stock options granted during the year ended
April 30, 2006.
On May 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R), which requires that the costs resulting from all share-based payment transactions be recognized
in the consolidated financial statements at their fair values. The Company adopted SFAS No. 123R using the
modified prospective application method under which the provisions of SFAS No. 123R apply to new awards and to
awards modified, repurchased, or canceled after the adoption date. Additionally, compensation cost for the portion
of the awards for which the requisite service had not been rendered that were outstanding as of May 1, 2006 will be
recognized in the consolidated statements of operations over the remaining service period after such date based on
the award’s original estimated fair value. The aggregate share-based compensation expense recorded in the
consolidated statements of operations for the years ended April 30, 2007 and 2008 under SFAS No. 123R was
approximately $1,082,000 and $1,789,000, respectively.
Valuation Assumptions for Options Granted During the Years Ended April 30, 2007 and 2008.
The fair value of each stock option granted during the years ended April 30, 2007 and 2008 were estimated at
the date of grant 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 was estimated using the “simplified” method as permitted by the Securities and Exchange Commission’s
F-12
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Staff Accounting Bulletin No. 107, Share-Based Payment. Expected volatility was based on historical volatility for
a peer group of companies for a period equal to the stock option’s expected life, calculated on a daily basis.
Years Ended April 30,
2007
2008
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 years
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.01%
0.0%
72.0%
4.69%
0.0%
5.99 years
77.9%
The above assumptions were used to determine the weighted average per share fair value of $8.80 and $10.87
for stock options granted during the years ended April 30, 2007 and 2008, respectively.
(m) Accounting for Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are
expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(n) Accumulated Other Comprehensive Loss
The functional currency for the Company’s foreign operations is the applicable local currency. The translation
from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using the exchange
rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during
the period. The unrealized gains or losses resulting from such translation are included in accumulated other
comprehensive loss within stockholders’ equity.
(o) Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a framework
for reporting fair value and expands disclosures about fair value measurements. SFAS No. 157 as issued is effective
for fiscal years beginning after November 15, 2007. On February 12, 2008, FASB Staff Position No. FAS 157-2,
Effective Date of FASB Statement No. 157, was issued, which delays the effective date to fiscal years beginning after
November 15, 2008 for certain nonfinancial assets and liabilities. The Company is currently evaluating the impact
of adopting SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 allows companies to elect to measure certain assets and liabilities at fair value and is
effective for fiscal years beginning after November 15, 2007. This standard is not expected to have any impact on
the Company’s financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combination, (SFAS No. 141R),
which establishes the principles and requirements for how an acquirer recognizes the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquirer at the acquisition date, measured at their fair values as of
that date, with limited exceptions. This statement applies to business combinations for which the acquisition date is
after the beginning of the first annual reporting period beginning after December 15, 2008. Earlier adoption is not
permitted. The Company will adopt SFAS No. 141R upon its effective date as appropriate for any future business
combinations.
F-13
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be recorded as equity in the consolidated financial
statements. This statement also requires that consolidated net income shall be adjusted to include the net income
attributed to the noncontrolling interest. Disclosure on the face of the statement of operations of the amounts of
consolidated net income attributable to the parent and to the noncontrolling interest is required. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. This standard is not
expected to have any impact on the Company’s financial condition or results of operations.
(3) Certificates of Deposit
Certificates of deposit with maturities in excess of 90 days from purchase are summarized as follows:
Nominal Face
Amount
Currency
2007
2008
April 30,
5.20% due May 17, 2007 . . . . . . . . . . . . . . . . . . . . .
5.22% due June 20, 2007 . . . . . . . . . . . . . . . . . . . . .
2,496,832
1,701,810
GBP
GBP
$4,989,420 —
3,400,726 —
$8,390,146 —
(4) Long-Term Investment
Long-term investments with maturities in excess of 365 days are summarized as follows:
3.875% due May 15, 2009 . . . . . . . . . . . . . . . . . . . .
12,233,437
USD
$— 12,233,437
Nominal Face
Amount
Currency
2007
2008
April 30,
(5) Property and Equipment
The components of property and equipment are as follows:
Computers and software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 466,734
403,233
198,923
47,494
614,695
630,116
247,491
70,145
April 30,
2007
2008
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,116,384
(728,461)
1,562,447
(933,993)
$ 387,923
628,454
(6) Accrued Expenses
Included in accrued expenses at April 30, 2007 and 2008 were contract reserves of approximately $1,780,000
and $2,070,000, respectively, and accrued employee incentive payments of approximately $1,051,000 and
$572,000, respectively. Accrued expenses at April 30, 2007 also included costs associated with the initial public
offering in the US of approximately $680,000. Accrued expenses at April 30, 2008 also included legal and
accounting fees of approximately $556,000 and accrued employee vacation of approximately $143,000.
F-14
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(7) Related Party Transactions
The Company is obligated to pay royalties to G.W. Taylor, a founding stockholder of the Company; M.Y.
Epstein; and the estate of J.R. Burns (stockholders of the Company) related to U.S. patent 4404490 entitled, “Power
Generation from Waves Near the Surface of Bodies of Water.” Royalty payments are limited to $925,000 in the
aggregate, based on revenues related to certain piezoelectric-technology, if any, on the basis of 6% of future licenses
sold and 4% of future product sales and development contracts. Through April 30, 2008, approximately $200,000 of
royalties had been earned. During the years ended April 30, 2006, 2007 and 2008, no royalties were earned pursuant
to these agreements, and no future royalties are expected to be earned. As of April 30, 2007, approximately $26,000
was included in other current liabilities related to these agreements. The amount was paid during the year ended
April 30, 2008.
In August 1999, the Company entered into a consulting agreement with an individual for marketing services at
a rate of $800 per day of services provided. The individual became a member of the board of directors in June 2006.
Under this consulting agreement, the Company expensed approximately $53,000, $54,000 and $62,000 during the
years ended April 30, 2006, 2007 and 2008, respectively.
(8) Debt
During the year ended April 30, 2000, the Company received an award of $250,000 from the State of New
Jersey Commission on Science and Technology for the development of a wave power system that was deployed off
the coast of New Jersey. The award contract was assigned to the New Jersey Economic Development Authority in
fiscal 2008. Under the terms of this award, the Company must repay the amount funded, without interest, by
January 15, 2012. The amounts to be repaid each year are determined as a percentage of revenues (as defined in the
loan agreement) the Company receives that year from its customer contracts that meet criteria specified in the loan
agreement, with any remaining amount due on January 15, 2012. Based upon the terms of the award, the Company
has repaid approximately $18,000 and is required to repay an additional approximately $43,000 as of April 30,
2008. The current payment required was included in accrued expenses in the accompanying consolidated balance
sheet as of April 30, 2008.
(9) Deferred Credits
During the year ended April 30, 2001, in connection with the sale of common stock to an investor, the
Company received $600,000 from the investor in exchange for an option to purchase up to 500,000 metric tons of
carbon emissions credits generated by the Company during the years 2008 through 2012, at a 30% discount from the
then-prevailing market rate. This amount has been recorded as deferred credits in the accompanying consolidated
balance sheets as of April 30, 2007 and 2008. If the Company does not become entitled under applicable laws to the
full amount of emission credits covered by the option by December 31, 2012, the Company is obligated to return the
option fee of $600,000, less the aggregate discount on any emission credits sold to the investor prior to such date. If
the Company receives emission credits under applicable laws and fails to sell to the investor the credits up to the full
amount of emission credits covered by the option, the investor is entitled to liquidated damages equal to 30% of the
aggregate market value of the shortfall in emission credits (subject to a limit on the market price of emission
credits).
(10) Common Stock
On December 7, 2006, the board of directors approved and recommended to shareholders and on January 12,
2007, the shareholders of the Company approved a one-for-ten reverse stock split, which was effective on April 20,
2007. All share data shown in the accompanying consolidated financial statements have been retroactively restated
to reflect the reverse stock split.
F-15
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
On April 30, 2007, the Company completed an initial public offering in the United States on the NASDAQ
Global Market by issuing 5,000,000 shares of its common stock for a purchase price of $20.00 per share, resulting in
net proceeds to the Company of $89,903,819.
(11) Preferred Stock
In September 2003, and in connection with the AIM offering, the Company’s stockholders authorized
5,000,000 shares of undesignated preferred stock with a par value of $0.001 per share. At April 30, 2007 and 2008,
no shares of preferred stock had been issued.
(12) Stock Options
Prior to August 2001, the Company maintained qualified and nonqualified stock option plans. The Company
had reserved 484,825 shares of common stock for issuance under these plans. There are no options available for
future grant under these plans as of April 30, 2008.
In August 2001, the Company approved the 2001 Stock Plan, which provides for the grant of incentive stock
options and nonqualified stock options. A total of 1,000,000 shares were authorized for issuance under the 2001
Stock Plan. As of April 30, 2008, the Company had issued or reserved 661,852 shares for issuance under the 2001
Stock Plan. After the effectiveness of the 2006 Stock Incentive Plan, no further options or other awards have been or
will be granted under the 2001 Stock Plan.
On April 24, 2007, the Company’s 2006 Stock Incentive Plan became effective. A total of 803,215 shares are
authorized for issuance under the 2006 Stock Incentive Plan. As of April 30, 2008, the Company had issued options
for 298,625 shares of common stock and had reserved an additional 504,590 shares of common stock for future
issuance under the 2006 Stock Incentive Plan. The Company’s employees, officers, directors, consultants and
advisors are eligible to receive awards under the 2006 Stock Incentive Plan; however, incentive stock options may
only be granted to employees. The maximum number of shares of common stock with respect to which awards may
be granted to any participant under the 2006 Stock Incentive Plan is 200,000 per calendar year. Members of the
board of directors who are not full-time employees receive, as part of their annual compensation, a choice of either
(a) an option to purchase 2,000 shares of common stock that is fully vested at the time of grant, or (b) shares of
common stock worth $10,000, which vests 50% at the time of grant and 50% one year later. Vesting provisions of
stock options are determined by the board of directors. The contractual term of these stock options is up to ten years.
The 2006 Stock Incentive Plan is administered by the Company’s board of directors who may delegate authority to
one or more committees or subcommittees of the board of directors or to the Company’s officers. If the board of
directors delegates authority to an officer, the officer has the power to make awards to all of the Company’s
employees, except to executive officers. The board of directors will fix the terms of the awards to be granted by such
officer. No award may be granted under the 2006 Stock Incentive Plan after December 7, 2016, but the vesting and
effectiveness of awards granted before that date may extend beyond that date.
F-16
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Transactions under these option plans during the year ended April 30, 2008 are as follows:
Shares Under
Option
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
(In Years)
Outstanding May 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,303,574
(75,833)
(78,381)
(24,100)
320,042
Outstanding April 30, 2008 . . . . . . . . . . . . . . . . . . . . . . .
1,445,302
Exercisable April 30, 2008 . . . . . . . . . . . . . . . . . . . . . . .
1,024,260
$14.49
14.45
17.51
11.94
15.59
14.61
14.72
5.2
3.9
The total intrinsic value of options exercised during the years ended April 30, 2006, 2007 and 2008 was
approximately $153,000, $188,000 and $101,000, respectively. The total intrinsic value of outstanding and
exercisable options as of April 30, 2008 was approximately $715,000. As of April 30, 2008, approximately
373,000 additional options were expected to vest, which had zero intrinsic value and a weighted average remaining
contractual term of 8.3 years. As of April 30, 2008, there was approximately $3,063,000 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 2.5 years. The Company normally issues new shares to satisfy option
exercises under these plans.
Certain stock options granted during the year ended April 30, 2006 were granted to employees with exercise
prices less than the fair value of the underlying common stock on the date of grant. Additionally, certain options
were granted to consultants during the years ended April 30, 2006, 2007 and 2008. The Company has charged
compensation expense of $129,139, $70,235 and $137,982 related to these option grants, which has been included
in selling, general and administrative costs in the accompanying consolidated statements of operations for the years
ended April 30, 2006, 2007 and 2008, respectively.
F-17
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(13)
Income Taxes
The tax effects of temporary differences and carryforwards that give rise to the Company’s deferred tax assets
and deferred tax liabilities are presented below.
April 30,
2007
2008
Deferred tax assets:
Federal net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . .
Foreign net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . .
New Jersey state operating loss carryforwards . . . . . . . . . . . . . . . . . .
Federal research and development tax credits . . . . . . . . . . . . . . . . . . .
Foreign research and development tax credits . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,218,000
1,897,000
—
761,000
—
1,509,000
6,000
829,000
—
10,942,000
3,328,000
756,000
882,000
870,000
1,788,000
148,000
731,000
7,000
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,220,000
19,452,000
Deferred tax liabilities:
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,000)
—
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,000)
(13,203,000)
—
(19,452,000)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
Income tax benefit was $143,963 for the year ended April 30, 2006. The effective income tax rate differed from
the percentages computed by applying the U.S. Federal income tax rate of 34% to loss before income taxes as a
result of the following:
Years Ended April 30,
2006
2008
2007
Computed “expected” tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (reduction) in income taxes resulting from:
(6)
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Federal research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)
Foreign research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . —
Sale of state loss carryforwards and tax credits . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6)
8
(1)
—
(2) —
1
1
32
41
(6)
5
(1)
(6)
—
—
42
(34)% (34)% (34)%
(2)% —% —%
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences
and carryforwards become deductible or utilized. As of April 30, 2007 and 2008, based upon the level of historical
taxable losses, valuation allowances of $13,203,000 and $19,452,000, respectively, were recorded in accordance
with the provisions of SFAS No. 109, Accounting for Income Taxes. The valuation allowance increased $2,436,000,
$3,149,000 and $6,249,000 during the years ended April 30, 2006, 2007 and 2008, respectively.
F-18
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
As of April 30, 2008, the Company had net operating loss carryforwards for Federal income tax purposes of
approximately $32,200,000, which begin to expire in 2009. The Company also had Federal research and
development tax credit carryforwards of approximately $882,000 as of April 30, 2008, which begin to expire
in 2012. The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and tax
credit carryforwards if there has been an ownership change, as defined. Such an ownership change, as described in
Section 382 of the Internal Revenue Code, may limit the Company’s ability to utilize its net operating loss and tax
credit carryforwards on a yearly basis. Foreign loss before income taxes was $982,934, $2,289,834, and $3,370,619
for the years ended April 30, 2006, 2007 and 2008, respectively. As of April 30, 2008, foreign net operating loss
carryforwards were approximately $11,500,000. These losses can be carried forward indefinitely, but the
Company’s ability to utilize these carryforwards may be limited in the event of an ownership change.
During the year ended April 30, 2006, the Company sold a portion of its New Jersey state net operating losses
and research and development credits to a company for net proceeds of $143,963 resulting in the recognition of an
income tax benefit in the accompanying consolidated statements of operations.
On May 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the criteria for recognizing tax
benefits related to uncertain tax positions under SFAS No. 109, and requires additional financial statement
disclosure. FIN 48 requires that the Company recognizes 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. The implementation of FIN 48 did not have any material impact on the Company’s consolidated
financial statements. At the adoption date of May 1, 2007 and also at April 30, 2008, the Company had no
unrecognized tax benefits. The Company does not expect any material increase or decrease in its income tax
expense, in the next twelve months, related to examinations or changes in uncertain tax positions.
The Company does not have any interest or penalties accrued related to uncertain tax positions as it does not
have any unrecognized tax benefits. In the event the Company determines that accrual of interest or penalties is
necessary in the future, the amount will be presented as a component of income taxes.
(14) Commitments and Contingencies
(a) Operating Lease Commitments
The Company leases office, laboratory and manufacturing space in Pennington, New Jersey and in Warwick,
United Kingdom under operating leases that expire on various dates through April 30, 2013. Rent expense under
operating leases was $295,089, $338,113 and $438,175 for the years ended April 30, 2006, 2007 and 2008,
respectively. Future minimum lease payments under operating leases as of April 30, 2008 are as follows:
Year ending April 30:
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 271,632
238,572
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
238,572
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
226,680
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
206,858
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,182,314
(b) Litigation
The Company is involved from time to time in certain legal actions arising in the ordinary course of business.
Management believes that the outcome of such actions will not have a material adverse effect on the Company’s
financial position or results of operations.
F-19
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(15) Quarterly Financial Data (Unaudited)
Fiscal Year 2008
Jul 31
Three Months Ended
Oct 31
Jan 31
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross loss. . . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net loss per share . . . . . . . $
555,704
(249,288)
(4,061,624)
(2,437,844)
(0.24)
1,686,212
(236,984)
(3,550,857)
(1,870,816)
(0.18)
1,421,856
(570,668)
(4,600,822)
(3,992,961)
(0.39)
Fiscal Year 2007
Jul 31
Three Months Ended
Oct 31
Jan 31
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit (loss) . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net loss per share . . . . . . . $
305,186
79,221
(2,360,950)
(1,660,954)
(0.32)
555,561
(601,104)
(2,976,109)
(2,307,200)
(0.45)
652,884
(67,594)
(2,436,457)
(1,540,296)
(0.30)
Apr 30
1,108,245
(2,131,085)
(6,962,422)
(6,355,102)
(0.62)
Apr 30
1,017,684
(862,950)
(4,792,384)
(4,130,315)
(0.75)
(16) Operating Segments and Geographic Information
The Company’s business consists of one segment as this represents management’s view of the Company’s
operations. The Company operates on a worldwide basis with one operating company in the US, one subsidiary in
the UK and one subsidiary in Australia, which are categorized below as North America, Europe and Australia,
respectively. Revenues are generally attributed to the operating unit which bills the customers.
Geographic information is as follows:
Revenues from external customers . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
North America
$ 1,747,715
(6,743,896)
487,770
33,820,540
Year Ended April 30, 2006
Australia
Europe
Total
—
(833,147)
56,515
156,102
— 1,747,715
(7,727,287)
544,285
33,996,138
(150,244)
—
19,496
North America
Year Ended April 30, 2007
Australia
Europe
Total
Revenues from external customers. . . . . . . $
Operating loss . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . .
1,484,998
(10,254,579)
293,633
118,074,176
1,007,689
(2,191,703)
94,290
1,607,549
38,628
(119,618)
—
29,821
2,531,315
(12,565,900)
387,923
119,711,546
North America
Year Ended April 30, 2008
Australia
Europe
Total
Revenues from external customers. . . . . . . $
Operating loss . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . .
2,831,122
(15,695,543)
392,980
103,873,654
1,940,895
(3,221,882)
234,497
3,624,686
—
(258,300)
977
52,625
4,772,017
(19,175,725)
628,454
107,550,965
F-20
Company Secretary
Charles F. Dunleavy
Registrar
Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940
–
800-662-7232 in the US
–
781-575-4238 outside the US
www.computershare.com
OCEAN POWER TECHNOLOGIES, INC.
Executive Officers
Dr. George W. Taylor
Chief Executive Officer
Charles F. Dunleavy
Chief Financial Officer, Senior Vice
President, Treasurer and Secretary
Mark R. Draper
Chief Operating Officer, Chief
Executive and Director of
Ocean Power Technologies Ltd.
Herbert T. Nock
Vice President, Business Development
and Marketing
Bankers
Barclays Bank Plc
1 Churchill Place
London E14 5HP
UK
PNC Bank
76 Nassau Street
Princeton, NJ 08540
USA
Nominated Advisors and
Nominated Broker
Collins Stewart Europe Ltd.
88 Wood Street, 9th Floor
London EC2V 7QR
Directors
Sir Eric A. Ash
Non-Executive Director
(Member, Keppel Corporation Limited)
Charles F. Dunleavy
Chief Financial Officer
Paul F. Lozier
Non-Executive Director
Thomas J. Meaney
Non-Executive Director
(President and Chief Executive
Officer, Mikros Systems Corp.)
Seymour S. Preston III
Chairman and Non-Executive Director
Dr. George W. Taylor
Chief Executive Officer
Independent Registered Public
Accounting Firm
KPMG LLP
1601 Market Street
Philadelphia, PA 19103
USA
Legal Advisors
Wilmer Cutler Pickering Hale and
Dorr LLP
399 Park Avenue
New York, NY 10022
USA
Wilmer Cutler Pickering Hale and
Dorr LLP
Alder Castle
10 Noble Street
London EC2V 7QJ
UK
Share Price Information
The company’s share price is quoted on the NASDAQ Global Market under the symbol OPTT and on the London
Stock Exchange, AIM market, under the symbol OPT. Go to www.nasdaq.com or to
www.londonstockexchange.com to access the company’s share price information. In addition, the share price and
other publicly released information are available at OPT’s website under the Investor Relations tab.
Offices
Ocean Power Technologies, Inc.
1590 Reed Road
Pennington, NJ 08534
USA
Ocean Power Technologies, Ltd.
Warwick Innovation Center
Gallows Hill
Warwick CV34 6UW
UK
Website Address: www.oceanpowertechnologies.com
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Ocean Power Technologies, Inc.