Annual Report
For The Year Ended April 30, 2011
Scotland PowerBuoy
Deployed April 2011
FINANCIAL HIGHLIGHTS
Key Financial Highlights
In millions of U.S. dollars for fiscal years ended April 30
Revenues
Total Operating Expenses
Net Loss
Cash, Cash Equivalents, Restricted Cash and
Marketable Securities
Total Assets
Total Long-Term Debt
Total Liabilities
Stockholders’ Equity
Contract Order Backlog
FY 2011
FY 2010
%Change
6.7
21.7
5.1
22.1
(20.5)
(19.1)
48.3
53.6
0.45
7.1
46.5
8.9
66.8
73.0
0.25
8.1
64.8
5.7
31%
-2%
7%
-28%
-27%
80%
-12%
-28%
56%
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
120.00
100.00
80.00
60.00
40.00
20.00
0.00
Ocean Power Technologies
FTSE NASDAQ Small Cap Index
Zacks Industry Group Index: Energy- Alternative Sources
4/27/2007
10/31/2007
4/30/2008
10/31/2008
4/30/2009
10/31/2009
4/30/2010
10/31/2010
4/30/2011
Total Revenues
Millions of U.S. dollars
Percentage Revenue Breakdown
By geographical location of customers
4.0
5.1
6.7
2%
2%
9%
3%
13%
89%
84%
25%
73%
Asia and
Australia
Europe
United
States
2009
2010
2011
2009
2010
2011
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Dear Shareholder,
Once again it is our pleasure to report to you not only with an update on what we
accomplished during the fiscal year ended April 30, 2011, but also on our plans for the
future. Following our discussion below, please find in this Annual Report the Company’s
consolidated financial statements and additional detailed information about our business
as reported in our Form 10-K filed with the US Securities and Exchange Commission.
Fiscal 2011 proved to be another year marked by continued progress across many
fronts. Highlights of the year include the following:
•
•
•
•
•
•
•
The Company generated revenues of $6.7 million for the twelve months ended
April 30, 2011, up 31% as compared to $5.1 million in fiscal 2010, reflecting
orders from the US Navy, US Department of Energy (“DOE”) and the United
Kingdom’s Technology Strategy Board.
We ended the fiscal year with a record backlog of $8.9 million, including DOE
awards for the PB150 program in Reedsport, Oregon and for development of our
next generation PB500 PowerBuoy®. This compares to a backlog of $5.7 million
at April 30, 2010 and reflects $10.3 million worth of orders booked during the
fiscal year.
We deployed our first 150 kW-rated PowerBuoy, the PB150, off the coast of
Scotland on April 15, 2011, with initial reported power levels for this utility-scale
system exceeding performance expectations. The capacity factor represented by
the results exceeded that experienced by most other renewable sources.
Ocean Power Technologies also achieved Lloyd’s Register certification for our
utility-scale PB150 PowerBuoy design, providing
third-party
assurance of its compliance with certain international standards for structural and
mooring system survivability.
independent
The Company has demonstrated the in-ocean reliability and survivability of the
first-ever grid-connected wave energy device in the US, at the Marine Corps
Base in Oahu, Hawaii, which has completed five million cycles in operation over
one and a half years.
OPT’s relationship with Mitsui Engineering & Shipbuilding continued
to
strengthen, with the award to OPT of a first-stage contract for the development
of a new PowerBuoy mooring system suitable for Japanese sea conditions.
During fiscal 2011, the Company substantially completed work under the US
Navy’s Littoral Expeditionary Autonomous PowerBuoy (“LEAP”) program to
provide an autonomous PowerBuoy wave energy conversion system for maritime
security and other applications. In August 2011, OPT reported the successful
ocean deployment of this LEAP system off the coast of New Jersey.
•
We again finished the year with strong liquidity. As of April 30, 2011, total cash,
cash equivalents, restricted cash and investments were $48.3 million. Our cash
equivalents and investments consist primarily of US treasury bills and notes, term
deposits at highly-rated commercial banks and money market funds with large
commercial banks.
As noted above, we accomplished a great deal this fiscal year and ended on a high note
– with a record backlog and plenty of momentum heading into fiscal 2012. In addition to
winning several important contracts, we made significant advances in our core
PowerBuoy technology and continued to build on some of our strategic relationships,
expected to benefit the Company over the long term. Let us touch on some of these
achievements in detail.
In September 2010, we completed the first-ever grid connection of a wave energy
device in the United States at the Marine Corps Base Hawaii ("MCBH"), in Oahu, in
conjunction with the US Navy. This connection demonstrates the ability of the
PowerBuoy systems to produce utility-grade, renewable energy that can be transmitted
to the grid in a manner fully compliant with national and international standards. This
PowerBuoy, which was deployed in December 2009, recently reached a significant
milestone with the completion of over five million cycles in operation. This is an
important achievement and evidences the durability of our grid-connected system,
which has successfully survived severe storms and tsunamis originating in Japan and
Chile.
We also announced in September 2010 that the Company had won two new funding
awards totaling $4.8 million from the DOE. Each contract is for $2.4 million. The first
was awarded for the construction and deployment of a PB150 off Reedsport, Oregon,
as part of the first proposed commercial wave power project in the US. As a reminder,
OPT had previously been awarded a $2.0 million contract in 2008 by the DOE in
connection with this Reedsport project. The second contract for $2.4 million announced
in September 2010 was for the design and development of OPT's PB500. Ocean Power
Technologies also won a £1.5 million grant from the UK’s Technology Strategy Board
for this next generation PowerBuoy, as announced in July 2010.
In the 2011 fiscal year, the US Navy awarded OPT $2.75 million in additional funding
under its existing LEAP contract to build and ocean-test an autonomous PowerBuoy
wave energy conversion device for a specialized, radar-based coastal anti-terrorism and
maritime surveillance program. This new award followed the successful completion,
earlier in fiscal 2011, of the first stage in which OPT developed and tested an innovative
power take-off system.
During fiscal 2011, we substantially completed the design and fabrication of the LEAP
PowerBuoy, which was successfully deployed in August 2011 for ocean trials about 20
miles off the coast of New Jersey. The LEAP PowerBuoy system was developed by
OPT to address the US Navy’s requirements for lower levels of persistent power in all
wave conditions for a sea-based radar and communications system. It is significantly
smaller and more compact than OPT’s standard utility PowerBuoy. The Company’s
proprietary power management techniques and on-board energy storage capability are
key innovations of the system, and enable operation even in extended zero-wave
conditions. We believe this makes these autonomous PowerBuoys an enabling and
game-changing technology solution for critical sea-based maritime security and other
deep-sea applications.
We continued to make advances in the development of the PB150. Most importantly,
we deployed our first utility-scale PB150 for ocean trials off the coast of Scotland on
April 15, 2011. Since that time, we have collected data on the performance of the unit
and have been very pleased by the results. Average electrical power of 45 kW was
achieved with wave heights as low as two meters, exceeding performance expectations.
The power take-off system has also performed better than anticipated with respect to
energy conversion efficiency in the irregular ocean wave conditions encountered.
Overall, the range of PB150 power outputs at specific operating points was in line with
our model predictions, such that our confidence in power predictions at other sites is
greatly increased. The Company will seek a commercial customer for the Scotland
PB150 after the trial phase, which is expected to be completed in fiscal 2012.
that
the PB150 design,
We were very pleased to announce in January 2011 that OPT achieved an independent
certification for the utility-scale PB150 PowerBuoy, by the internationally respected
including
Lloyd’s Register. The certificate confirms
hydrodynamics, structural and mooring system, complies with the requirements of
Lloyd’s 1999 Rules and Regulations for the Classification of Floating Offshore
Installations at a Fixed Location. This provides independent, third-party assurance on
the design of the PB150 PowerBuoy for its intended use, as analyzed against
international standards. This is an important third-party validation of the core
PowerBuoy technology’s commercial status. It complements the certification by
independent laboratory Intertek Testing Services, as announced in July 2007, that the
PowerBuoy interface with the electrical utility power grid complies with designated
national and international standards for grid connection, which has included OPT’s
PowerBuoy off Hawaii.
In addition, we’ve continued to make progress with the construction and land testing of
our PB150 unit for Reedsport, Oregon. As a reminder, this project has two phases: the
first, on which we are now working, is for the deployment of one PB150. We expect this
to be followed by a second phase during which we would build and deploy nine
additional PB150s and connect all ten to the Oregon grid, with a total rated capacity of
1.5 MW. We finished initial construction of the steel structure for the first PB150 during
fiscal 2011.
Earlier in the fiscal year, we reported that OPT and 14 other interested federal, state
and non-governmental stakeholders signed a groundbreaking agreement for the
Reedsport project. This agreement represents a major step towards the grant of the first
license ever issued by the Federal Energy Regulatory Commission ("FERC") for a
commercial-scale wave power project in the US. The agreement supports the
responsible, phased development by OPT of a 10-PowerBuoy, 1.5 MW capacity wave
energy station in a manner that protects ocean resources and stakeholder interests.
This wave power station is still subject to the receipt of the FERC license, which we
expect to receive, and additional funding for the build-out of the second phase
encompassing nine more PowerBuoys and the grid connection infrastructure.
We also continued to see interest this fiscal year from our development partners as
evidenced by our agreement with Mitsui Engineering & Shipbuilding (“Mitsui”) in Japan.
During fiscal 2011 we worked with Mitsui to develop a new mooring system for our
PowerBuoys, which will be customized for wave power stations off the coast of Japan.
OPT and Mitsui now expect to complete economic assessments and identify a project
site for an anticipated in-ocean trial of the PowerBuoy system. This would provide the
basis for a prospective build-out of a commercial-scale wave power station with an initial
capacity of several megawatts, scalable to 10 MW or more. We have seen heightened
interest by the Japanese government and industry following the nuclear crisis in Japan
earlier this year.
In Australia, as we have previously reported, our joint venture with Leighton Contractors
(“Leighton”) won a coveted A$66.5 million grant from the Commonwealth Government
in fiscal 2010 – the equivalent of US$71 million -- for the purpose of building a 19 MW
wave power station off the coast of Victoria, supplying electricity to up to 10,000 homes.
The grant is conditional on Leighton attaining the balance of funding needed for the
project, although it is expected that this can be raised in stages. We are encouraged by
the strong interest in our technology and by the support of the Australian government,
and we look forward to providing an update on this important project as we get more
visibility on financing for the project.
is gaining
the necessary
With continued focus on our core technology and business development activity, Ocean
Power Technologies
full
commercialization of our PowerBuoy technology. We see this as only the beginning, as
we continue to work with governments, utilities and other partners across the globe to
validate our systems and accelerate deployment opportunities. We are focused on
achieving specific goals during fiscal 2012 – including finalizing our ocean trials in
Scotland, preparing a new PB150 for deployment off the coast of Oregon and
demonstrating the in-ocean performance of our autonomous PowerBuoy for the Navy’s
LEAP program off the coast of New Jersey.
to move
traction
into
Given the ongoing volatility in oil prices and recognition of nuclear-related risks, the
necessity for clean, efficient, reliable power sources is greater than it has ever been.
Nations across the globe are coming to recognize the importance of energy
sustainability as well as energy independence, and we believe that these trends will
grow.
To our investors, let us assure you that we remain focused on the fundamentals:
demonstrating the survivability of our technology, increasing the efficiency of the
PowerBuoy, reducing the cost of energy, bringing in new business and expanding our
relationships with strategic partners. As we continue to move toward full-scale
commercialization, we believe 2012 will be a year of significant accomplishment for
OPT – one that sees further deployment activity, increased demand and additional
technology achievements. We thank our investors for their continued interest in our
success.
Dr. George W. Taylor
Executive Chairman
Charles F. Dunleavy
Chief Executive Officer
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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, 2011
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
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 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes n
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 the 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 ¥
Non-accelerated filer n
(Do not check if a smaller reporting company)
Smaller reporting company n
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, 2010, the last business day
of the registrant’s most recently completed second fiscal quarter, was $63.5 million based on the closing sale price 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, 2011 was 10,402,722.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of the Form 10-K into Which Incorporated
Proxy Statement for the registrant’s 2011 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:
(Removed and Reserved) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4:
PART II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6:
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
Item 7A: Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8:
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . .
Item 9:
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:
Page
4
24
38
38
39
39
39
41
42
55
56
56
56
56
56
56
57
57
57
PART IV
Item 15: Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
PowerBuoy» is a registered trademark of Ocean Power Technologies, Inc. The Ocean Power Technologies
logo, CellBuoytm, Talk on Watertm and Making Waves in Power SM 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 a leading wave energy
company. Our latest PB150 PowerBuoy has been certified by the Lloyd’s Register Group, Intertek has certified our
grid connection system, and an independent environmental assessment of the PB40 PowerBuoy in Hawaii has
resulted in the highest rating.
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 nearly fifteen years. 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 and
have deployed and maintained our systems in the ocean. The PowerBuoy technology has the unique, patented
capability to electronically “tune” itself automatically as wave characteristics change. This enables the PowerBuoy
to optimize its efficiency and resulting power output in dynamic ocean wave conditions. Our two PowerBuoy
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.
Intertek, an independent laboratory, provided testing and evaluation services to certify that our grid
connection systems comply with designated national and international standards. The PowerBuoy grid
interface bears the Electrical Testing Laboratories (ETL) listing mark, and can be connected to the utility
grid. In September 2010, working in conjunction with the US Navy and Hawaii Electric Company, our
40 kilowatt (kW)-rated PowerBuoy, located at Marine Corps Base Hawaii, became the first-ever grid
connected wave energy device in the United States. In January 2011, our utility scale PB150 structure and
mooring system achieved independent certification from Lloyd’s Register. This certification confirms that
the PB150 design complies with certain international standards promulgated for floating offshore instal-
lations. The Lloyd’s Register process included detailed design analysis and appraisals, addressing the
PB150’s structure, hydrodynamics, mooring and anchoring.
(cid:129) Our autonomous PowerBuoy system is designed to generate power for use independent of the power grid in
remote locations. We believe there are a variety of potential applications for this system, including homeland
security, off-shore oil and gas platforms, aquaculture and ocean -based communication and data gathering
such as for tsunami warnings.
Our product development and engineering efforts currently are focused on increasing the reliability and peak-
rated output of our utility PowerBuoy system to 150kW, and, to a lesser extent increasing the peak rated output of
the system to 500kW. In addition, we are researching and developing new products, product applications and
complementary technologies. We believe that by increasing the maximum rated 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 market our undersea substation pod (“USP”) and undersea power connection infrastructure
services to other companies in the marine energy sector. We completed the successful in-ocean trials of our USP in
4
2009. The USP, based on our proprietary design, has been developed to facilitate the collection, networking and
transforming of power and data generated by multiple offshore energy devices. The USP has been built as an open
platform, and can provide connectivity for the PowerBuoy as well as offshore energy systems developed by other
companies. The required switching and protection circuits for the individual PowerBuoys are also included in the
USP.
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) The United States Navy:
(cid:129) To develop and build wave power systems at the US Marine Corps base in Hawaii.
(cid:129) To provide our PowerBuoy wave conversion system to the Navy’s Littoral Expeditionary Autonomous
PowerBuoy (LEAP) Program.
(cid:129) To provide PowerBuoy technology to a unique program for ocean data gathering. Under this program, we
have built an autonomous PowerBuoy as the power source for the Navy’s Deep Water Active Detection
System.
(cid:129) Pacific Northwest Generating Cooperative (PNGC Power) and the US Department of Energy, both of which
are providing funding toward the construction, ocean installation, and ocean trials of a 150kW PowerBuoy
near Reedsport, Oregon.
(cid:129) The Scottish Government, to develop a 150kW PowerBuoy ,which was deployed off the coast of
Invergordon, Scotland in April 2011.
(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. (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 wave power
station off the coast of Santoña, Spain.
(cid:129) The US Department of Energy (DOE) and the UK Government’s Technology Strategy Board (TSB) to help
fund the scale-up of the power output per PowerBuoy from the current level of 150kW to 500kW.
(cid:129) Mitsui Engineering and Shipbuilding, with which we are working to develop a wave power project in Japan.
(cid:129) Leighton Contractors, a major Australian construction and infrastructure company, for the development of a
wave power station in Victoria, Australia.
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
was listed on the AIM market of the London Stock Exchange plc in October 2003. We voluntarily delisted our
common shares from the AIM market effective January 14, 2011. Our common stock has been listed on the
NASDAQ Global Market since April 24, 2007, the date on which we commenced our initial public offering in the
United States.
Our Market
Global demand for electric power is expected to increase from 18.8 trillion kilowatt hours in 2007 to 35.2
trillion kilowatt hours by 2035, according to the Energy Information Administration’s Annual Energy Outlook 2010
(AEO 2010). To meet this demand, the International Energy Agency, or the IEA, estimates that investments in new
generating capacity will be $6.8 trillion in the period from 2007 to 2030, of which new renewable energy generation
equipment is expected to account for approximately half of the total projected investment in electricity generation.
5
According to the AEO 2010, fossil fuels such as coal, oil and natural gas generated over 67% of the world’s
electricity in 2007. 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, tides, flowing
water, wind and sunlight, and convert it into electricity.
(cid:129) Rising cost of fossil fuels. Although subject to short-term fluctuations, the cost of fossil fuel used to
generate electricity has been generally rising and is likely to continue to rise in the future.
(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 fossil fuel producing regions of the world are
encouraging consuming countries to diversify their sources of energy.
(cid:129) Environmental concerns. Environmental concerns regarding the contamination, pollution and by-products
from 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.
As a result of these and other factors, the AEO 2010 projects that grid-connected renewable generating
capacity 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 — 50 megawatts (MW) 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 less of the ocean surface than an offshore wind power
station of equivalent capacity.
(cid:129) Predictability. The supply of electricity from wave energy can be forecasted several days in advance. The
amount of energy a wave hundreds 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. Power
producers 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.
(cid:129) Close to population centers. The proximity of large population areas to large bodies of water means that
power transmission infrastructure is often already in place and may be utilized for wave energy generation
projects.
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
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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 and nearshore systems are often located on a shore cliff
or a breakwater, or a short distance at sea from the shore line, 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 to these systems. As waves approach the
shore, the energy in the waves decreases; onshore and nearshore wave power stations, therefore, 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 and nearshore systems and there are environmental and possible aesthetic issues with these
wave power stations due to their size and location at or near the seashore.
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 150kW-rated PowerBuoy system installed during fiscal year 2011 and in operation off
Invergordon, Scotland:
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 grid-ready 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 electronically 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 for the PowerBuoy 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
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generation and transmission recommence. This safety feature prevents the PowerBuoy system from being damaged
by the increased amount of energy in storm waves.
Our 150kW PowerBuoy system has a maximum diameter of 36 feet near the surface, and is 135 feet long, with
approximately 30 feet of the PowerBuoy system protruding above the surface of the ocean. At anticipated
deployment distances, generally the system has minimal visability from the shore.
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 current utility PowerBuoy systems presently being marketed to
customers have rated capacities of 40kW and 150kW. 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 by our USP 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 likely be configured 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 system 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 System
Ocean trials of our first 150kW PowerBuoy commenced in April 2011. These ocean trials are being conducted
at a site approximately 33 nautical miles from Invergordon, off Scotland’s northeast coast. Since deployment for
preliminary tests, our 150kW rated PowerBuoy has produced power in excess of our expectations of performance. A
second PB150 is now under construction and is expected to be ready for deployment off the coast of Reedsport,
Oregon in late 2011, with deployment timing principally dependent on weather conditions. Our utility scale PB150
structure and mooring system achieved independent certification from Lloyd’s Register.
We completed the successful in-ocean trials of our USP in October 2009. The USP, based on our proprietary
design, has been developed to facilitate the collection, networking and transforming of power and data generated by
multiple offshore energy devices. The USP has been built as an open platform, and can provide connectivity for the
PowerBuoy as well as other offshore energy systems developed by other companies.
8
The following is a picture of the USP being lowered into the water for ocean trials:
In September 2010, working in conjunction with the US Navy, our 40kW-rated PowerBuoy located at Marine
Corps Base Hawaii became the first-ever grid connected wave energy device in the United States.
We have also initiated product development efforts in connection with our 500kW PowerBuoy. Concept
development of the PB500’s major subsystems is in progress, and wave tank testing of models has been completed.
Autonomous PowerBuoy System
The autonomous PowerBuoy system is based on similar technology to 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 deep-ocean locations. The autonomous PowerBuoy range of products has rated output from 300 Watts to
40kW, depending on the application. In addition, the PB150 may be utilized in an autonomous mode. Our
autonomous PowerBuoy system is designed to operate anywhere in the ocean and in any depth of water.
We believe there are a variety of potential applications for this system, including homeland security, off-shore
oil and gas platforms, aquaculture and ocean -based communication and data gathering such as for tsunami
warnings.
Status of Autonomous PowerBuoy System
We received a contract from the US Navy to provide our PowerBuoy to the Navy’s Littoral Expeditionary
Autonomous PowerBuoy (LEAP) program. The LEAP program has been established to enhance the US Navy’s
anti-terrorism and force protection capability by providing persistent power at sea for port maritime surveillance in
near coast, harbor, and offshore areas. In September 2010, the US Navy appropriated $2.6 million in additional
funding to us for the second stage of this program. During the first stage of the LEAP program, we successfully
completed delivery of the design and on-land testing of a new power take-off system for the autonomous LEAP
PowerBuoy. In the second stage of the program, which is now in progress, we will build and ocean-test a LEAP
PowerBuoy structure, incorporating that new power take-off system, off the coast of New Jersey. Deployment of
this PowerBuoy is expected to take place in the second half of calendar year 2011.
We also have received several contracts from the US Navy to provide our PowerBuoy technology to a unique
program for ocean data gathering. Under this program, the Navy has conducted an ocean test of our autonomous
PowerBuoy as the power source for the Navy’s Deep Water Active Detection System, and we have substantially
completed work under a contract for ocean testing by the Navy of an advanced version of the autonomous
PowerBuoy for the Navy’s operational requirements.
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.
9
Our PowerBuoy system uses an ocean-tested technology to generate electricity.
(cid:129) We have been conducting ocean tests for nearly 15 years in order to demonstrate the viability of our
technology. We initiated our first ocean installation in 1997 and have had several deployments of our systems
for testing and operation since then. Our grid-connected Hawaii system has been operating since December
2009. Subsequent to its installation in Hawaii, our 40kW-rated PowerBuoy has produced power consistent
with our predictive models for the incoming wave conditions. Since its deployment off the coast of Scotland
in April 2011 for preliminary tests, our 150kW-rated PowerBuoy has produced power in excess of our
expectations of performance. Our PowerBuoy systems have endured hurricanes, winter storms and tsunami-
driven waves while installed in the ocean.
Our PowerBuoy system’s grid connection has been certified and one of our PowerBuoys has been connected to
a grid.
(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. In September 2010, our PowerBuoy located at the US Marine Corps Base in Hawaii became
the first-ever grid-connected wave energy device in the United States.
Our PowerBuoy system design 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, or “tune”, 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 capacity factor. The capacity factor
is the percent of kilowatt hours produced by a specific system in a given period as compared to the maximum
kilowatt hours that could be produced by the system in that period. A high capacity factor indicates a high
degree of utilization of the capacity of the system and provides a means to compare the effectiveness of
different energy sources. Based on our research and analysis, and in-ocean experience to date, we believe the
design capacity factor for a PowerBuoy wave power station located at many of our targeted sites would be
favorably positioned in the range of 30% to 45%.
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 currently
targeting the west coast of 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 access to existing power transmission infrastructure
and significant and increasing electricity requirements.
We have significant commercial relationships.
(cid:129) Our current projects with PNGC Power, the US Department of Energy, the US Navy, Mitsui Engineering and
Shipbuilding, the Scottish Government, and the UK Government’s Technology Strategy Board (TSB),
provide us with an initial opportunity to sell our wave power stations for utility applications. By collab-
orating 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 projects
to add wave power stations, new customers and complementary revenue streams from operations and
maintenance contracts.
(cid:129) With the funding from the US Navy, we have been able to refine our PowerBuoy system while simulta-
neously preparing for commercial deployment to address a particular customer need. We believe that the
successful deployment of our PowerBuoy system for the US Navy will significantly enhance market
visibility.
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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 and
reliability of the design of our utility PowerBuoy system. Currently we are marketing PowerBuoys rated at
40kW and 150kW. Assuming we are able to reach significant manufacturing volume levels of our 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 renewable energy systems and, in certain cases, with existing fossil fuel systems in key
markets.
(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 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. This assessment resulted in a Finding
of No Significant Impact, the highest such level of approval. 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-buoy 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.
Customers/Projects
The table below shows the percentage of our revenue we derived from significant customers for the periods
indicated:
Years Ended April 30,
2011
2009
2010
US Navy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US Department of Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iberdrola Cantabria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UK Government’s Technical Strategy Board . . . . . . . . . . . . . . . . . . . . . . . . . . .
52% 80% 67%
28%
4%
9%
(4)% 4% 15%
14% —
—
During fiscal 2011, we reduced revenue by approximately $0.2 million due to a change in estimated revenue to
be recognized in connection with the Spain construction agreement.
We expect an increasing proportion of our future revenues to be contributed by commercial customers.
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 that use electricity in and near the ocean.
Our efforts to identify new customers are concentrated on four geographic markets: the west coast of North America,
the west coast of Europe, the coasts of Australia and the east coast of Japan. Our efforts to identify new customers
11
are currently led and coordinated by our Executive Chairman. We also use consultants and other personnel to assist
us in locating potential customers.
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.
Under the contract for the current phase of the project, which was entered into in September 2005 and will expire in
September 2011, we are reimbursed for costs and paid a fixed fee, and over this period had been awarded contracts
for total potential revenue of $6.1 million. The current PowerBuoy now in operation at the Marine Corps base was
deployed in December 2009 and connected to the grid in September 2010. This PowerBuoy has produced power
consistent with our predictive models. We expect to continue operation of this grid-connected PowerBuoy for the
foreseeable future.
Pictured below are views of our 40kW-rated PowerBuoy system being lowered into the ocean in Oahu, and
after deployment.
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 conducted an ocean test
in October 2008 of our autonomous PowerBuoy as the power source for the Navy’s Deep Water Active Detection
System. In October 2008, we received a $3.0 million contract from the US Navy to expand the program and ocean-
test an advanced version of our autonomous PowerBuoy. We have substantially completed performance under this
contract.
In September 2009, we received $2.4 million from the US Navy for the first stage of a contract to provide our
PowerBuoy to the Navy’s LEAP program. In September 2010, the US Navy awarded $2.6 million in additional
funding to us for the second stage of this program. The LEAP program is being developed to enhance the US Navy’s
anti-terrorism and force protection capability by providing persistent power at sea for port maritime surveillance in
the near coast, harbor, piers and offshore areas. This contract expires in September 2011, and we expect it to be
extended.
Reedsport, Oregon Project
We are evaluating the feasibility of a location off the coast of Reedsport, Oregon for the proposed construction
and operation of a wave power station with a total potential maximum rated output of up to 50MW, of which the first
1.5 MW would be a demonstration wave power station. In February 2007, we signed a cooperative agreement with
PNGC Power, an Oregon-based electric power cooperative, as a utility partner for the development of the wave
power station. In July 2007, we filed a Pre-Application Document and Notice of Intent with the US Federal Energy
Regulatory Commission (FERC) for the Reedsport project, which provides notice of our intent to seek a license for
the Reedsport power station and information regarding the project. In February 2010, we filed with FERC a full
application to build, deploy and connect to the grid a 10-PowerBuoy array (1.5 MW). In March 2011, FERC granted
us a second preliminary permit to continue to evaluate the feasibility of the Reedsport project. We believe these
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filings were the first Pre-Application Document, Notice of Intent, and full License Application filed by a wave
power company, and is an important step in the full licensing process for the Reedsport project. We will need
additional authorization from FERC to sell electric power generated from the Reedsport wave power station into the
wholesale or retail markets.
In August 2007, we announced the award of a $0.5 million contract from PNGC Power, providing funding
toward the fabrication and installation of a 150kW PowerBuoy system for the Reedsport project. In October 2008,
we received a $2.0 million award from the DOE in support of the project. This DOE grant is being used to help fund
the fabrication and factory testing of the first PowerBuoy to be installed at the Reedsport site. This was the first
award for the building of ocean wave energy systems by the DOE. In September 2010, we announced the award of
another grant from the DOE of $2.4 million. This award will be used for final assembly, deployment and ocean trials
of the first PowerBuoy. We believe these grants are indicative of the growing recognition and support of wave
energy in the US federal and state governments.
This PowerBuoy is expected to be ready for deployment by the end of 2011, with deployment timing
principally dependent on weather conditions.
The following photographs show manufacturing activity associated with our PB150 PowerBuoy being built in
Oregon:
We continue to make progress on the overall permitting and licensing process while working extensively with
interested stakeholder groups at local, county, state and federal agency levels. In August 2010, we announced a
Settlement Agreement with 11 federal and state agencies and three non-governmental stakeholders. This first-ever
wave energy settlement agreement was reached after extensive technical, policy, and legal discussions regarding
appropriate prevention, mitigation and enhancement measures, and study requirements. It covers a broad array of
resource areas including aquatic resources, water quality, recreation, public safety, crabbing and fishing, terrestrial
resources and cultural resources. The Settlement Agreement includes an innovative Adaptive Management Plan
that will be used to identify and implement environmental studies that may be required, and to provide a blueprint
for the application of this new information as the wave power station develops.
Next Generation PB500 PowerBuoy
In April 2010, we received a $1.5 million award from the DOE for the development of our next generation
500kW PowerBuoy wave power system, the PB500. In the fiscal year ended April 30, 2011, we received awards of
an additional $4.7 million for development of the PB500, $2.4 million from the DOE and $2.3 million from the UK
Government’s Technology Strategy Board. We intend to use proceeds from these grants to help fund the scale-up of
the power output per PowerBuoy from the current level of 150kW to 500kW. In addition, the technology
development effort will focus on increasing the power extraction efficiency and reliability. Concept design of
the PB500 major subsystems is in progress, and wave tank testing of the models has been completed.
Scotland Project
In 2007, we received a $1.8 million contract from the Scottish Executive toward the construction and testing of
a 150kW grid-connected PowerBuoy system. We are now conducting ocean trials of the buoy at a site
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approximately 33 nautical miles from Invergordon, off Scotland’s northeast coast. Since its deployment off the
coast of Scotland in April 2011 for preliminary tests, our 150kW rated PowerBuoy has produced power in excess of
our expectations of performance. We are seeking a customer for the commercial utilization of the buoy after the
ocean trial phase is completed, including its deployment at various potential sites.
The following pictures show manufacturing and deployment activity in Scotland associated with our PB150
PowerBuoy:
Spain
In July 2006, after exploratory studies were conducted, 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 Renovables II, S.A. (Iberdrola Energias), an affiliate of Iberdrola, is the largest
shareholder of Iberdrola Cantabria. Minority shareholders include us, Sociedad para el Desarrollo Regional de
Cantabria, S.A., or SODERCAN, which is the industrial development agency of the Spanish region of Cantabria,
Total Eolica, an affiliate of Total S.A., and Instituto para la Diversificacion y Ahorro de la Energia, S.A., (IDAE), a
Spanish government agency dedicated to energy conservation and diversification efforts. Funding is shared among
the shareholders based on agreed-upon percentages that reflect the parties’ anticipated ownership interest in the
wave power station. We own 10% of Iberdrola Cantabria.
In July 2006, we entered into an agreement for the first phase of the construction of a wave power station with
our customer, Iberdrola Cantabria. In January 2007, the parties entered into a corresponding operations and
maintenance agreement. Under the Spain construction agreement, we agreed to manufacture and deploy one 40kW
PowerBuoy system and the ocean-based substation and infrastructure required to connect nine additional 150kW
PowerBuoy systems by December 31, 2009. The terms of the construction of the nine additional PowerBuoy units
and the installation of the underwater transmission cable and underwater substation pod were not covered by the
Spain construction agreement and were to be separately agreed upon.
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The initial PB40 PowerBuoy system for this project was deployed in September 2008. After a short testing
period, the buoy was removed from the water for work on improvements to the power take-off and control systems.
If no modification to the Spain construction agreement is agreed to by the parties, the customer may, subject to
certain conditions in the agreement, terminate the agreement without the obligation to make further milestone
payments and, potentially, collect reimbursement for direct damages, limited as specified in the Spain construction
agreement, for the failure of the PowerBuoy to meet certain performance thresholds. While we do not expect the
termination of the Spain construction agreement or potential liability for damages to materially adversely affect our
financial condition, the new Santoña project does represent a portion of our anticipated revenue stream. If we are
unable to successfully meet the terms of the existing Spain construction agreement, if Iberdrola Cantabria were to
terminate the agreement, or if we are not able to successfully negotiate a subsequent contract or contracts with
Iberdrola Cantabria, we may lose that revenue stream.
In November 2010, we agreed to negotiate with Iberdrola Cantabria with the goal of cancelling the remaining
obligations between the parties under the Spain construction and operations and maintenance agreements,
transferring ownership of the equipment manufactured or purchased by us under the construction agreement to
Iberdrola Cantabria, and having Iberdrola Cantabria pay certain amounts due to us. We further agreed to work
toward a new project with Iberdrola Cantabria. Under this new project, we would provide project management of
the installation and connection of the sub-sea cable and underwater substation pod at Santoña. In addition, we would
provide a proposal to perform maintenance on the assets transferred to Iberdrola Cantabria. Negotiations are
underway for such efforts.
In March 2010, we announced the award of A2.2 million under the European Commission’s Seventh
Framework Programme (FP7) by the European Commission’s Directorate responsible for new and renewable
sources of energy, energy efficiency and innovation. This grant is part of a total award of A4.5 million to a
consortium of companies, including us, to deliver a PowerBuoy wave energy device under a project entitled
WavePort, with an innovative wave prediction capability and a “wave-by-wave” tuning system. It is anticipated that
the PowerBuoy will be deployed at the Santoña site in Spain.
Other Projects
In February 2006, we received approval from the UK Government’s Technology Strategy Board (TSB) to
install a demonstration wave power station off the coast of Cornwall, England as part of TSB’s “Wave Hub” project,
a planned offshore facility for demonstrating and testing wave energy generation devices. TSB has obtained the
necessary permits for this Wave Hub project, and the project received over £40 million of funding for construction
of the Wave Hub infrastructure, which was completed during 2010. We are in the planning and development stage
for our part of the project, and we are seeking funding for the deployment of our PowerBuoy systems at this site.
In October 2008, we signed an exclusive agreement with a consortium of three Japanese companies to develop
a demonstration wave power station in Japan. The Japanese consortium comprises Idemitsu Kosan Co., Mitsui
Engineering & Shipbuilding Co. (MES), and Japan Wind Development Co. We are presently working with MES to
identify prospective sites for the wave power station. In 2011, we signed a $220,000 contract with MES to develop a
new mooring system for our PowerBuoy. We also worked with MES to conduct certain development engineering in
connection with the project, and to perform tests at MES’s wave tank facilities.
In December 2008, we announced a Joint Development Agreement with Leighton Contractors Pty. Ltd.
(Leighton) for the development of wave power projects off the east and south coasts of Australia. Over the past
50 years, Leighton has played an active role in building Australia’s ports and marine facilities, transportation
infrastructure, and energy projects including projects within the wind and offshore oil and gas sectors. In 2009,
Leighton formed Victorian Wave Partners Pty. Ltd. (VWP), a special purpose company for the development of a
19MW power wave power project off the coast of Victoria, Australia. In November 2009, we announced that VWP
was awarded an A$66.46 million grant from the Federal Government of Australia for the 19MW wave power
project. The grant is conditional on the Funding Deed which sets out the terms of the grant, including funding
milestones. Victorian Wave Partners is currently seeking the significant additional funding required to enable the
completion of the 19MW wave power station.
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Over the period October 2005 to December 2009, we operated, at intervals, a demonstration PowerBuoy
system off the coast of New Jersey, which allowed continuous monitoring of the system and evaluation of its
performance in actual wave conditions. Periodically, the buoy was removed from the ocean for maintenance, testing
and upgrades, and was redeployed. The buoy was deployed continuously for 12 months between October 2005 and
October 2006, and survived hurricane-generated storm waves during this period and in a later period of ocean
deployment. 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 not designed to supply electricity to the power grid, but rather to provide us with operational data and marketing
opportunities. We were partially funded, which funds we recognized as revenue, for the construction of this
PowerBuoy system by the New Jersey Board of Public Utilities. We do not anticipate any additional funding or
recognizing any additional revenue in connection with this project.
Backlog
At April 30, 2011, our total negotiated backlog was $8.9 million compared with $5.7 million at April 30, 2010.
We anticipate that a majority of our backlog will be recognized as revenue over the next 12 months. Our backlog
includes both funded amounts, which are unfilled firm orders for our products and services for which funding has
been both authorized and appropriated by the customer (Congress, in the case of US Government agencies) and
unfunded amounts, which are unfilled firm orders from the US Department of Energy for which funding has not
been appropriated. If any of our contracts were to be terminated, our backlog would be reduced by the expected
value of the remaining terms of such contracts. Funded backlog was $6.9 million and $5.2 million at April 30, 2011
and 2010, respectively.
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.
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) Sell turn-key power stations and operating and maintenance contracts. Our fundamental business plan is
to sell turn-key power stations, rather than to take on the capital requirements of building and owning power
stations and selling the energy generated. In addition, in order to create recurring revenue streams, we seek to
sell operating and maintenance (O&M) contracts over the life-cycle of the plants.
(cid:129) Outsource most of the plant construction and deployment. We outsource all metal fabrication, anchoring,
mooring, cabling supply and deployment in order to minimize our capital requirements as we scale up
production volumes. The high value-added “smart part” of the system is assembled and tested at our
facilities and shipped to project sites for integration into the PowerBuoys.
(cid:129) Concentrate sales and marketing efforts on four geographic markets. We are currently focusing our sales
and marketing efforts on the west coast of 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 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 rated output of the design of our PowerBuoy systems from 40kW to 150kW, and
thereafter to 500kW. If we increase the size of a PowerBuoy system or increase its energy conversion
efficiency, we will be able to increase the amount of wave energy the system can capture and, in turn,
increase the output of the system. We believe that by increasing system output of the individual PowerBuoy,
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and also by increasing volume production of the PowerBuoys, 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) Leverage customer relationships to enhance the commercial acceptance of our utility PowerBuoy system.
We believe that our project 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. We believe there
are a variety of potential applications for this system, including homeland security, off-shore oil and gas
platforms, aquaculture and ocean -based communication and data gathering such as for tsunami warnings.
We have entered into contracts with the US Navy for the testing of our autonomous PowerBuoy in
connection with a unique program for ocean data gathering, as well as for the LEAP program for homeland
security. We believe that successful testing of our autonomous PowerBuoy System under these contracts
may result in additional revenues from the US Navy and other prospective customers.
(cid:129) Maximize customer funding of technology development. We actively seek to obtain external funding for
the development of our technology, including cost-sharing obligations under some of our customer
contracts. In April 2010, we were awarded $1.5 million from the US Department of Energy for the
development of our PB500 product. In fiscal year 2011, we were awarded an additional $2.4 million from the
US Department of Energy and $2.3 million from the UK Government’s Technology Strategy Board for
PB500 development.
(cid:129) Expand our partnerships in key market areas. We believe that an important element of our business
strategy is to collaborate with other organizations to leverage our combined expertise, market presence and
core competences. We have formed such partnerships more recently with Leighton Contractors in Australia,
Mitsui Engineering and Shipbuilding in Japan, and Lockheed Martin in the US.
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 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
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. 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 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. 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
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PowerBuoy system would bypass the grid and be delivered directly to the point of electricity consumption for these
special applications.
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.
Autonomous PowerBuoy System Marketing
There are a variety of potential customers, such as companies within the offshore oil and gas industry, the US
Department of Homeland Security and US Department of Defense, 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 homeland security, off-shore oil and gas platforms, aquaculture and ocean-based communication
and data gathering such as for tsunami warnings.
Manufacturing and Deployment
Manufacturing and Raw Materials
We engage in two types of manufacturing activities: the manufacturing of the high value-added components, or
“smart part” modules, for systems control, power generation and power conversion for each PowerBuoy system,
and the contracting to outside companies for the 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 perfor-
mance of the PowerBuoy system in response to those changing conditions. We have a portfolio of 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 subsystem to the project
site.
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.
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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, is
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.
The following are pictures showing the PowerBuoy deployment process:
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, reliability 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 and reliability of our utility PowerBuoy system including the 150kW PowerBuoy
system and to our research and development of new products, product applications and complementary technol-
ogies. We are also conducting research on improvements to our current technology.
Research and development expenses are reflected on our consolidated statements of operations as product
development costs. Research and development expenses were $13.3 million for fiscal 2011, $13.0 million for fiscal
2010 and $8.4 million for fiscal 2009.
We are currently working on the design for our 500kW PowerBuoy. 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 and
efficiency of the wave capture portion of the 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 float’s
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diameter, we will approximately quadruple its power capacity. We believe that we will be able to further 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 safely
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 are too large for these trucks and need
to be transported in modules and assembled on-site. In addition, we will need to adjust the mooring system to
account for the larger-sized PowerBuoy systems.
We completed the successful in-ocean trials of our USP in October 2009. The USP, based on our proprietary
design, has been developed to facilitate the collection, networking and transforming of power and data generated by
multiple offshore energy devices. The USP has been built as an open platform, and can provide connectivity for the
PowerBuoy as well as other offshore energy systems developed by other companies.
Ocean trials of our first 150kW PowerBuoy commenced in April 2011. The ocean trials are being conducted at
a site approximately 33 nautical miles from Invergordon, off Scotland’s northeast coast. We are seeking a customer
for the commercial utilization of the buoy after the ocean trial phase is completed, including its deployment at
various potential sites.
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 would allow our PowerBuoys to
provide power for desalination of water, hydrogen production, water treatment and natural resource processing.
It is our intent to fund the majority of our research and development expenses, including cost sharing
obligations under some of our customer contracts, over the next several years with sources of external funding. If we
are unable to obtain external funding, we may curtail our research and development expenses or we may decide to
self-fund significant research and development expenses, in which case our product development costs may
continue to increase.
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 licensing opportunities to develop and maintain our
proprietary position.
As of April 30, 2011, we owned a total of 46 issued United States patents and 15 United States patent
applications. We have pending foreign counterparts to 19 of our issued patents and 9 of our pending non-provisional
patent applications.
Our patent portfolio includes patents and patent applications with claims directed to:
(cid:129) system design;
(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 2028. 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
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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
Intellectual Property.”
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 », Talk on Watertm and CellBuoytm marks and our
Making Waves in Powersm service mark, and we have filed applications to register our PowerTower mark in the
United States. Trademark ownership is generally of indefinite duration when marks are properly maintained in
commercial use.
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 differentiate 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 over 75 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, like ourselves, have conducted ocean testing of their systems, which is the
critical factor in proving the survivability and performance of any wave energy system.
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
maintenance services that we provide. We believe that we compare 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
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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 to 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. 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 power station and information regarding the project. In February 2010, we
filed with FERC a full application to build, deploy and connect to the grid a 10-PowerBuoy array (1.5 MW).In
March 2011, FERC granted us a second preliminary permit to continue to evaluate the feasibility of the Reedsport
project. We believe these filings were the first Pre-Application Document, Notice of Intent, and full License
Application filed by a wave power company, and is an important step in the full licensing process for the Reedsport
project. We will need additional authorization from FERC to sell electric power generated from the Reedsport wave
power station into the wholesale or retail markets.
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 generally 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 project, and the organizers of the
Cornwall, England project, are responsible for obtaining the necessary siting permits for their projects.
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.
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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 often 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. Several governments also facilitate low interest loans for renewable energy systems, either through
direct lending, credit enhancement or other programs.
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.
In 2008, the US enacted the Energy Improvement and Extension Act of 2008, which enables owners of wave
power projects in the US to receive federal tax credits, thereby improving the long-term economics of wave power
as a renewable energy source. The Act expands the definition of qualifying facilities for the Production Tax Credit
(PTC) to include those that generate power from marine renewables (including wave and tidal sources). As a result,
the PTC is now available for electricity produced and generated after October 3, 2008 from marine renewable
energy facilities with a “nameplate capacity” of at least 150kW, and that are placed in service anytime between
October 3, 2008 and December 31, 2013. The credit rate for marine renewables is $0.01 per kilowatt hour, and the
duration of the credit will be ten years after the facility is placed in service.
The American Recovery and Reinvestment Act of 2009 provides significant grants, tax incentives and policy
initiatives to stimulate investment and innovation in the “cleantech” sector. At times, the DOE has also issued
requests for proposal to be funded under programs it has established to further investment in marine energy
technologies. We have devoted additional resources to develop proposals seeking government funding to support
existing projects and technology enhancements. Consequently, while our selling, general and administrative costs
related to such efforts may increase over the next year, we believe that these governmental initiatives may result in
additional revenues for us over the next several years. Given the uncertainties surrounding the scope and size of
government programs, there can be no assurances as to whether we will be successful in obtaining significant
additional government funding or as to the terms and conditions of any such funding.
The State of Oregon has enacted the Business Energy Tax Credit program that allows companies that invest in
renewable energy capital projects an Oregon State income tax credit of up to 50% of the first $20.0 million of capital
costs. This program is scheduled to expire on June 30, 2012.
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 2020. The United Kingdom Renewables Obligation of April 2002
included a target of 15% of electricity generation to come from renewable sources by 2015, which will continue
until 2027. Electricity suppliers that are unable to otherwise meet their renewables obligation have to pay a buy-out
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price (currently £0.033 per kilowatt hour) or purchase Renewables Obligation Certificates from companies that
generate electricity from renewable resources.
The UK Department of Energy and Climate Change and Department of Business Innovation and Skills are
examining measures for the support of the renewable energy market. In 2011, it is expected that the UK Government
will announce new policies on Electricity Market Reform (EMR) which may include among other measures: a floor
price for carbon for electricity generators; and a Feed-in-Tariff, for renewable energy to replace the existing system
of Renewable Obligation Certificates (ROCs). Additionally, it is anticipated that specific funding will be made
available for both capital and revenue support for marine energy (wave and tidal stream) projects. These measures
will supersede the earlier Marine Renewables Deployment Fund.
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 zero, and, therefore, a PowerBuoy wave power station may
generate carbon credits that could be used and sold.
Employees
As of April 30, 2011, we had 51 employees, including 18 employees in manufacturing, 16 in research,
development and engineering functions and 17 in selling, general and administrative functions. Of these employees,
42 are located in Pennington, New Jersey and 9 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.
Product Insurance
We currently have a property and liability insurance policy underwritten by Lloyd’s Underwriters that covers
our PowerBuoy systems currently deployed, and that can be expanded to cover our PowerBuoy systems to be
deployed in the future. 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 attributable to Ocean
Power Technologies, Inc. of $20.4 million in fiscal 2011, $19.2 million in fiscal 2010, and $18.3 million in fiscal
2009. As of April 30, 2011, we had an accumulated deficit of $110.8 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 certain of our operating expenses significantly as we continue to expand our
infrastructure and commercialization activities. As a result, we will need to generate significant revenues to cover
these costs and achieve profitability.
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
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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.
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. As we begin to manufacture, market, sell and deploy our PowerBuoy systems in greater quantities, we may
encounter unforeseen hurdles 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 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
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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.
Our product development costs have increased and may continue to increase.
Our product development costs primarily relate to our efforts to increase the maximum rated output of our
utility PowerBuoy system to 150kW and to 500kW. Our product development costs were $13.3 million in fiscal
2011 compared to $13.0 million in fiscal 2010 and $8.4 million in fiscal 2009. It is our intent to fund the majority of
our research and development expenses, including cost sharing obligations under some of our customer contracts,
over the next several years with sources of external funding. If we are unable to obtain external funding, we may
curtail our research and development expenses or we may decide to self-fund research and development expenses,
in which case our product development costs may continue to increase.
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 may 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 nearly 15 years ago. However, to date we have only
manufactured 14 PowerBuoy systems for use in ocean testing and development. The longest continuous in-ocean
deployment of our PowerBuoy system has been from December 2009 to the present. 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 yet demonstrated that our engineering and test results can be duplicated in
volume 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.
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Our future success in the utility power markets 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 system, 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
150kW to 500kW. 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 problems and delays in
the development and deployment of our PowerBuoy system in the past, and could experience similar delays or other
difficulties in the future. If we cannot increase the power output of the utility PowerBuoy system, or if it takes us
longer to do so than we anticipate, we may be unable to expand our utility 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.
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, 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 certain parts in the world. 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 power transmission 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 as PowerBuoy systems achieve 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,
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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 to 500kW, 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, it could adversely
affect our business, financial condition and results of operations.
The initial PB40 PowerBuoy system for our Spain project was deployed in September 2008. After a short
testing period, the buoy was removed from the water for work on improvements to the power take-off and control
systems. In November 2010, we agreed to negotiate with Iberdrola Cantabria with the goal of cancelling the
remaining obligations between the parties under the Spain construction and operations and maintenance agree-
ments, transferring ownership of the equipment manufactured or purchased by us under the construction agreement
to Iberdrola Cantabria, and having Iberdrola Cantabria pay certain amounts due to us. We further agreed to work
toward a new project with Iberdrola Cantabria. Under this new project, we would provide project management of
the installation and connection of the sub-sea cable and underwater substation pod at Santoña. In addition, we would
provide a proposal to maintain the assets transferred to Iberdrola Cantabria. Negotiations are underway for such
efforts. If negotiations are unsuccessful and no modification to the existing Spain construction agreement is agreed
to by the parties, the customer may, subject to certain conditions in the agreement, terminate the agreement without
the obligation to make further milestone payments and, potentially, collect reimbursement for direct damages,
limited as specified in the Spain construction agreement, for failure of the PowerBuoy to meet certain performance
thresholds. While we do not expect the termination of the Spain construction agreement or potential liability for
damages to materially adversely affect our financial condition, the new Santoña project does represent a portion of
our anticipated revenue stream. If we are unable to successfully meet the terms of the existing Spain construction
agreement, if Iberdrola Cantabria were to terminate the agreement, or if we are not able to successfully negotiate a
subsequent contract or contracts with Iberdrola Cantabria, we may lose that revenue stream.
If the Spain project were cancelled or otherwise interrupted, it could 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
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.
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 projected 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.
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
28
manufacturing 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. 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.
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.
The US Navy, our largest customer, accounted for 52% of our revenues and the DOE accounted for 28% of our
revenues, during fiscal 2011. In fiscal 2010, revenues from the US Navy accounted for 80% of our total revenues.
Our current contract for our LEAP project with the US Navy expires in September 2011. 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
products and services.
An important element of our business strategy is to enter into development agreements and strategic alliances
with regional utilities, and energy and other 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. Furthermore, even if we are able to find, negotiate
and enter into these relationships, such arrangements may be conditional upon our receipt of additional funding. For
example, our projects with Leighton and the European Commission are conditional upon our receipt of significant
29
additional funds. There can be no assurance that we will receive such additional funding. 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
authority, 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 some of our 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 additional risk to wave power projects undertaken by the joint venture.
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 the west coast of 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 technologies, including tidal and ocean current technologies. Competition may arise from other companies
manufacturing similar products, developing different products that produce energy more efficiently than our
products, or making improvements to traditional energy-producing methods or technologies, any of which could
make our products less attractive or render them obsolete. 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 or improvements to existing 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 than us to
develop new or improve existing 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 limited 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
manufacturing staff. There is intense competition for hiring qualified technical and engineering personnel, and we
may not be able to hire a sufficient number of qualified personnel to allow us to meet our growth objectives.
30
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, or 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
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
materials, 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
government 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 2011 and fiscal 2010,
we derived 52% and 80%, respectively, of our total revenue from contracts with the US Navy.
31
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.
We market and plan to market 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 plan to market our products in a number of foreign countries, including the United Kingdom,
Spain, Australia and Japan, and we are therefore subject to risks associated with having international operations.
International customers accounted for, 16% of our revenues in fiscal 2011, 11% of our revenues in fiscal 2010, and
27% of our revenues in fiscal 2009. 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) complexity 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
support development of our products or 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.
32
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 our past
results should not be relied on 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 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. A large percentage of
our revenues may 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. 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
technical, 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
be deterred by these regulations and policies, which could result in a significant reduction in the potential demand
for our PowerBuoy systems.
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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
implement 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, we are dependent
upon our customer 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.
We face numerous accident and safety risks and hazards that are inherent in offshore energy operations.
Portions of our operations are subject to many hazards and risks inherent in the building, testing, deploying and
maintenance of our PowerBuoy systems. These hazards and risks could result in personal injuries, loss of life, and
other damages, which may include damage to our properties and the properties of others and other consequential
damages, and could lead to the suspension of certain of our operations, large damage claims, damage to our safety
reputation and a loss of business. Some of these risks may be uninsurable and some claims may exceed our
insurance coverage. Therefore, the occurrence of a significant accident or other risk event or hazard that is not fully
34
covered by insurance could materially and adversely affect our business and financial results and, even if fully
covered by insurance, could materially and adversely affect our business due to the impact on our reputation for
safety. In addition, the risks inherent in our business are such that we cannot assure you that we will be able to
maintain adequate insurance in the future at reasonable rates.
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 product
development, 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
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 executive chairman, and
Charles Dunleavy, our chief executive officer; 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 senior executives as well as talented staff in various fields of expertise.
In addition, our anticipated growth will require us to hire a significant number of qualified technical,
commercial and administrative personnel. 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
condition 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.
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
35
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.
Risks Related to Intellectual Property
If we are unable to obtain or maintain intellectual property rights relating to our technology and
products, 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 and US Department of Energy 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
technical data or software for
nonexclusive license authorizing the government
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.
to use the invention,
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
business, 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
36
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.
If we infringe or are alleged to infringe intellectual property rights of third parties, our business,
financial 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. In addition, if we were to license our intellectual property to others, we may be required to
indemnify our licensee if the licensed intellectual property is found to be infringing on a third party’s rights. 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
37
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
who 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
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
dividends 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. For the period ended April 30, 2011, the 52-week high and low prices for our common stock were $7.20 and
$4.55, respectively. 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 fluctu-
ations 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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 for our PowerBuoy systems.
38
We also have an office and warehouse facilities in Warwick, United Kingdom, where we occupy 3,840 square
feet under leases expiring on January 1, 2012 and December 18, 2011, respectively. Nine 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 also have warehouse facilities in Santander, Spain, where we occupy 1,350 square feet under a lease
expiring on August 6, 2011. We use these facilities for storage related to our project in Spain.
In the future, we may add sales, marketing and engineering offices in additional locations, including Australia,
Japan, continental Europe and the west coast of the United States.
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.
(REMOVED AND RESERVED)
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.” For a portion of fiscal 2011, our stock was listed on the AIM market of the London Stock Exchange under
the symbol “OPT”. We voluntarily delisted from AIM on January 14, 2011. As of June 30, 2011, there were 309
holders of record for shares of our common stock. Since a portion of our common stock is held in “street” or
nominee name, we are unable to determine the exact number of beneficial holders.
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, 2011
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7.20
6.85
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.80
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.73
Year Ended April 30, 2010
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7.72
9.50
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.22
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.69
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4.82
4.55
5.12
4.70
$4.73
3.81
6.00
6.00
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
39
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 net proceeds to us resulting from the offering were
$89.9 million. From the effective date of the registration statement through April 30, 2011, we used $7.8 million to
construct demonstration PowerBuoys, $27.4 million to fund the continued development and commercialization of
our PowerBuoy system, $5.4 million to expand our sales and marketing capabilities, and $1.0 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 marketable securities, in accordance with our investment policy. We intend to allocate the remaining
$48.3 million of proceeds towards working capital and general corporate purposes, which we believe will give us
needed flexibility in responding to opportunities for future growth.
The following table contains information about our purchases of our equity securities during February, March
and April 2011.
Period
Total Number
of Shares
Purchased(1)
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of A
Announced Plan
Approximate
Dollar Value that
May Yet Be
Purchased Under
the Plan
February 1-28, 2011 . . . . . . . . . . . . .
March 1-31, 2011 . . . . . . . . . . . . . . .
April 1-30, 2011 . . . . . . . . . . . . . . . .
1,012
—
—
5.37
—
—
—
—
—
—
—
—
(1) Represents shares delivered back to the Company by employees to pay taxes related to the vesting of restricted
shares, at an average of $5.37 per share.
40
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.
2011
Fiscal Years Ended April 30,
2009
2008
2010
2007
Consolidated Statement of Operations
Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . .
$ 6,691,082 $ 5,101,311 $ 4,049,445
4,840,403
6,255,437
4,298,955
$ 4,772,017
7,960,042
$ 2,531,315
3,983,742
Gross profit (loss) . . . . . . . . . . . . . . . . . . .
435,645
802,356
(790,958)
(3,188,025)
(1,452,427)
Operating expenses:
Product development costs . . . . . . . . . . . . .
Selling, general and administrative costs . . .
13,319,110
8,399,325
13,001,550
9,063,482
8,372,244
9,529,071
8,255,123
7,732,577
6,219,893
4,893,580
Total operating expenses . . . . . . . . . . . . .
21,718,435
22,065,032
17,901,315
15,987,700
11,113,473
Operating loss . . . . . . . . . . . . . . . . . . . . . .
Interest income, net . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange (loss) gain . . . . . . . . . . .
(21,282,790)
689,276
—
(229,415)
(21,262,676)
1,032,484
557,540
540,644
(18,692,273)
1,672,350
—
(1,295,227)
(19,175,725)
4,434,844
—
84,158
(12,565,900)
1,389,702
13,906
1,523,527
Loss before income taxes . . . . . . . . . . . . . .
Income tax benefit. . . . . . . . . . . . . . . . . . .
(20,822,929)
364,105
(19,132,008)
—
(18,315,150)
—
(14,656,723)
—
(9,638,765)
—
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net loss (income) attributable to the
noncontrolling interest in Ocean Power
Technologies (Australasia) Pty Ltd. . . . . .
Net loss attributable to Ocean Power
(20,458,824)
(19,132,008)
(18,315,150)
(14,656,723)
(9,638,765)
22,950
(38,299)
—
—
—
Technologies, Inc. . . . . . . . . . . . . . . . . .
$(20,435,874) $(19,170,307) $(18,315,150) $(14,656,723) $ (9,638,765)
Basic and diluted net loss per share . . . . . . .
$
(1.99) $
(1.88) $
(1.79) $
(1.44) $
(1.83)
Basic and diluted weighted average shares
outstanding . . . . . . . . . . . . . . . . . . . . . .
10,246,921
10,217,003
10,210,354
10,200,729
5,260,794
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments. . . . . . . . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current portion . .
Accumulated deficit . . . . . . . . . . . . . . .
Total Ocean Power Technologies, Inc.
2011
2010
As of April 30,
2009
2008
2007
$ 30,394,730
26,957,108
16,323,016
53,552,578
450,000
(110,848,972)
$ 36,772,598
32,569,351
28,865,046
72,978,193
250,000
(90,413,098)
$ 53,117,566
51,129,985
28,619,528
88,793,906
345,386
(71,242,791)
$ 88,836,304
85,870,307
12,233,437
107,550,965
188,784
(52,927,641)
$115,895,619(1)
111,187,195
—
119,711,546
231,585
(38,270,918)
stockholders’ equity. . . . . . . . . . . . . .
46,469,550
64,814,200
82,783,027
100,098,609
112,541,209
(1) On April 30, 2007, we completed our initial public offering in the United States resulting in net proceeds to us of
$89.9 million.
41
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 market two PowerBuoy products,
which consist of our utility PowerBuoy system and our autonomous PowerBuoy system. We also market operations
and maintenance services for our PowerBuoy systems to our customers, which are expected to provide a source of
recurring revenues. In addition, we expect to market our undersea substation pod and undersea power connection
infrastructure services to other companies in the marine energy sector.
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 were incorporated in New Jersey in April 1984, began commercial operations in 1994, and were re-
incorporated in Delaware in 2007. We currently have three wholly-owned subsidiaries, which include Ocean Power
Technologies Ltd., Reedsport OPT Wave Park LLC, and Oregon Wave Energy Partners I, LLC, and we own
approximately 88% of the ordinary shares of Ocean Power Technologies (Australasia) Pty Ltd.
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 testing of our wave power systems 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 autonomous PowerBuoy system.
At April 30, 2011, our total negotiated backlog was $8.9 million compared with $5.7 million at April 30, 2010.
We anticipate that a majority of our backlog will be recognized as revenue over the next 12 months. Our backlog
includes both funded amounts, which are unfilled firm orders for our products and services for which funding has
been both authorized and appropriated by the customer (Congress, in the case of US Government agencies) and
unfunded amounts, which are unfilled firm orders from the US Department of Energy for which funding has not
been appropriated. If any of our contracts were to be terminated, our backlog would be reduced by the expected
value of the remaining terms of such contracts. Funded backlog was $6.9 million and $5.2 million at April 30, 2011
and 2010, respectively.
Our fiscal year ends on April 30. For fiscal 2011, we generated revenues of $6.7 million and incurred a net loss
attributable to Ocean Power Technologies, Inc. of $20.4 million, and for fiscal 2010, we generated revenues of
$5.1 million and incurred a net loss attributable to Ocean Power Technologies, Inc. of $19.2 million. As of April 30,
2011, our accumulated deficit was $110.8 million. We have not been profitable since inception, and we do not know
42
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 may, in the future, represent the majority of our revenues.
The marine energy industry, including wave, tidal and ocean current energy technologies, is expected to
benefit from various legislative initiatives that have been undertaken or are planned by state and federal agencies.
For example, the production tax credit was expanded to include marine energy, as part of the Energy Improvement
and Extension Act of 2008, signed into law in October 2008. Production tax credit provisions that were previously
in place served only to benefit other renewable energy sources such as wind and solar. This new legislation will, for
the first time, enable owners of wave power projects in the US to receive federal production tax credits, which, by
their prospective effect of lowering income taxes for our customers based on energy produced, should improve the
comparative economics of wave power as a renewable energy source.
Further, it is expected that the US federal and state governments will increase their investments in the
renewable energy sector under various economic stimulus measures. The American Recovery and Reinvestment
Act of 2009 provides significant grants, tax incentives and policy initiatives to stimulate investment and innovation
in the “cleantech” sector. At times, the Department of Energy (DOE) has also issued requests for proposal to be
funded under programs it has established to further investment in marine energy technologies. We have devoted
additional resources to develop proposals seeking government funding to support existing projects and technology
enhancements. Consequently, while our selling, general and administrative costs related to such efforts may
increase over the next year, we believe that these governmental initiatives may result in additional revenues for us
over the next several years. Given the uncertainties surrounding the scope and size of the government programs,
there can be no assurances as to whether we will be successful in obtaining significant additional government
funding or as to the terms and conditions of any such funding.
The recent global economic uncertainty may have a negative effect on our business, financial condition and
results of operations because the utility companies with which we contract or propose to contract may decrease their
investment in new power generation equipment in response to the uncertainty. However, the various legislative
initiatives described above may diminish the effect of any decrease in such capital expenditures by these utility
companies insofar as they may relate to renewable energy generation equipment. As discussed above, the timing,
scope and size of these new government programs for renewable energy is uncertain, and there can be no assurances
that we or our customers will be successful in obtaining any additional government funding. We do not believe the
recent global economic uncertainty will have a material negative impact on our sources of supply, as our products
incorporate what are substantially non-custom, standard parts found in many regions of the world.
According to the International Energy Agency, $3.4 trillion is expected to be spent for new renewable energy
generation equipment in the period from 2007 to 2030. This equates to annual global expenditures of approximately
$150 billion. We plan to take advantage of these global drivers of demand for renewable energy, as we continue to
refine and expand our proprietary technology.
Financial Operations Overview
The following describes certain line items in our statement of operations and some of the factors that affect our
operating results.
Revenues
Generally, we recognize revenue using the percentage-of-completion method based on the ratio of costs
incurred to total estimated costs at completion. In certain circumstances, revenue under contracts that have specified
milestones or other performance criteria may be recognized only when our customer acknowledges that such
criteria have been satisfied. In addition, recognition of revenue (and the related costs) may be deferred for fixed-
price contracts until contract completion if we are unable to reasonably estimate the total costs of the project prior to
completion. 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
43
the periods involved. Upon anticipating a loss on a contract, we recognize the full amount of the anticipated loss in
the current period.
Generally our contracts are either cost plus or fixed price contracts. Under cost plus contracts, we bill the
customer for actual expenses incurred plus an agreed-upon fee. Revenue is typically recorded using percenta-
ge-of-completion based on the maximum awarded contract amount. In certain cases we may choose to incur costs in
excess of the maximum awarded contract amount resulting in a loss on the contract. Currently, we have two types of
fixed price contracts, firm fixed price and cost sharing. Under firm fixed price contracts we receive an agreed upon
amount for providing products and services which are specified in the contract. Revenue is typically recorded using
percentage-of-completion based on the contract amount. Depending on whether actual costs are more or less than
the agreed upon amount, there is a profit or loss on the project. Under cost sharing contracts the fixed amount agreed
upon with the customer is only intended to fund a portion of the costs on a specific project. We fund the remainder of
the costs as part of our product development efforts. Revenue is typically recorded using percentage-of-completion
based on the amount agreed upon with the customer. An amount corresponding to the revenue is recorded in cost of
revenues resulting in gross profit on these contracts of zero. Our share of the costs is recorded as product
development expense.
The following table provides information regarding the breakdown of our revenues by customer for fiscal years
2011, 2010 and 2009:
US Navy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US Department of Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iberdrola Cantabria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UK Government’s Technical Strategy Board . . . . . . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended April 30,
2011
2009
2010
($ millions)
$4.1
0.4
0.2
—
0.4
$ 3.5
1.9
(0.2)
0.9
0.6
$2.7
0.2
0.7
—
0.4
$ 6.7
$5.1
$4.0
During fiscal 2011, the Company reduced revenue by approximately $0.2 million due to a change in estimated
revenue to be recognized in connection with the Spain construction agreement.
The revenue increase for fiscal 2011 reflected significant increase in revenue from the DOE related to our
project off the coast of Reedsport, Oregon and revenue from the DOE and the UK Government’s Technology
Strategy Board (TSB) in connection with development of our PB500 PowerBuoy. In addition, revenue attributable
to the US Navy’s Littoral Expeditionary Autonomous PowerBuoy or LEAP, program contributed to the increase.
The increased revenue was partially offset by a decrease in revenue from the US Navy related to the Hawaii project
and the Deep Water Active Detection System (DWADS) project.
The revenue increase for fiscal 2010 reflected a significant increase in revenue from the US Navy related to
autonomous PowerBuoy projects and also an increase in revenue related to our project off the coast of Reedsport,
Oregon. The increased revenue was partially offset by a decrease in revenue from our construction project in Spain
and our Hawaii project for the US Navy.
The US Navy has been our largest customer since fiscal 2002. The US Navy accounted for 52% of our revenues
in fiscal 2011, 80% of our revenues in fiscal 2010 and 67% of our revenues in fiscal 2009. We anticipate that, if our
commercialization efforts are successful, the relative contribution of the US Navy to our revenue may decline in the
future.
44
We currently focus our sales and marketing efforts on North America, the west coast of Europe, Australia and
the east coast of Japan. The following table shows the percentage of our revenues by geographical location of our
customers for fiscal years 2011, 2010 and 2009:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia and Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84% 89% 73%
9% 25%
13%
2%
2%
3%
100% 100% 100%
Years Ended April 30,
2011
2009
2010
Cost of revenues
Our cost of revenues consists primarily of incurred material, labor and manufacturing overhead expenses, such
as engineering expense, equipment depreciation and maintenance and facility related expenses, and includes the
cost of PowerBuoy parts and services supplied by third-party suppliers. Cost of revenues also includes PowerBuoy
system delivery and deployment expenses and may include anticipated losses at completion on some contracts.
We operated at a gross profit of $0.4 million in fiscal 2011, a gross profit of $0.8 million in fiscal 2010 and a
gross loss of $0.8 million in fiscal 2009. 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. During fiscal 2011, we reduced revenue by approximately $0.2 million due to a
change in estimated revenue to be recognized in connection with the Spain construction agreement, and there was
no corresponding reduction in cost of revenues. Additionally, approximately $0.4 million of costs related to revenue
activity during fiscal 2009 had been previously anticipated and accrued as contract loss reserves as of April 30,
2009. These loss reserves were no longer necessary and, accordingly, reversed in fiscal year 2010, contributing to
the increase in gross profit.
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 and reliability of our utility PowerBuoy
system, including the 150kW PowerBuoy system and 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. Patents are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of the patent may not be recoverable.
Selling, general and administrative costs
Our selling, general and administrative costs consist primarily of professional fees, salaries and other
personnel-related costs for employees and consultants engaged in sales and marketing and support of our
PowerBuoy systems and costs for executive, accounting and administrative personnel, professional fees and other
general corporate expenses.
Interest income, net
Interest income consists of interest received on cash and cash equivalents, investments in commercial bank-
issued certificates of deposit and US Treasury bills and notes. Total cash, cash equivalents, restricted cash, and
marketable securities were $48.3 million as of April 30, 2011, $66.8 million as of April 30, 2010 and $82.7 million
as of April 30, 2009. Interest income decreased due to a decline in interest rates and a decline in cash, cash
equivalents and marketable securities.
45
Foreign exchange (loss) gain
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 pounds sterling, the Euro and the Australian
dollar.
We invest in certificates of deposit and maintain cash accounts that are denominated in British pounds sterling,
Euros and Australian dollars. These foreign denominated certificates of deposit and cash accounts had a balance of
$4.8 million as of April 30, 2011 and $4.1 million as of April 30, 2010, compared to our total cash, cash equivalents,
restricted cash, and marketable securities balances of $48.3 million as of April 30, 2011 and $66.8 million as of
April 30, 2010.
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 pounds 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. Our international revenues for the years ended April 30, 2011, 2010, and 2009 were recorded
in Euros, British pounds sterling, Australian dollars or Japanese yen.
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 taxes
As of April 30, 2011, we had federal and foreign net operating loss carryforwards of $70.5 million and
$17.5 million, respectively, and federal and foreign research and development tax credits of $1.9 million and
$0.7 million, respectively, which may be used to offset future taxable income. As of April 30, 2011, we had state net
operating loss carryforwards of $58.1 million. If not utilized, the net operating loss carryforwards and credit
carryforwards will expire at various dates through 2031. We may not achieve profitability in time to utilize the tax
credit and net operating loss carryforwards in full or at all. In addition, we have determined that the future utilization
of our net operating loss carryforwards is subject to limitations based upon changes in ownership including changes
resulting from our initial public offering in April 2007, pursuant to regulations promulgated under the Internal
Revenue Code. As discussed in Note 12 to our consolidated financial statements included in this Annual Report, we
have established a valuation allowance for our net deferred tax assets, which were $39.9 million as of April 30, 2011
and $33.1 million as of April 30, 2010.
During the year ended April 30, 2011, we sold $4,446,000 of our New Jersey State net operating losses
resulting in the recognition of an income tax benefit of $364,105 recorded in our Statement of Operations.
Outlook
We have incurred net losses since we began operations in 1994, including net losses attributable to Ocean
Power Technologies, Inc. of $20.4 million in fiscal 2011, $19.2 million in fiscal 2010 and $18.3 million in fiscal
2009. As of April 30, 2011, we had an accumulated deficit of $110.8 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 certain of our operating expenses as we continue to expand our commercialization
activities. To achieve profitability, we believe we will need to increase revenues, control our fixed costs and reduce
our unfunded research and development expenditures.
46
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.
Results of Operations
Fiscal Years Ended April 30, 2011 and 2010
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, 2011 and 2010:
Fiscal Year Ended
April 30, 2011
Fiscal Year Ended
April 30, 2010
Amount
As a % of
Revenues(1)
Amount
As a % of
Revenues
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,691,082
6,255,437
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100% $ 5,101,311
4,298,955
93
100%
84
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
435,645
7
802,356
16
Operating expenses:
Product development costs. . . . . . . . . . . . . . . . . . .
Selling, general and administrative costs . . . . . . . .
13,319,110
8,399,325
Total operating expenses . . . . . . . . . . . . . . . . . . . . . .
21,718,435
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income, net. . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange (loss) gain . . . . . . . . . . . . . . . . . . .
(21,282,790)
689,276
—
(229,415)
Loss before income taxes . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,822,929)
364,105
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,458,824)
Less: Net loss (income) attributable to the
199
126
325
(318)
10
—
(3)
(311)
5
(306)
13,001,550
9,063,482
22,065,032
(21,262,676)
1,032,484
557,540
540,644
(19,132,008)
—
255
178
433
(417)
20
11
11
(375)
—
(19,132,008)
(375)
noncontrolling interest . . . . . . . . . . . . . . . . . . . .
22,950
—
(38,299)
(1)
Net loss attributable to Ocean Power Technologies,
Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(20,435,874)
(305)% $(19,170,307)
(376)%
(1) Certain subtotals may not add due to rounding.
Revenues
Revenues increased by $1.6 million in fiscal 2011, or 31%, to $6.7 million as compared to $5.1 million in fiscal
2010. The change in revenues was attributable primarily to the following factors:
(cid:129) Revenues relating to our utility PowerBuoy system increased by $1.1 million due primarily to an increase in
billable work on our PB500 PowerBuoy development project and our 150kW PowerBuoy project off the
coast of Reedsport, Oregon. This was partially offset by a decrease in revenue related to our Hawaii project
for the US Navy and our wave power project off the coast of Spain, as these projects were completed. Also,
during fiscal 2011, there was a reduction in revenue of approximately $0.2 million due to a change in
estimated revenue to be recognized in connection with the Spain construction agreement.
(cid:129) Revenues relating to our autonomous PowerBuoy system increased by $0.5 million as a result of an increase
in billable work on our project to provide our PowerBuoy technology to the US Navy’s LEAP program. This
was partially offset by a decrease in billable work on the US Navy’s DWADS project.
47
Cost of revenues
Cost of revenues increased by $2.0 million, or 46%, to $6.3 million in fiscal 2011, as compared to $4.3 million
in fiscal 2010. This increase in the cost of revenues reflected the increased activity related to the LEAP program, the
150kW PowerBuoy project off the coast of Reedsport, Oregon, and our PB500 PowerBuoy development project.
This was partially offset by a lower level of activity on our Hawaii project for the US Navy, the US Navy’s DWADS
project and our wave power project off the coast of Spain. During fiscal 2010, there was a reduction in cost of
revenues resulting from the reversal of $0.4 million in the provision for loss reserves related to our project off the
coast of Spain as the reserve was no longer considered necessary.
We operated at a gross profit of $0.4 million and $0.8 million in fiscal 2011 and 2010, respectively. Certain of
our projects in fiscal 2011 and 2010 were under cost sharing contracts. Under cost sharing contracts, we receive a
fixed amount agreed upon with the customer that is only intended to fund a portion of the costs on a specific project.
We fund the remainder of the costs as part of our product development efforts. Revenue is typically recorded using
percentage-of-completion applied to the contractual amount agreed upon with the customer. An equal amount
corresponding to the revenue is recorded in cost of revenues resulting in gross profit on these contracts of zero. Our
share of the costs is considered to be product development expense. During fiscal 2011, we reduced revenue by
approximately $0.2 million due to a change in estimated revenue to be recognized in connection with the Spain
construction agreement, and there was no corresponding reduction in cost of revenues. During fiscal 2010, there was
a reduction in cost of revenues resulting from the reversal of $0.4 million in the provision for loss reserves related to
our project off the coast of Spain as the reserve was no longer considered necessary. 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
Product development costs increased by $0.3 million, or 2% to $13.3 million in fiscal 2011, as compared to
$13.0 million in fiscal 2010. Product development costs were primarily attributable to our efforts to increase the
power output and reliability of our utility PowerBuoy system, especially the 150kW PowerBuoy system. It is our
intent to fund the majority of our research and development expenses, including cost-sharing obligations under
some of our customer contracts, over the next several years with sources of external funding. If we are unable to
obtain external funding, we may curtail our research and development expenses or we may decide to self-fund
research and development expenses, in which case our product development costs may continue to increase.
Selling, general and administrative costs
Selling, general and administrative costs decreased $0.7 million, or 7%, to $8.4 million in fiscal 2011, as
compared to $9.1 million in fiscal 2010. The decrease was attributable primarily to a decrease in compensation and
recruiting expenses.
Interest income
Interest income decreased by $0.3 million, or 33%, to $0.7 million in fiscal 2011, compared to $1.0 million in
fiscal 2010, due to a decrease in cash, cash equivalents and marketable securities and a decrease in interest rates. The
average interest yield was approximately 1.20% during fiscal 2011 and approximately 1.40% during fiscal 2010.
Other income
Other income was $0.6 million in fiscal 2010. During the first quarter of fiscal 2010, we settled a claim which
we had against a supplier of engineering services, which resulted in a settlement in our favor. There was no other
income in fiscal 2011.
48
Foreign exchange (loss) gain
Foreign exchange loss was $0.2 million in fiscal 2011, compared to a foreign exchange gains of $0.5 million in
fiscal 2010. The difference was attributable primarily to the relative change in value of the British pound sterling,
Euro and Australian dollar compared to the US dollar during the two periods.
Income tax benefit
During fiscal 2011, we sold New Jersey net operating tax loss carryforwards of $4.4 million for cash of
$0.4 million which resulted in an income tax benefit of the same amount.
Fiscal Years Ended April 30, 2010 and 2009
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, 2010 and 2009:
Fiscal Year Ended
April 30, 2010
Fiscal Year Ended
April 30, 2009
Amount
As a % of
Revenues
Amount
As a % of
Revenues(1)
% Change
2010 Period to
2009 Period
Revenues . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . .
$ 5,101,311
4,298,955
100% $ 4,049,445
4,840,403
84
Gross profit (loss) . . . . . . . . . . . . . . . . . .
802,356
16
(790,958)
Operating expenses:
Product development costs. . . . . . . . . .
Selling, general and administrative
13,001,550
255
8,372,244
costs . . . . . . . . . . . . . . . . . . . . . . . .
9,063,482
Total operating expenses . . . . . . . . . . . . .
22,065,032
Operating loss. . . . . . . . . . . . . . . . . . . . .
Interest income, net. . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . .
Foreign exchange gain (loss) . . . . . . . . . .
(21,262,676)
1,032,484
557,540
540,644
178
433
(417)
20
11
11
9,529,071
17,901,315
(18,692,273)
1,672,350
—
(1,295,227)
(19,132,008)
(375)
(18,315,150)
100%
120
(20)
207
235
442
(462)
41
—
(32)
(452)
26%
(11)
201
55
(5)
23
14
(38)
—
142
4
Net loss . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to the
noncontrolling interest in Ocean
Power Technologies (Australasia)
Pty Ltd.
. . . . . . . . . . . . . . . . . . . . .
Net loss attributable to Ocean Power
(38,299)
(1)
—
—
—
Technologies, Inc.
. . . . . . . . . . . . . . .
$(19,170,307)
(376)% $(18,315,150)
(452)%
5%
(1) Certain subtotals may not add due to rounding.
Revenues
Revenues increased by $1.1 million in fiscal 2010, or 26%, to $5.1 million as compared to $4.0 million in fiscal
2009. The change in revenues was attributable primarily to the following factors:
(cid:129) Revenues relating to our autonomous PowerBuoy system increased by $1.8 million as a result of work on
projects with the US Navy to provide our PowerBuoy technology to the US Navy’s DWADS and LEAP
programs.
(cid:129) Revenues relating to our utility PowerBuoy system decreased by $0.7 million due primarily to a decrease in
billable work on our wave power station off the coast of Spain, as work under this phase of the project neared
completion, coupled with a reduction in the expected contract value of this project in late fiscal 2009. There
49
was also a decrease in revenue related to our Hawaii project for the US Navy, partially offset by an increase
in revenue related to our project off the coast of Reedsport, Oregon.
Cost of revenues
Cost of revenues decreased by $0.5 million, or 11%, to $4.3 million in fiscal 2010, as compared to $4.8 million
in fiscal 2009. This decrease in cost of revenues reflected the lower level of activity on our project off the coast of
Spain, offset by increased activity related to our autonomous PowerBuoy projects for the US Navy.
We operated at a gross profit of $0.8 million in fiscal 2010 and a gross loss of $0.8 million in fiscal 2009.
Certain of our projects in fiscal 2010 and 2009 were under cost sharing contracts. Under cost sharing contracts we
receive a fixed amount agreed upon with the customer that is only intended to fund a portion of the costs on a
specific project. We fund the remainder of the costs as part of our product development efforts. Revenue is typically
recorded using percentage-of-completion based on the amount agreed upon with the customer. An equal amount
corresponding to the revenue is recorded in cost of revenues resulting in gross profit on these contracts of zero. Our
share of the costs is considered to be product development expense. Approximately $0.4 million of costs related to
revenue activity during fiscal 2009 had been previously anticipated and accrued as contract loss reserves as of
April 30, 2009. These loss reserves were no longer necessary and, accordingly, reversed in fiscal year 2010
contributing to the increase in a gross profit. 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
Product development costs increased by $4.6 million, or 55% to $13.0 million in fiscal 2010, as compared to
$8.4 million in fiscal 2009. Product development costs were attributable primarily to our efforts to increase the
power output and reliability of our utility PowerBuoy system, especially the 150kW PowerBuoy system. It is our
intent to fund the majority of our research and development expenses, including cost-sharing obligations under
some of our customer contracts, over the next several years with sources of external funding. If we are unable to
obtain external funding, we may curtail our research and development expenses or we may decide to self-fund
research and development expenses, in which case our product development costs may continue to increase.
Selling, general and administrative costs
Selling, general and administrative costs decreased $0.4 million, or 5%, to $9.1 million in fiscal 2010, as
compared to $9.5 million in fiscal 2009. The decrease was attributable primarily to a decrease in consulting, legal,
accounting and investor relations expenses partially offset by increased personnel-related expenses.
Interest income
Interest income decreased by $0.7 million, or 38%, to $1.0 million in fiscal 2010, compared to $1.7 million in
fiscal 2009, due to a decrease in cash, cash equivalents and marketable securities. In addition, the average yield
decreased to approximately 1.40% during fiscal 2010 from approximately 1.86% during fiscal 2009.
Other income
Other income was $0.6 million in fiscal 2010, compared to none for fiscal 2009. During the first quarter of
fiscal 2010, we settled a claim which we had against a supplier of engineering services, which resulted in a
settlement in our favor.
Foreign exchange gain (loss)
Foreign exchange gain was $0.5 million in fiscal 2010, compared to a foreign exchange loss of $1.3 million in
fiscal 2009. The difference was attributable primarily to the relative change in value of the British pound sterling,
Euro and Australian dollar compared to the US dollar during the two periods.
50
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, 2011, our
revenues were $15.8 million, our net losses were $57.9 million and our net cash used in operating activities was
$51.2 million.
Year Ended April 30,
2011
2010
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments for noncash operating items . . . . . . . . . . . . . . . . . . . . .
$(20,458,824)
2,112,952
$(19,132,008)
1,181,318
Net cash operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
(18,345,872)
(424,230)
(17,950,690)
2,180,006
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . .
$(18,770,102)
$(15,770,684)
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . .
$ 18,431,358
$ 7,309,086
Net cash provided by (used in) financing activities . . . . . . . . . . . . . .
Effect of exchange rates on cash and cash equivalents. . . . . . . . . . . .
$
$
207,701
270,582
$
$
(99,841)
530,206
Net cash used in operating activities
Net cash used in operating activities was $18.8 million for fiscal 2011 and $15.8 million for fiscal 2010. The
change was the result of an increase in net loss of $1.3 million and a decrease in cash provided by operating assets
and liabilities of $2.6 million, offset by an increase in cash provided by non-cash charges of $0.9 million.
The change in non-cash charges was due primarily to a change in foreign exchange gains (losses) of
$0.8 million due to the relative change in the value of the British pound against the US dollar, an increase in stock
compensation expense of $0.3 million, a decrease in loss on disposal of equipment of $0.1 million and a decrease in
Treasury note amortization of $0.1 million.
The decrease in cash provided by operating assets and liabilities was primarily the result of a decrease in cash
provided by accounts payable of $1.9 million, a decrease in cash provided by unearned revenues of $1.6 million, a
decrease in cash provided by unbilled receivables of $0.6 million and a decrease in cash provided by other
noncurrent liabilities of $0.3 million, partially offset by an increase in cash provided by other non-current assets of
$1.1 million and an increase in cash provided by accounts receivable of $0.8 million. The change in accounts
payable reflects a decrease in payables to the steel fabricator for our Reedsport, Oregon project. The changes in
unearned revenue and receivables were primarily due to the timing of billings to customers.
Net cash provided by investing activities
Net cash provided by investing activities was $18.4 million and $7.3 million for fiscal 2011 and 2010,
respectively. The change was primarily the result of a net decrease in purchases of marketable securities during
fiscal 2011.
Net cash provided by (used in) financing activities
Net cash provided by financing activities was $0.2 million in fiscal 2011 and net cash used in financing
activities was $0.1 million in fiscal 2010, reflecting a net change in our loans from the State of New Jersey. During
fiscal 2011, we received a $0.25 million loan under the New Jersey Board of Public Utilities Renewable Energy
Business Venture Assistance Program.
51
Effect of exchange rates on cash and cash equivalents
Effect of exchange rates on cash and cash equivalents was an increase in cash of $0.3 million and $0.5 million
in fiscal 2011 and 2010, respectively. The change was primarily the result of gains on consolidation of foreign
subsidiaries and foreign denominated cash and cash equivalents.
Liquidity Outlook
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 major customers;
(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, cash equivalents and investments will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures at least through fiscal 2013. 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, or at all. If we are unable to obtain necessary 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 primarily to our facilities leases. We have summarized in
the table below our fixed contractual cash obligations as of April 30, 2011.
Payments Due by Period
Total
Less than
One Year
One to
Three Years
Three to
Five Years
More than
Five Years
Long-term debt . . . . . . . . . . . . . . . $ 589,000
574,000
Operating leases . . . . . . . . . . . . . .
$139,000
326,000
$200,000
248,000
$200,000
—
$50,000
—
Total . . . . . . . . . . . . . . . . . . . . . . . $1,163,000
$465,000
$448,000
$200,000
$50,000
Our long-term debt consists of a recoverable grant award from the New Jersey Board of Public Utilities. Under
the recoverable grant award, the amount to be repaid is a fixed monthly amount of principal only, repayable over a
five-year period beginning in November 2011.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet financing activities.
52
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 $0.8 million as of April 30, 2011 and 2010 related to one contract. In fiscal 2009, we
recognized a loss of $0.8 million on our contract for a wave power station off the coast of Spain. The additional
anticipated loss in 2009 was recognized based on changes in estimated costs associated with this contract, a
reduction in the expected contract value, and our decision in the fourth quarter of fiscal 2008 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. Approximately $0.4 million of loss reserves related to the Spanish contract were no longer necessary
and, accordingly, were reversed in fiscal 2010, contributing to the increase in gross profit. In fiscal 2011, we reduced
revenues by approximately $0.2 million due to a change in estimated revenue to be recognized in connection with
the Spain construction agreement, and there was no corresponding reduction in cost of revenues. Modifications to
contract provisions, such as those in connection with the Company’s Spain construction agreement, as well as
modifications in contract loss estimates, may require changes in reserves established for anticipated contract losses.
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.
Stock-based compensation
Costs resulting from all share-based payment transactions are recognized in the consolidated financial
statements at their fair values. 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 is being recognized in the consolidated statements of
operations over the remaining service period after such date based on the award’s original estimated fair value.
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. 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
53
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 traded from October 2003 to January 2011, 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. We voluntarily delisted from the AIM market effective
January 14, 2011. 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 the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, Share-
Based Payment. 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 the fair value of our stock-based awards.
In addition, we are required 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. To date, 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.
The aggregate share-based compensation expense, related to all share-based transactions related to employees
was approximately $1.4 million, $1.1 million and $1.5 million in fiscal 2011, 2010 and 2009, respectively.
Income taxes
We account for income taxes under the asset and liability method. 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 net operating loss and tax credit carryforwards, 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 12 to our
consolidated financial statements included in this Annual Report, we have established a valuation allowance for our
net deferred tax assets, which was $39.9 million as of April 30, 2011 and $33.1 million as of April 30, 2010. We
recognized a tax benefit in fiscal 2011 of $0.4 million related to the sale of $4.4 million of New Jersey state net
operating losses.
54
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued further additional authoritative
guidance related to fair value measurements and disclosures. The new guidance results in a consistent definition of
fair value and common requirements for measurement of and disclosure about fair value between accounting
principles generally accepted in the United States (U.S. GAAP) and International Financial Reporting Standards
(IFRS). The guidance is effective for fiscal years and interim periods within those years beginning after
December 15, 2011. We are currently assessing the impact of the guidance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We generally place our investments in money market funds, Treasury notes, Treasury bills and certificates of
deposit with maturities of less than one year. We actively manage our portfolio of cash equivalents and 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.
Management estimates that had the average yield on our cash, cash equivalents, and investments decreased by
100 basis points, our interest income for the year ended April 30, 2011 would have decreased by $0.6 million. This
estimate assumes that the decrease occurred on the first day of fiscal 2011 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 pounds sterling, the Euro and the Australian
dollar.
We maintain cash accounts that are denominated in British pounds sterling, Euros and Australian dollars.
These foreign-denominated cash accounts had a balance of $4.8 million as of April 30, 2011 and $4.1 million as of
April 30, 2010, compared to our total cash, cash equivalents, marketable securities and restricted cash account
balances of $48.3 million as of April 30, 2011 and $66.8 million as of April 30, 2010. 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. If the foreign currency exchange rates had fluctuated by 10% as of April 30,
2011, the impact on our foreign exchange gains and losses would have been $0.5 million.
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 pounds 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, 2011 were recorded in Euros,
British pounds sterling or Australian dollars.
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.
We have limited potential exposure to fluctuations in prices of commodities used in the production of our
buoys, such as steel. Currently, we believe our exposure is minimal since we contract for the components of our
55
buoys on a project-by-project basis and do not yet produce in large unit volumes. We do not use long-term supply
agreements nor do we use derivative instruments to hedge any potential exposure.
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
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was
performed as of the end of the period covered by this report. This evaluation was performed under the supervision
and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures are effective in providing reasonable assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is
accumulated and communicated to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective in providing
reasonable assurance that such information is recorded, processed, summarized and reported within the time
periods specified by the rules and forms of the US Securities and Exchange Commission (SEC).
The annual report of management on the Company’s internal control over financial reporting is provided under
“Reports of Management” 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 “Report of Independent Registered Public
Accounting Firm” on page F-3.
During the quarter ended April 30, 2011, 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 2011 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 “Corporate Governance” 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.
56
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.
ITEM 14. PRINCIPAL ACCOUNTING 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 59 to 60.
57
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, 2011
OCEAN POWER TECHNOLOGIES, INC.
By: /s/ CHARLES F. DUNLEAVY
Charles F. Dunleavy
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/
/s/
CHARLES F. DUNLEAVY
Charles F. Dunleavy
GEORGE W. TAYLOR
George W. Taylor
BRIAN M. POSNER
Brian M. Posner
SEYMOUR S. PRESTON III
Seymour S. Preston III
THOMAS J. MEANEY
Thomas J. Meaney
PAUL F. LOZIER
Paul F. Lozier
J. VICTOR CHATIGNY
J. Victor Chatigny
Director, Chief Executive Officer
(Principal Executive Officer)
July 14, 2011
Executive Chairman of the Board of Directors
July 14, 2011
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
Director
Director
Director
Director
July 14, 2011
July 14, 2011
July 14, 2011
July 14, 2011
July 14, 2011
58
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
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 3.2 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)
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 10.5 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)
Amended and Restated Employment Agreement, dated April 8, 2009, between Charles F. Dunleavy and
Ocean Power Technologies, Inc. (incorporated by reference from Exhibit 10.2 to Form 8-K filed April 13,
2009)*
10.10 Amended and Restated Employment Agreement, dated April 8, 2009, between George W. Taylor and
Ocean Power Technologies, Inc. (incorporated by reference from Exhibit 10.1 to Form 8-K filed April 13,
2009)*
10.12
10.13
10.11 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)*
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)
10.14
10.15 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)
10.16 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,
59
Exhibit
Number
Description
10.18
10.19
10.17 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)
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 8-K filed
June 8, 2007)
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 (incorporated by reference from
Exhibit 10.27 to Form 10-K filed July 14, 2008)
Lease, dated February 1, 2008, between KUC Properties Limited and Ocean Power Technologies Ltd.
(incorporated by reference from Exhibit 10.28 to Form 10-K filed July 14, 2008)
Financial Assistance Award agreement between Ocean Power Technologies, Inc. and US Department of
Energy date September 23, 2008 (incorporated by reference from Exhibit 10.1 to Form 10-Q filed
December 10, 2008)
10.21
10.20
10.23
10.24
10.22 Modification of Financial Assistance Award agreement between Ocean Power Technologies, Inc. and US
Department of Energy dated October 16, 2008 (incorporated by reference from Exhibit 10.2 to Form 10-Q
filed December 10, 2008)
Agreement between Ocean Power Technologies, Inc. and the Office of Naval Research of the US Navy
dated October 31, 2008 (incorporated by reference from Exhibit 10.3 to Form 10-Q filed December 10,
2008)
Employment Agreement, dated May 19, 2010, between Brian M. Posner and Ocean Power Technologies,
Inc. (incorporated by reference from Exhibit 10.28 to Form 10-K filed July 14, 2010)*
Form of Restricted Stock Agreement (incorporated by reference from Exhibit 10.1 to Form 10-Q filed
March 14, 2011)*
Subsidiaries of the registrant
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
21.1
23.1
31.1
31.2
32.1
32.2
10.25
* Management contract or compensatory plan or arrangement
60
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, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations, Years ended April 30, 2011, 2010 and 2009. . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss, Years ended April 30, 2011,
2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows, Years ended April 30, 2011, 2010 and 2009 . . . . . . . . . . . . . . .
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 management of Ocean Power
Technologies, Inc. (the Company) 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 Annual 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. 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
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.
The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of April 30, 2011. 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, 2011.
The effectiveness of the Company’s internal control over financial reporting as of April 30, 2011 has been
audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which appears
herein.
/s/ CHARLES F. DUNLEAVY
Charles F. Dunleavy
Chief Executive Officer
/s/ BRIAN M. POSNER
Brian M. Posner
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 Ocean Power Technologies, Inc.’s internal control over financial reporting as of April 30,
2011, 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 Annual
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, 2011, 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,
2011 and 2010, 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, 2011, and our report dated July 14, 2011
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
July 14, 2011
F-3
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, 2011 and 2010, 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, 2011.
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, 2011 and 2010, and the
results of their operations and their cash flows for each of the years in the three-year period ended April 30, 2011, in
conformity with U.S. generally accepted accounting principles.
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, 2011,
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, 2011 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
July 14, 2011
F-4
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30,
2011
2010
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,376,136
26,018,594
1,285,000
456,316
832,142
32,968,188
792,092
1,222,368
1,624,669
16,323,016
622,245
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,552,578
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,224,728
4,302,952
344,022
139,378
6,011,080
450,000
600,000
—
7,061,080
4,236,597
32,536,001
1,474,600
448,686
1,005,885
39,701,769
710,563
1,036,881
1,205,288
28,865,046
1,458,646
72,978,193
1,843,378
4,092,113
1,101,541
95,386
7,132,418
250,000
600,000
140,685
8,123,103
Commitments and contingencies (note 13)
Ocean Power Technologies, Inc. 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
10,419,183 and 10,390,563 shares, respectively . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost; 7,685 and 1,072 shares, respectively . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Ocean Power Technologies, Inc. stockholders’ equity . . . . . . . . . . .
Noncontrolling interest in Ocean Power Technologies (Australasia) Pty Ltd . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
10,419
(42,734)
157,174,930
(110,848,972)
175,907
46,469,550
21,948
46,491,498
10,391
(6,443)
155,726,672
(90,413,098)
(503,322)
64,814,200
40,890
64,855,090
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,552,578
72,978,193
See accompanying notes to consolidated financial statements.
F-5
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
2011
Year Ended April 30,
2010
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,691,082
6,255,437
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,101,311
4,298,955
2009
4,049,445
4,840,403
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
435,645
802,356
(790,958)
Operating expenses:
Product development costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative costs . . . . . . . . . . . . . . . .
13,319,110
8,399,325
13,001,550
9,063,482
8,372,244
9,529,071
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
21,718,435
22,065,032
17,901,315
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . .
(21,282,790)
689,276
—
(229,415)
(21,262,676)
1,032,484
557,540
540,644
(18,692,273)
1,672,350
—
(1,295,227)
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,822,929)
364,105
(19,132,008)
—
(18,315,150)
—
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net loss (income) attributable to the noncontrolling interest
. . . . . . .
in Ocean Power Technologies (Australasia) Pty Ltd.
(20,458,824)
(19,132,008)
(18,315,150)
22,950
(38,299)
—
Net loss attributable to Ocean Power Technologies, Inc.
. . . . . . $(20,435,874)
(19,170,307)
(18,315,150)
Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . $
(1.99)
(1.88)
(1.79)
Weighted average shares used to compute basic and diluted net
loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,246,921
10,217,003
10,210,354
See accompanying notes to consolidated financial statements.
F-6
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
Common Shares
Shares
Treasury Shares
Amount Shares Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total Ocean
Power
Technologies, Inc,
Stockholders
Equity
Noncontrolling
Interest
Total
Equity
Balance, May 1, 2008 . .
. . .
Net loss . .
. . .
. .
. . .
. . .
. .
. .
. . .
. . .
. 10,210,354 $10,210
—
—
.
— $
—
— 153,057,265
—
(52,927,641)
— (18,315,150)
—
—
— 1,453,350
58,316
—
—
—
—
—
—
—
154,568,931
(71,242,791)
— (19,170,307)
—
918,235
239,506
—
—
—
—
—
(41,225)
—
(512,098)
—
—
(553,323)
—
50,001
—
—
—
.
.
.
.
—
—
—
—
—
—
. . .
. . .
. . .
. . .
. . .
. 10,210,354 $10,210
—
—
.
—
—
180,209
—
—
181
—
—
—
—
—
—
—
Foreign currency translation adjustment .
Total comprehensive loss
. .
Stock-based compensation . . .
Issuance of restricted stock . . .
Balance, April 30, 2009 .
. . .
Net loss . .
. . .
. .
. . .
. . .
. .
. .
. .
. .
. .
.
.
.
.
.
Foreign currency translation adjustment .
. .
Total comprehensive loss
Stock-based compensation . . .
Issuance of restricted stock . . .
Acquisition of treasury stock . .
Balance, April 30, 2010 .
. . .
Net loss . .
. . .
. .
. . .
. . .
. .
. .
. .
. .
. .
. .
. . .
. . .
. . .
. . .
. . .
Foreign currency translation adjustment .
Total comprehensive loss
. .
Stock-based compensation . . .
Issuance of restricted stock . . .
Acquisition of treasury stock . .
. .
. .
. .
. .
. . .
. . .
. . .
. . .
—
— (1,072)
(6,443)
. . .
. 10,390,563
10,391
(1,072)
(6,443) 155,726,672
(90,413,098)
(503,322)
.
.
.
.
.
.
—
—
—
—
—
—
—
—
—
—
—
—
28,620
—
28
—
— (6,613)
—
(36,291)
— (20,435,874)
—
964,000
484,258
—
—
—
—
—
—
679,229
—
—
—
100,098,609
(18,315,150)
(512,098)
(18,827,248)
1,453,350
58,316
82,783,027
(19,170,307)
50,001
(19,120,306)
918,235
239,687
(6,443)
64,814,200
(20,435,874)
679,229
—
—
—
—
—
—
—
38,299
2,591
40,890
—
—
—
100,098,609
(18,315,150)
(512,098)
(18,827,248)
1,453,350
58,316
82,783,027
(19,132,008)
52,592
(19,079,416)
918,235
239,687
(6,443)
40,890
64,855,090
(22,950)
(20,458,824)
4,009
683,238
(19,756,645)
(18,942)
(19,775,587)
964,000
484,286
(36,291)
—
—
—
964,000
484,286
(36,291)
Balance, April 30, 2011 .
. . .
. .
. . .
. 10,419,183 $10,419
(7,685) $(42,734) 157,174,930 (110,848,972)
175,907
46,469,550
21,948
46,491,498
See accompanying notes to consolidated financial statements.
F-7
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended April 30,
2010
2009
2011
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(20,458,824)
Adjustments to reconcile net loss to net cash used in operating activities:
(19,132,008)
(18,315,150)
Foreign exchange loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury note premium amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense related to stock option grants and restricted stock . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . .
229,415
358,722
5,293
71,236
1,448,286
—
(540,644)
365,755
113,087
146,834
1,117,935
(21,649)
1,295,227
299,405
268,976
288,331
1,511,666
5,412
277,115
1,396
198,569
903,729
(891,417)
(7,923)
(761,473)
(144,226)
(18,770,102)
(474,407)
603,765
77,278
(202,731)
1,047,213
153,418
827,786
147,684
(15,770,684)
472,422
(589,970)
140,418
(857,060)
(448,138)
(361,284)
(418,182)
—
(16,707,927)
Cash flows from investing activities:
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of patent costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . .
(7,993,642)
27,059,601
(302,871)
(72,998)
(258,732)
18,431,358
(33,884,604)
41,838,886
(252,080)
(239,449)
(153,667)
7,309,086
(124,675,859)
67,151,702
—
(811,493)
(243,941)
(58,579,591)
Cash flows from financing activities:
250,000
Proceeds from long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,008)
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(36,291)
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
207,701
Net cash provided by (used in) financing activities . . . . . . . . . . . . .
270,582
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . .
139,539
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . .
4,236,597
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,376,136
—
(93,398)
(6,443)
(99,841)
530,206
(8,031,233)
12,267,830
4,236,597
250,000
(42,801)
—
207,199
(1,488,155)
(76,568,474)
88,836,304
12,267,830
Supplemental disclosure of noncash investing and financing activities:
Capitalized patent costs financed through accounts payable and accrued
expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capitalized purchases of equipment financed through accounts payable . . . .
Investment in joint ventures financed through accrued expenses . . . . . . . . .
41,722
314,824
—
66,513
6,360
—
23,255
96,304
175,803
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 and Cost Method Investment
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.
Participation of stockholders other than the Company in the net assets and in the earnings or losses of a consolidated
subsidiary is reflected in the caption “Noncontrolling interest” in the Company’s Consolidated Balance Sheets and
Statements of Operations. Noncontrolling interest adjusts the Company’s consolidated results of operations to
reflect only the Company’s share of the earnings or losses of the consolidated subsidiary. For the years presented in
the accompanying consolidated financial statements, there was one noncontrolling interest, consisting of 11.8% of
the Company’s Australian subsidiary.
In addition, the Company evaluates its relationships with other entities to identify whether they are variable
interest entities, 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. For the
years presented in the accompanying consolidated financial statements, there were no such entities.
The Company has a 10% investment in Iberdrola Energias Marinas de Cantabria, S.A. (Iberdrola Cantabria).
Revenues from Iberdrola Cantabria for the years ended April 30, 2011, 2010 and 2009 were ($242,614), $178,215,
and $601,736, respectively. Additionally, aggregate accounts receivable and unbilled receivables from Iberdrola
Cantabria were $341,286 and $556,491 as of April 30, 2011 and 2010, respectively. See Note 13(c).
(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. The current economic environment has increased the
degree of uncertainty inherent in those estimates and assumptions.
(c) Revenue Recognition
The Company primarily recognizes revenue under the percentage-of-completion 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 year ended April 30, 2011, the Company reduced revenue by
approximately $243,000 due to a change in estimated revenue to be recognized in connection with the Company’s
construction agreement relating to development of a PowerBuoy system off Santoña, Spain. During the year ended
April 30, 2009, the Company recorded provisions of approximately $810,000, related to anticipated losses on
contracts. During the year ended April 30, 2010, the Company reversed approximately $400,000 of the loss reserves
established in fiscal year 2009 as these loss reserves were no longer necessary as of April 30, 2010. During the year
F-9
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
ended April 30, 2009, the Company recorded reductions in the contract loss reserves of $1,728,000. Reserves
related to loss contracts in the amount of approximately $785,000 are included in accrued expenses in the
accompanying consolidated balance sheets as of April 30, 2011 and 2010. Modifications to contract provisions,
such as those currently being discussed in connection with the Company’s Spain construction agreement (see
Note 13), as well as modifications in contract loss estimates, may require changes in reserves established for
anticipated contract losses.
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 determination
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.
Generally our contracts are either cost plus or fixed price contracts. Under cost plus contracts, we bill the
customer for actual expenses incurred plus an agreed-upon fee. Revenue is typically recorded using percenta-
ge-of-completion based on the maximum awarded contract amount. In certain cases we may choose to incur costs in
excess of the maximum awarded contract amount resulting in a loss on the contract. Currently, we have two types of
fixed price contracts, firm fixed price and cost-sharing. Under firm fixed price contracts we receive an agreed-upon
amount for providing products and services specified in the contract. Revenue is typically recorded using
percentage-of-completion based on the contract amount. Depending on whether actual costs are more or less
than the agreed-upon amount, there is a profit or loss on the project. Under cost-sharing contracts the fixed amount
agreed upon with the customer is only intended to fund a portion of the costs on a specific project. We fund the
remainder of the costs as part of our product development efforts. Revenue is typically recorded using
percentage-of-completion based on the amount agreed upon with the customer. An amount corresponding to
the revenue is recorded in cost of revenues, resulting in gross profit on these contracts of zero. Our share of the costs
is recorded as product development expense.
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 and Cash Equivalents
Cash equivalents consist of investments in short-term financial instruments with original maturities of three
months or less from the date of purchase. Cash and cash equivalents include $273,000 and $1,590,000 of certificates
of deposit with initial maturities of less than three months at April 30, 2011 and 2010, respectively, and $482,000
and $192,000 invested in a money market fund as of April 30, 2011 and 2010, respectively.
(e) Marketable Securities
Marketable securities with original maturities longer than three months but that mature in less than one year
from the balance sheet date are classified as current assets. Marketable securities that mature more than one year
from the balance sheet date are classified as noncurrent assets. Marketable securities that the Company has the
intent and ability to hold to maturity are classified as investments held-to-maturity and are reported at amortized
cost. The difference between the acquisition cost and face values of held-to-maturity investments is amortized over
the remaining term of the investments and added to or subtracted from the acquisition cost and interest income. As
of April 30, 2011 and 2010, all of the Company’s investments were classified as held-to-maturity.
F-10
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(f) Restricted Cash and Credit Facility
The Company had $1,624,669 and $1,205,288 of restricted cash as of April 30, 2011 and April 30, 2010,
respectively. The cash is restricted under the terms of two security agreements.
One agreement is between Ocean Power Technologies, Inc. and Barclays Bank. Under this agreement, the 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., one of the Company’s subsidiaries, under a A800,000
($1,187,000 at April 30, 2011) 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. As of April 30, 2011, there were A266,000 ($395,000)
in letters of credit outstanding under this agreement. The credit facility does not have an expiration date, but is
cancelable at the discretion of the bank. As of April 30, 2011 and 2010, approximately A720,000 ($1,068,000 and
$953,000 at April 30, 2011 and 2010, respectively) is included in restricted cash.
The other agreement is between Ocean Power Technologies, Inc. and the New Jersey Board of Public Utilities
(NJBPU). The Company received a $500,000 recoverable grant award from the NJBPU in two installments in fiscal
year 2011 and 2010. Under this agreement, the Company is required to assign to the NJBPU a certificate of deposit
in an amount equal to the outstanding grant balance. As of April 30, 2011 and 2010, the Company has assigned
certificates of deposit in the amount of $500,000 and $250,000, respectively, to the NJBPU. See Note 7.
(g) 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 $310,268, $324,596 and $259,696 for the years ended April 30, 2011, 2010 and 2009,
respectively.
(h) Other Income
Other income consists of transactions that the Company considers to be outside the normal scope of its
operations and operating activities. The Company recognized other income of $557,540 during the year ended
April 30, 2010, primarily in connection with the settlement of a claim that it had against a supplier that provided
engineering services to the Company.
(i) Foreign Exchange Gains and Losses
The Company has invested in certain certificates of deposit and has maintained cash accounts that are
denominated in British pounds sterling, Euros and Australian dollars. Such certificates of deposit and cash accounts
had a balance of approximately $4,793,000 and $4,131,000 as of April 30, 2011 and 2010, respectively. These
amounts are included in cash, cash equivalents, restricted cash and marketable securities on the accompanying
consolidated balance sheets. Such positions may result in realized and unrealized foreign exchange gains or losses
from exchange rate fluctuations, which are included in foreign exchange (loss) gain in the accompanying consolidated
statements of operations. Foreign exchange (loss) gain was ($229,415), $540,644 and ($1,295,227) for the years ended
April 30, 2011, 2010 and 2009, respectively.
(j) 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, beginning upon issuance of the
patent). Expenses for the development of technology are charged to operations as incurred. Amortization expense
F-11
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
was $47,877, $41,064, and $39,613 for the years ended April 30, 2011, 2010 and 2009, respectively. Amortization
expense for the next five fiscal years related to amounts capitalized for patents as of April 30, 2011 is estimated to be
approximately $70,000 per year. Accumulated amortization was $333,909 and $285,454 at April 30, 2011 and
2010, respectively.
(k) 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. The Company reviewed its
long-lived assets for impairment and determined there was no impairment for the years ended April 30, 2011, 2010
or 2009.
(l) 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, Treasury notes 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 at least one of the periods indicated:
Years Ended April 30,
2011
2009
2010
US Navy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US Department of Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iberdrola Cantabria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UK Government’s Technical Strategy Board . . . . . . . . . . . . . . . . . . . . . . . . . . .
52% 80% 67%
4%
9%
28%
(4)% 4% 15%
14% —
—
During fiscal 2011, the Company reduced revenue by approximately $243,000 due to a change in estimated
revenue to be recognized in connection with the Spain construction agreement.
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.
(m) 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 and non-vested performance-based shares,
were excluded from the diluted loss per share calculation due to their anti-dilutive effect.
In computing diluted net loss per share, 1,504,888, 1,532,577 and 1,676,631 options to purchase shares of
common stock, non-vested restricted stock and shares to be issued to non-employee directors were excluded from
the computations for the years ended April 30, 2011, 2010 and 2009, respectively.
F-12
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(n) Stock-Based Compensation
Costs resulting from all share-based payment transactions are recognized in the consolidated financial
statements at their fair values. 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 is being 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, 2011, 2010 and 2009 was approximately $1,448,000, $1,118,000 and $1,512,000 respectively.
Valuation Assumptions for Options Granted During the Years Ended April 30, 2011, 2010 and 2009
The fair value of each stock option granted during the years ended April 30, 2011, 2010 and 2009 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 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,
2010
2011
2009
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.39 years
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.29%
0.0%
93.8%
2.98%
0.0%
3.36%
0.0%
6.42 years
6.29 years
81.8%
79.3%
The above assumptions were used to determine the weighted average per share fair value of $4.18, $4.42 and
$6.33 for stock options granted during the years ended April 30, 2011, 2010 and 2009, respectively.
(o)
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.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of
being sustained upon examination. Recognized income tax positions are measured at the largest amount that is
greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in
which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest
expense and penalties in selling, general, and administrative expenses, to the extent incurred.
(p) 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 US 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
F-13
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
the period. The unrealized gains or losses resulting from such translation are included in accumulated other
comprehensive loss within stockholders’ equity.
(q) Recent Accounting Pronouncements
In May 2011, the FASB issued further additional authoritative guidance related to fair value measurements and
disclosures. The new guidance results in a consistent definition of fair value and common requirements for
measurement of and disclosure about fair value between accounting principles generally accepted in the United
States (U.S. GAAP) and International Financial Reporting Standards (IFRS). The guidance is effective for fiscal
years and interim periods within those years beginning after December 15, 2011. The Company is currently
assessing the impact of the guidance.
(r) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
(3) Marketable Securities
Marketable securities with original maturities longer than three months but that mature in less than one year
from the balance sheet date are classified as current assets and are summarized as follows:
April 30,
2011
2010
Certificates of deposit denominated in AUD . . . . . . . . . . . . . . . . . . . . . $
US Treasury obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
491,895
25,526,699
519,232
32,016,769
$26,018,594
32,536,001
The Company’s marketable securities that mature more than one year from the balance sheet date are classified
as noncurrent assets and are all classified as held-to-maturity, carried at amortized cost and are summarized as
follows. All non-current marketable securities mature within two years from April 30, 2011.
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Market
Value
April 30, 2011
US Treasury obligations . . . . . . . . . . . . . . . . . $12,516,208
3,806,808
Certificate of deposit . . . . . . . . . . . . . . . . . . .
164,107
—
$16,323,016
164,107
April 30, 2010
US Treasury obligations . . . . . . . . . . . . . . . . . $25,058,238
3,806,808
Certificate of deposit . . . . . . . . . . . . . . . . . . .
158,672
—
$28,865,046
158,672
—
—
—
—
—
—
12,680,315
3,806,808
16,487,123
25,216,910
3,806,808
29,023,718
F-14
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(4) Property and Equipment
The components of property and equipment are as follows:
3 years
Computers and software . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 7 years
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . 3 to 7 years
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . 3 to 8 years
$
713,779
990,283
297,612
149,505
654,400
661,120
303,918
147,640
Life
2011
2010
April 30,
Less accumulated depreciation and amortization . . . . . . .
(5) Accrued Expenses
The components of accrued expenses are as follows:
2,151,179
(1,359,087)
1,767,078
(1,056,515)
$
792,092
710,563
April 30,
2011
2010
Project costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee incentive payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll tax withholdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in joint venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and accounting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value-added tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,505,981
785,000
749,464
282,999
364,799
219,632
197,318
157,616
40,143
1,072,635
785,000
682,400
308,514
491,621
374,208
176,121
154,567
47,047
$4,302,952
4,092,113
(6) Related Party Transactions
In August 1999, the Company entered into a consulting agreement with an individual for marketing services.
Currently, this agreement is at a rate of $950 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 $85,000,
$72,000 and $61,000 during the years ended April 30, 2011, 2010 and 2009, respectively. The amount of these
consulting fees payable at April 30, 2011, 2010 and 2009 was $7,000, $7,000 and $5,000, respectively. In addition,
this individual is also the chief executive officer of a company that provided engineering and technical services to
the Company. The Company incurred expenses of approximately $207,000 and $213,000 for such services during
the years ended April 30, 2011 and 2010, respectively, of which $56,000 and $65,000 was payable at April 30, 2011
and 2010, respectively. There was no such expense incurred for the year ended April 30, 2009. The Company also
provided services to the company where this individual is the chief executive officer. The Company recorded
revenue of approximately $77,000 and $15,000 for such services during the years ended April 30, 2011 and 2009,
respectively, of which $27,000 and $6,000 was receivable at April 30, 2011 and 2010, respectively. There was no
revenue earned during the year ended April 30, 2010.
F-15
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(7) 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 $161,000, and the remaining $89,000 due has been classified as current portion of long-
term debt on the accompanying balance sheet as of April 30, 2011.
The Company was awarded a recoverable grant totaling $500,000 from the NJBPU under the Renewable
Energy Business Venture Assistance Program. Under the terms of this agreement, the amount to be repaid is a fixed
monthly amount of principal only, repayable over a five-year period beginning in November 2011. As of April 30,
2011, $50,000 was included in current portion of long-term debt and $450,000 was included in long-term debt on
the accompanying consolidated balance sheet. The terms also require the Company to assign to the NJBPU a
certificate of deposit in an amount equal to the outstanding grant balance. The Company received $250,000,
representing the first half of the grant during the year ended April 30, 2010 and the remaining $250,000 was
received during the year ended April 30, 2011. See Note 2(f).
(8) 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, 2011 and 2010. 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).
(9) Common Stock
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 approximately $89,900,000.
(10) Preferred Stock
The Company has authorized 5,000,000 shares of undesignated preferred stock with a par value of $0.001 per
share. At April 30, 2011 and 2010, no shares of preferred stock had been issued.
(11) Share-Based Compensation
Prior to August 2001, the Company maintained qualified and nonqualified stock option plans. As of April 30,
2011, the Company had 90,000 shares remaining of common stock for issuance under these plans. There are no
options available for future grant under these plans as of April 30, 2011.
F-16
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
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, 2011, the Company had issued or reserved 430,675 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 were
authorized for issuance under the 2006 Stock Incentive Plan. On October 2, 2009, an amendment to the 2006 Stock
Incentive Plan was approved, increasing the aggregate number of shares authorized for issuance by 850,000 shares
to 1,653,215. As of April 30, 2011, the Company had issued share-based awards for 1,042,089 shares of common
stock and had reserved an additional 611,126 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) shares of common stock
worth $20,000, which vest proportionately over three years, starting on the first anniversary of the grant, or (b) an
equivalent amount of options based on the Black-Scholes formula, to purchase shares of common stock that is fully
vested at the time of grant. 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.
(a) Stock Options
A summary of stock options under the plans described above is as follows:
Shares Under
Option
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
(In Years)
Outstanding May 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,445,302
(130,510)
317,471
Outstanding April 30, 2009 . . . . . . . . . . . . . . . . . . . . . . .
1,632,263
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(588,018)
331,208
Outstanding April 30, 2010 . . . . . . . . . . . . . . . . . . . . . . .
1,375,453
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(305,223)
283,705
Outstanding April 30, 2011 . . . . . . . . . . . . . . . . . . . . . . .
1,353,935
Exercisable April 30, 2011 . . . . . . . . . . . . . . . . . . . . . . .
795,163
$14.61
15.40
8.88
13.43
13.21
6.10
11.87
12.79
5.36
10.30
12.68
5.1
5.2
5.7
3.8
F-17
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
The total intrinsic value of outstanding and exercisable options as of April 30, 2011 was $453. As of April 30,
2011, approximately 559,000 additional options were expected to vest, which had $792 of intrinsic value and a
weighted average remaining contractual term of 8.4 years. There was $940,309, $913,233 and $1,416,899 of total
recognized compensation cost related to employees for stock options during the years ended April 30, 2011, 2010
and 2009, respectively. As of April 30, 2011, there was approximately $1,842,000 of total unrecognized com-
pensation cost related to non-vested stock options granted under the plans. This cost is expected to be recognized
over a weighted-average period of 3.2 years. The Company normally issues new shares to satisfy option exercises
under these plans.
Certain options were granted to consultants during the years ended April 30, 2011, 2010 and 2009. The
Company has charged compensation expense of $23,691, $5,002 and $36,451 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, 2011, 2010 and 2009, respectively.
(b) Restricted Stock
Compensation expense for restricted stock is generally recorded based on its market value on the date of grant
and recognized ratably over the associated service and performance period. There were 33,620, 157,217 and
44,992 shares of restricted stock granted to employees and non-employee board members with service and/or
performance-based vesting requirements during the years ended April 30, 2011, 2010 and 2009, respectively.
A summary of non-vested restricted stock under the plans is as follows:
Issued and unvested at May 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Shares
—
44,992
—
(624)
Issued and unvested at April 30, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,368
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,217
(22,000)
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(22,461)
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued and unvested at April 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,124
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,620
(5,000)
(34,791)
Issued and unvested at April 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,953
Weighted
Average
Price per
Share
—
6.65
—
8.01
6.63
6.29
6.27
6.55
6.35
5.32
6.40
6.17
6.16
There was $476,789, $159,700 and $58,316 of total recognized compensation cost relating to restricted stock
granted to employees during the years ended April 30, 2011, 2010 and 2009, respectively. Certain shares of
restricted stock were granted to non-employee directors during the years ended April 30, 2011, 2010 and 2009,
respectively. The Company recorded compensation expenses of $7,497, $40,000 and $39,987 in 2011, 2010 and
2009, respectively. In 2009, the shares were not issued as of April 30, 2009, and accordingly the liability was
included in accrued expense. As of April 30, 2011, there was approximately $508,000 of total unrecognized
compensation cost related to non-vested restricted stock granted under the plans. This cost is expected to be
recognized over a weighted average period of 1.9 years.
F-18
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(c) Treasury Stock
During the years ended April 30, 2011 and 2010, 6,613 and 1,072 shares of common stock, respectively, were
purchased by the Company from employees to pay taxes related to the vesting of restricted stock.
(12)
Income Taxes
Tax Rate Reconciliation
The effective income tax rate differed from the percentages computed by applying the US federal income tax
rate of 34% to loss before income taxes as a result of the following:
Computed “expected” tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended April 30,
2011
2009
2010
(34)% (34)% (34)%
(5)
1
(2)
1
1
3
33
(5)
1
(2)
—
2
(1)
39
(5)
1
(1)
1
1
4
33
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)% —% —%
Significant Components of Deferred 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,
2011
2010
Deferred tax assets:
Federal net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . .
Foreign net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . .
New Jersey state net operating loss carryforwards . . . . . . . . . . . . . . . .
Federal research and development tax credits . . . . . . . . . . . . . . . . . . .
Foreign research and development tax credits . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized research and development costs, net of amortization . . . . .
Unrealized foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,978,000
4,905,000
3,587,000
1,914,000
731,000
2,548,000
766,000
333,000
737,000
407,000
20,818,000
3,777,000
3,035,000
1,562,000
670,000
2,307,000
—
231,000
428,000
271,000
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,906,000
33,099,000
Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(39,906,000)
(33,099,000)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
F-19
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
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 are utilized. As of April 30, 2011 and 2010, based upon the level of
historical taxable losses, valuation allowances of $39,906,000 and $33,099,000, respectively, were recorded to fully
offset deferred tax assets. The valuation allowance increased $6,807,000, $7,550,000 and $6,097,000 during the
years ended April 30, 2011, 2010 and 2009, respectively.
As of April 30, 2011, the Company had net operating loss carryforwards for federal income tax purposes of
approximately $70,500,000, which begin to expire in 2012. The Company also had federal research and exper-
imental tax credit carryforwards of approximately $1,914,000 as of April 30, 2011, 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. The Company has determined that such an
ownership change, as described in Section 382 of the Internal Revenue Code, occurred in conjunction with the
Company’s US initial public offering in April 2007. The Company’s annual Section 382 limitation is approximately
$3,300,000. The Section 382 limitation is cumulative from year to year, and thus, to the extent net operating loss or
other credit carryforwards are not utilized up to the amount of the available annual limitation, the limitation is
carried forward and added to the following year’s available limitation. The Company has not performed additional
analysis on ownership changes that may have occurred subsequently to further limit the ability to utilize net tax
attributes. As of April 30, 2011, the Company had state net operating loss carryforwards of approximately
$58,100,000, which begin to expire in 2026, which also may be limited to utilization limitations. As of April 30,
2011, the Company had foreign net operating loss carryforwards of approximately $17,500,000, which begin to
expire in 2024. The ability to utilize these carryforwards may also be limited in the event of a historic ownership
change.
During the year ended April 30, 2011, the Company sold $4,446,000 of its New Jersey State net operating
losses resulting in the recognition of an income tax benefit of $364,105 recorded in the Company’s Statement of
Operations.
The Company applies the guidance issued by the FASB for the accounting and reporting of uncertain tax
positions. The guidance requires the Company to recognize in its consolidated financial statements the impact of a
tax position if that position is more likely than not to be sustained upon examination, based on the technical merits
of the position. At April 30, 2011, 2010 and 2009, the Company had no unrecognized tax positions. The Company
does not expect any material increase or decrease in its income tax expense in the next twelve months, related to
examinations or uncertain tax positions. US federal and state income tax returns were audited through fiscal 2007.
Net operating loss and credit carryforwards since inception remain open to examination by taxing authorities, and
will continue to remain open for a period of time after utilization.
The Company does not have any interest or penalties accrued related to uncertain tax positions as it does not
have any unrecognized tax benefits.
(13) Commitments and Contingencies
(a) Operating Lease Commitments
The Company leases office, laboratory, manufacturing and other space in Pennington, New Jersey, Warwick,
United Kingdom and Santander, Spain under operating leases that expire on various dates through April 30, 2013.
Rent expense under operating leases was approximately $525,000, $579,000 and $606,000 for the years ended
F-20
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
April 30, 2011, 2010 and 2009, respectively. Future minimum lease payments under operating leases as of April 30,
2011 are as follows:
Year ending April 30:
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $326,000
248,000
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$574,000
(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.
(c) Spain Construction Agreement
The Company is currently engaged in discussions with Iberdrola Cantabria (see Note 2(a)) regarding
modifications to its agreement for the first phase of the construction of a wave power station off the coast of
Spain. This phase was due to be completed by December 31, 2009. If no modification is agreed to by the parties, the
customer may, subject to certain conditions in the agreement, terminate the agreement and would not be obligated to
make any more milestone payments. The agreement also provides that the customer may seek reimbursement for
direct damages only, limited to amounts specified in the agreement, if the Company is in default of its obligations
under the agreement. As of April 30, 2011, the Company does not believe that the outcome of this matter will have a
material adverse effect on the Company’s financial position or results of operations.
(14) Quarterly Financial Data (Unaudited)
Fiscal Year 2011
Jul 31
Three Months Ended
Oct 31
Jan 31
Apr 30
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,374,407
(213,839)
Gross (loss) profit . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . .
(6,268,535)
Net loss attributable to Ocean Power
Technologies, Inc.
. . . . . . . . . . . . . . . . .
Basic and diluted net loss per share . . . . . . . $
(6,266,593)
(0.61)
1,864,407
87,427
(5,738,888)
1,523,601
70,204
(3,841,082)
1,928,667
491,853
(5,434,285)
(5,499,192)
(0.54)
(3,362,818)
(0.33)
(5,307,271)
(0.51)
Fiscal Year 2010
Jul 31
Three Months Ended
Oct 31
Jan 31
Apr 30
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,310,937
286,710
Gross profit . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . .
(3,240,961)
Net loss attributable to Ocean Power
Technologies, Inc.
. . . . . . . . . . . . . . . . .
Basic and diluted net loss per share . . . . . . . $
(2,098,477)
(0.21)
F-21
581,875
53,727
(5,562,854)
856,482
165,392
(6,073,657)
2,352,017
296,527
(6,385,204)
(5,191,771)
(0.51)
(5,649,496)
(0.55)
(6,230,563)
(0.61)
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(15) 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.
Geographic information is as follows:
North America
Year Ended April 30, 2011
Asia and
Australia
Europe
Total
Revenues from external customers . . . . . . . $ 5,609,789
(19,443,565)
Operating loss . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . .
619,861
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 47,697,028
853,939
(1,676,354)
172,231
4,935,922
227,354
(162,871)
—
919,628
6,691,082
(21,282,790)
792,092
53,552,578
Revenues from external customers . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
North America
$ 4,580,872
(20,068,920)
448,022
$ 67,424,387
Year Ended April 30, 2010
Asia and
Australia
Europe
Total
431,801
(934,638)
262,541
4,684,104
88,638
(259,118)
—
869,702
5,101,311
(21,262,676)
710,563
72,978,193
North America
Year Ended April 30, 2009
Asia and
Australia
Europe
Total
Revenues from external customers . . . . . . . $ 2,944,361
(15,870,696)
Operating loss . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . .
524,231
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 81,006,430
1,016,223
(2,475,659)
373,429
7,677,316
88,861
(345,918)
58
110,160
4,049,445
(18,692,273)
897,718
88,793,906
F-22
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Senior Management Team
Charles F. Dunleavy*
Chief Executive Officer
Company Secretary
Brian M. Posner
OCEAN POWER TECHNOLOGIES, INC.
Directors
J. Victor Chatigny
President of Grampian Group, Inc.
Charles F. Dunleavy
Chief Executive Officer of
Ocean Power Technologies, Inc.
Paul F. Lozier
Retired Senior Investment Banker &
Managing Director of
Merrill Lynch & Co.
Thomas J. Meaney
President and Chief Executive Officer
of Mikros Systems Corp.
Seymour S. Preston III
Vice-Chairman and Lead Independent
Director of Ocean Power Technologies, Inc..
President of The Millrace Group
Dr. George W. Taylor
Executive Chairman of
Ocean Power Technologies, Inc.
Philip R. Hart
Chief Technology Officer
Michael G. Kelly
Vice President of Operations
Angus T. Norman
Chief Executive
Ocean Power Technologies Limited
Brian M. Posner*
Chief Financial Officer,
Treasurer and Secretary
Dr. George W. Taylor*
Executive Chairman
* Denotes Executive Officers
Independent Registered Public
Accounting Firm
KPMG LLP
1601 Market Street
Philadelphia, PA 19103-2499
USA
Legal Advisor
Drinker Biddle & Reath LLP
105 College Road East
Princeton, NJ 08542-0627
USA
Registrar
Computershare Investor Services
250 Royal Street
Canton, MA 02021-1011
US & Canada: 800-662-7232
International: 781-575-4238
www.computershare.com
Bankers
Barclays Bank Plc
1 Churchill Place
London E14 5HP
UK
PNC Bank
76 Nassau Street
Princeton, New Jersey 08540
USA
Share Price Information
The Company’s share price is quoted on the NASDAQ Global Market under the symbol OPTT. Go to www.nasdaq.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, New Jersey 08534
USA
Website Address: www.oceanpowertechnologies.com
Ocean Power Technologies Limited
Warwick Innovation Centre
Gallows Hill
Warwick CV34 6UW
UK
Hawaii PowerBuoy
Grid Connected September 2010
Ocean Power Technologies, Inc.