M a k i n g W a v e s i n P o w e r
Annual Report
For The Year Ended
April 30, 2012
Littoral Expeditionary Autonomous PowerBuoy (LEAP)
Final systems check
Deployment
process
Fully operational LEAP
PowerBuoy the day after
having withstood
50 foot waves from
Hurricane Irene
Front cover: LEAP PowerBuoy deployed
20 miles off the coast of New Jersey
Ocean Power Technologies (OPT) is a leading renewable energy company specializing
in cost-effective, advanced, and environmentally sound wave power technology. OPT’s PowerBuoy® system
integrates patented technologies in hydrodynamics, electronics, energy conversion, and computer control
systems to extract the natural energy in ocean waves. The result is a leading-edge, ocean-tested, proprietary
system that turns wave power into reliable, clean, and environmentally beneficial electricity.
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 2012
FY 2011
% Change
5.7
16.6
(15.2)
33.2
37.4
0.35
5.3
32.1
6.8
6.7
21.7
(20.5)
48.3
53.6
0.45
7.1
46.5
8.9
-14%
-24%
26%
-31%
-30%
-22%
-25%
-31%
-24%
Total Revenues
Millions of U.S. dollars
Percentage Revenue Breakdown
By geographical location of customers
6.7
5.7
5.1
2%
9%
3%
13%
3%
33%
89%
84%
Asia and
Australia
Europe
United
States
64%
2010
2011
2012
2010
2011
2012
Dear Shareholder,
Fiscal 2012 was a year of accomplishment for Ocean Power Technologies, and we are proud to report our
progress as well as highlight activities that we see shaping Fiscal 2013. 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.
Highlights of Fiscal 2012 include the following:
•
•
•
•
•
•
The Company reduced its operating loss by 22% to $16.6 million for the year versus $21.3 million in
Fiscal 2011, primarily reflecting a significant decrease in product development costs.
For the US Navy’s maritime security program, we successfully operated an autonomous LEAP
PowerBuoy® off the coast of New Jersey – surviving Hurricane Irene and its 50-foot high waves.
The Company commenced work under contract from the European Union, for our €2.2 million
WavePort project in Spain, which is expected to showcase advancements in OPT’s energy conversion
technology.
We completed ocean testing of our first utility-scale PB150 off Scotland, reporting excellent operating
performance data.
OPT remains on track to complete construction of a PB150 PowerBuoy for a major project at
Reedsport, Oregon. Factory testing of the device’s next generation power take-off (“PTO”) has been
completed, and the unit has been shipped to Oregon Iron Works for integration into the spar in
preparation for ocean testing. The buoy is expected to be ready for deployment late this summer.
We again finished the year with a solid backlog, valued at $6.8 million, and total cash, cash
equivalents, restricted cash and investments of $33.2 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.
Fiscal 2013 got off to a strong start as Ocean Power Technologies signed a teaming agreement with Lockheed
Martin Corporation with the goal to develop a 19 megawatt wave energy project in Victoria, Australia. Lockheed
Martin will assist with the design of OPT’s PowerBuoy technology, lead the production and system integration
of the wave-energy converters, and support overall project management.
This project is expected to be developed by a special purpose Australian company named Victorian Wave
Partners Ltd., currently owned by our subsidiary Ocean Power Technologies (Australasia) Pty Ltd. We are now
working with Lockheed Martin and actively pursuing financing opportunities and power purchase agreements
with local industry and utilities. The project already includes a previously announced grant of A$66.5 million
from the Commonwealth of Australia’s Department of Resources, Energy and Tourism conditional upon receipt
of additional capital commitments towards the project. The 19 megawatt power station could supply electricity
for up to 10,000 homes. We have begun the permitting process for the project and thus far, have received
positive support from the community. OPT is very appreciative of the Australian Government’s continued
support for this project off the coast of Portland, Victoria.
During Fiscal 2012, we worked closely with our partner, Mitsui Engineering & Shipbuilding in Japan, on the
next steps in the development of our PowerBuoy project there. Analysis and design work is expected to
continue through much of Fiscal 2013, before we move to the planned next phase for in-ocean operation of a
system off the coast of Japan. With the growing focus in that country on renewable energy, we hope that our
current efforts will result in a significant opportunity for multi–megawatt PowerBuoy wave power stations there.
In the United States, OPT made significant progress in 2012 with regard to our project in Reedsport, Oregon,
which has received funding support from the US Department of Energy and PNGC Power, a power cooperative
serving the northwest portion of the United States. We recently announced the successful completion of
rigorous testing on our next generation PTO. This PTO was developed to be more durable, involve less
maintenance, and provide better long-term efficiency than our previous hydraulic design – an important step
forward for our core technology applicable to both the utility and autonomous power markets.
The PTO has been shipped to Oregon for integration with the rest of the PB150, after which some additional
testing will take place prior to final assembly. Then, the entire PB150 will be transported from Portland to the
Reedsport/Coos Bay coastal area for final staging. We expect the PB150 will be ready for ocean deployment in
late summer 2012, with exact timing determined by weather conditions. Lockheed Martin is providing design,
manufacturing, and supply chain management expertise on this project to enhance our technology as we
move towards larger-scale commercialization.
We also began exciting work in Spain during Fiscal 2012 related to our €2.2 million WavePort project to
design, supply and deploy a PowerBuoy with an advanced energy conversion system that includes a new wave
assessment model. The grant to OPT by the European Union under its Seventh Framework Programme for
research and innovation is part of a total award of €4.5 million made by the EU to a consortium of enterprises,
and substantial progress has already been made along with our partners: the United Kingdom’s University of
Exeter, DeGima in Spain, the Wave Energy Centre of Portugal, and Norway’s Fugro-Oceanor.
The new system is expected to assess the characteristics of incoming waves prior to them reaching the
PowerBuoy, allowing more time for OPT’s proprietary electronic tuning system to react. This could significantly
boost the power output of the buoy and reduce the cost per megawatt hour of energy produced. The
PowerBuoy being built for the project is planned to be installed at an existing OPT-developed mooring site off
Santoña, Spain.
We also continued development of our next generation PowerBuoy in Fiscal 2012, leveraging a $2.4 million
contract from the US Department of Energy announced in September 2010 for further design and development
of this next generation device. Our goal is to build a more durable buoy that generates greater power output
with lower cost per megawatt hour produced.
Another very important milestone for Ocean Power Technologies during Fiscal 2012 was the operation of
our autonomous LEAP unit off the coast of New Jersey. This autonomous, or non-grid-connected, buoy is
significantly smaller and more compact than our utility PowerBuoys. It exceeded the project specifications for
payload power delivery and even withstood the onslaught of Hurricane Irene with waves over 50 feet high. The
PowerBuoy was designed to provide persistent energy for the US Navy’s on-board radar and communications
payload, which called for continuous power of 150 watts. The actual results showed that the PowerBuoy
supplied constant power in excess of 400 watts throughout the entire deployment period and produced peak
sustained electrical power of 1,500 watts. This level of performance more than supported the payload 24
hours a day, 7 days a week, for the duration of the ocean operations. In fact, the on-board power management
and storage system allowed the payload to be operational even during extended periods of zero wave activity.
The LEAP PowerBuoy operated on a fully autonomous basis, implementing the requisite power management
and self-protection functions without the need for human intervention. These results demonstrated strong
performance under our contract with the US Navy for their maritime security mission.
More broadly, the fact that our autonomous PowerBuoys can offer the ability to supply persistent levels of
power – even during extended periods of calm water - represents an entirely new offering to satisfy offshore
energy needs for a multitude of applications. We are currently in dialogue with potential customers within the
oil and gas industry as well as oceanographic data-analysis initiatives and desalination companies. We believe
that our autonomous PowerBuoys could replace customers’ diesel generators which are costly, dirty, and
require frequent maintenance. We are allocating more resources into developing these attractive end markets
for our autonomous PowerBuoy.
During fiscal year 2012, leadership changes were made to the OPT team. Tim Stiven was appointed as
Managing Director of Ocean Power Technologies Limited, OPT’s UK-based, wholly-owned subsidiary. Tim
is responsible for all of OPT’s UK and European operations. During his career, Tim has held a number of
positions involving marine engineering and sustainable energy. At QinetiQ, an international defense and
security company, he led new market ventures in the energy & environmental markets. In addition, as a Marine
Engineer Officer in the Royal Navy, he specialized in leading complex technology development programs to
meet the Royal Navy’s future equipment requirements.
We also announced in Fiscal 2012 two new members of our Board of Directors – David Davis and Bruce
Peacock. David is a Vice President of PJM Grid Development for the independent power producer NRG
Energy. PJM International is the largest Independent System Operator in North America. David brings strong
relationships with regulators, legislators, and other stakeholders within both the renewable and conventional
energy sectors, with over 20 years of applicable experience.
Bruce, currently the Chief Business Officer of Ophthotech, a biopharmaceutical company, has over 30
years experience at companies with international operations, bringing new products to commercial status in
regulatory-driven markets. Both David and Bruce have already played active roles in shaping our strategy for
fiscal 2013 and beyond.
In summary, Ocean Power Technologies continues to gain traction towards full commercialization of our
PowerBuoy technology. We are very excited about the progress we have made to date and believe Fiscal
2013 will see the achievement of additional milestones on our path to profitability. The opportunities that we
have before us follow from the hard work and dedication of our employees and the steadfast support of our
commercial partners. We see a growing requirement for reliable, efficient, clean power worldwide, and OPT
intends to be a major player in providing long-lasting, ocean-based energy for generations to come.
Once again, our thanks to our investors for their support, passion, and interest in our groundbreaking
technology. We look forward to sharing the events of Fiscal 2013 as they unfold.
Charles F. Dunleavy
Dr. George W. Taylor
Chairman & Chief Executive Officer
Executive Vice Chairman
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, 2012
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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
Common Stock, par value $0.001
Name of Exchange on Which Registered
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 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 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
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 No
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
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the common stock of the registrant held by non-affiliates as of October 31, 2011, the last business day
of the registrant's most recently completed second fiscal quarter, was $37.1 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, 2012 was 10,382,060.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of the Form 10-K into Which Incorporated
Proxy Statement for the registrant's 2012 Annual Meeting of
Stockholders .............................................................................
III
OCEAN POWER
TECHNOLOGIES, INC.
INDEX TO REPORT ON FORM 10-K
Item 1:
Item 1A:
Item 1B:
Item 2:
Item 3:
Item 4:
Item 5:
Item 6:
Item 7:
Item 7A:
Item 8:
Item 9:
Item 9A:
Item 9B:
Item 10:
Item 11:
Item 12:
Item 13:
Item 14:
PART I
Business .......................................................................................................................................
Risk Factors .................................................................................................................................
Unresolved Staff Comments ........................................................................................................
Properties .....................................................................................................................................
Legal Proceedings ........................................................................................................................
(Removed and Reserved) .............................................................................................................
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ..........................................................................................................................
Selected Financial Data ................................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations .......
Quantitative and Qualitative Disclosures About Market Risk .....................................................
Financial Statements and Supplementary Data ............................................................................
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ......
Controls and Procedures ..............................................................................................................
Other Information ........................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance ...........................................................
Executive Compensation .............................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .........................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence .............................
Principal Accountant Fees and Services ......................................................................................
Page
1
19
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Item 15:
PART IV
Exhibits and Financial Statement Schedules ................................................................................
48
PowerBuoy® is a registered trademark of Ocean Power Technologies, Inc. The Ocean Power Technologies logo,
CellBuoy®, Talk on Water®, Making Waves in Power® and Powertower® 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.
i
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 uncertainties, 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.
ii
ITEM 1. BUSINESS
Overview
PART I
We develop and are seeking to commercialize proprietary systems that generate electricity by harnessing the
renewable energy of ocean waves. Our PowerBuoy® systems use proprietary technologies to convert the mechanical
energy created by the rising and falling of ocean waves into electricity. We currently offer two PowerBuoy products,
which consist of our utility PowerBuoy system and our autonomous PowerBuoy system. We also offer our customers
operations and maintenance services for our PowerBuoy systems. In addition, we market our undersea substation pod
product and undersea power connection infrastructure services to other companies in the marine energy sector. Since
fiscal 2002, the US Navy and other government agencies have accounted for a significant portion of our
revenues. These revenues were largely for the support of our product development efforts. Our goal, over time, is to
generate revenues from utilities and other non-government commercial customers and to have such revenues represent a
greater portion of our total revenues. In addition, our goal in the future is that an increased portion of our revenues will
be from the sale of products and maintenance services, as compared to revenue to support our product development
efforts.
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:
• 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
installations. The Lloyd’s Register process included detailed design analysis and appraisals, addressing the
PB150’s structure, hydrodynamics, mooring and anchoring. This PowerBuoy was deployed off the coast of
Scotland from April 2011 through October 2011. We are currently seeking a commercial partner or customer for
this buoy.
• Our autonomous PowerBuoy system is designed to generate power for use independent of the power grid in
remote locations. We have successfully operated an autonomous PowerBuoy® off the coast of New Jersey,
which we designed and manufactured under the US Navy’s Littoral Expeditionary Autonomous PowerBuoy
(LEAP) program for coastal security and maritime surveillance. The LEAP PowerBuoy structure, incorporating a
unique power take-off and onboard system for energy storage and management, is significantly smaller than our
standard utility PowerBuoy. With the funding from the US Navy, we have been able to refine our PowerBuoy
system while simultaneously preparing for commercial deployment to address a particular customer need. We
believe that the successful deployment of our PowerBuoy system for the US Navy has enhanced our market
visibility. We believe there are a variety of potential applications for this system, including homeland security,
offshore oil and gas platforms, aquaculture and ocean-based communication and data gathering such as for
tsunami warnings and seismic surveys.
1
Our product development and engineering efforts are focused primarily on increasing energy output, reliability
and scalability of the design of our utility PowerBuoy system. Currently, we are marketing PowerBuoys rated at levels
up to 150kW. We have also initiated product development efforts in connection with our 500kW PowerBuoy. Structural
development of the PB500’s major subsystems is in progress, and wave tank testing of models has been completed.
Assuming we are able to reach significant annual manufacturing volume levels of our 500kW PowerBuoy systems and
increase the energy output of our PowerBuoy systems, we believe we will be able 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.
If we achieve economies of scale for our 150kW PowerBuoy systems and improve energy conversion efficiencies,
we expect them to be able to provide a renewable electricity solution that competes in certain local markets where wave
energy resources are very strong, where the current retail price of electricity is relatively high, or where sufficient
subsidies are available.
We expect to market our undersea substation pod (USP) and marine energy infrastructure services to other
companies in the marine energy sector. We completed the successful in-ocean trials of our USP in 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. Our recent commercial relationships are with the following:
• The United States Navy:
- From 2009 to 2012, we ocean-tested our PowerBuoy at the US Marine Corps Base Hawaii at Kanehoe Bay.
The Oahu PowerBuoy was launched under our program with the US Navy for ocean testing and demonstration
of PowerBuoys, including connection to the Oahu grid.
- We operated in 2011 an autonomous PowerBuoy off the coast of New Jersey, designed and manufactured by
us under the US Navy’s Littoral Expeditionary Autonomous PowerBuoy (LEAP) Program for coastal security
and maritime security.
- We have built an autonomous PowerBuoy as the power source for the Navy's Deep Water Active Detection
System (DWADS).
• Pacific Northwest Generating Cooperative (PNGC Power) and the US Department of Energy (DOE), both of
which are providing funding toward the construction, ocean installation, and ocean trials of a 150kW PowerBuoy
near Reedsport, Oregon.
• The Scottish Government, to develop a 150kW PowerBuoy, which was deployed off the coast of Invergordon,
Scotland in 2011.
• The European Union has awarded funding to deploy a PowerBuoy off the coast of Santoña, Spain. We
commenced work under the European Union grant in fiscal year 2012.
• The DOE and the UK Government’s Technology Strategy Board to help fund the scale-up of the power output
per PowerBuoy from the current level of 150kW to 500kW.
• Mitsui Engineering and Shipbuilding, with which we are working to develop a wave power project in Japan.
• Lockheed Martin, which is providing design, manufacturing, system integration and supply chain management
expertise to enhance our technology, under the DOE grant we received for the 150kW PowerBuoy project near
Reedsport Oregon. This builds on previous work conducted by Lockheed Martin and OPT. In addition, both
companies entered into a teaming agreement with the goal of developing a 19MW wave energy project in
Victoria, Australia.
2
We were incorporated under the laws of the State of New Jersey in April 1984 and began commercial operations
in 1994. On April 23, 2007, we reincorporated in Delaware. Our principal executive offices are located at 1590 Reed
Road, Pennington, New Jersey 08534, and our telephone number is (609) 730-0400. Our website address is
www.oceanpowertechnologies.com. We make available free of charge on our website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is filed electronically with the Securities and Exchange Commission, or SEC. The
information on our website is not a part of this Annual Report. Our common stock has been listed on the NASDAQ
Global Market since April 24, 2007, the date on which we commenced our initial public offering in the United States.
Our Market
According to the World Energy Council, wave energy has the potential to produce around 2,000 terawatt hours of
electricity a year, or enough power to meet 10% of the world’s current energy needs. Global demand for electric power
is expected to increase from 19.1 trillion kilowatt hours in 2008 to 35.2 trillion kilowatt hours by 2035 according to
Energy Information Administration’s Outlook 2011.
According to a January 11, 2011 report from Bloomberg New Energy Finance, nearly $243 billion was invested
in low carbon energy worldwide during 2010, representing a 23% increase over 2009 investments. This includes wind,
solar, biomass, geothermal and hydropower, increased efficiencies and smart-grid technologies and biofuels, as well as
carbon capture and storage technologies. There are a variety of factors 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. These factors include:
• 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.
• 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.
• 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.
• 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.
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.
• 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 we expect would occupy less of the ocean surface than an offshore wind power station of
equivalent capacity.
3
• 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.
• 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.
• 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 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.
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, proprietary 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. By making these electrical adjustments automatically, the PowerBuoy system is able to
maximize the amount of usable electricity generated from the waves. 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 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.
4
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 up to 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 were conducted in 2011. These ocean trials were conducted at a site
approximately 33 nautical miles from Invergordon, off Scotland’s northeast coast. During the ocean trials, our 150kW
rated PowerBuoy produced power in excess of our expectations of performance. A second PB150 is expected to be ready
for deployment off the coast of Reedsport, Oregon in 2012, with deployment timing dependent principally 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.
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. This PowerBuoy was
deployed from December 2009 to January 2012.
Our product development and engineering efforts are focused primarily on increasing energy output, reliability
and scalability of the design of our utility PowerBuoy system. Currently we are marketing PowerBuoys rated at levels up
to 150kW. We have also initiated product development efforts in connection with our 500kW PowerBuoy. Structural
development of the PB500’s major subsystems is in progress, and wave tank testing of models has been completed.
Assuming we are able to reach significant annual manufacturing volume levels of our 500kW PowerBuoy systems and
increase the energy output of our PowerBuoy systems, we believe we will be able 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.
If we achieve economies of scale for our 150kW PowerBuoy systems and improve energy conversion efficiencies,
we expect them to be able to provide a renewable electricity solution that competes in certain local markets where wave
energy resources are very strong, where the current retail price of electricity is relatively high, or where sufficient
subsidies are available.
5
Autonomous PowerBuoy System
The autonomous PowerBuoy system is based on similar technology to the utility PowerBuoy system, but is
designed for persistent electricity generation of relatively low amounts of continuous power for use independent of the
power grid, in remote deep-ocean locations. The autonomous PowerBuoy range of products has rated output from 2kW
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, offshore oil
and gas platforms, aquaculture and ocean-based communication and data gathering such as for tsunami warnings and
seismic surveys.
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 provided $2.75 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, we built and in 2011 deployed off the coast of New Jersey a LEAP PowerBuoy structure incorporating that
new power take-off system. The ocean test of the LEAP PowerBuoy further supported the use of our technology as a
persistent power source for systems requiring remote power at sea.
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.
Our PowerBuoy system uses an ocean-tested technology to generate electricity.
• 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 was deployed from December 2009 to January 2012.
During its period of operation in Hawaii, our 40kW-rated PowerBuoy produced power consistent with our
predictive models for the incoming wave conditions. Ocean trials of our first 150kW PowerBuoy were conducted
in 2011. These ocean trials were conducted at a site approximately 33 nautical miles from Invergordon, off
Scotland’s northeast coast. During the ocean trials, our 150kW rated PowerBuoy produced power in excess of
our expectations of performance. The 2011 ocean test of the LEAP PowerBuoy further supported the use of our
technology as a persistent power source for systems requiring remote power at sea. Our PowerBuoy systems
have endured hurricanes, winter storms and tsunami-driven waves while installed in the ocean.
In 2011, The DOE assessed our 150kW rated PowerBuoy as the highest-rated wave energy system for
commercial readiness (Technology Readiness Level 7-8).
6
Our PowerBuoy system's grid connection has been certified and one of our PowerBuoys has been successfully connected
to a grid.
• 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, which was tested 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.
• 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.
• 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.
• 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.
• Our recent projects with PNGC Power, the DOE, the US Navy, Lockheed Martin, Mitsui Engineering and
Shipbuilding, the European Union, and the UK Government’s Technology Strategy Board, provide us with an
initial opportunity to sell our wave power stations for utility applications. By collaborating with leaders in
renewable energy development, we believe we are able to accelerate both our in-house knowledge of the utility
power generation market and our reputation as a credible renewable energy equipment supplier. If these projects
are successful, we intend to leverage our experiences with our projects to add wave power stations, new
customers and complementary revenue streams from operations and maintenance contracts.
• With the funding from the US Navy, we have been able to refine our PowerBuoy system while simultaneously
preparing for commercial deployment to address a particular customer need. We believe that the successful
deployment of our PowerBuoy system for the US Navy has enhanced our market visibility.
Our systems are environmentally benign and aesthetically non-intrusive.
• We believe that our PowerBuoy system does not present significant risks to marine life and does not emit
significant levels of pollutants. For example, in connection with our project at the US Marine Corps Base in
Hawaii, 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 rating. We believe that PowerBuoy systems deployed, 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. In addition, we received a “Finding
of No Significant Impact,” from the DOE after environmental assessment in connection with our Reedsport,
Oregon project.
7
• 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
2010
2012
US Department of Energy ........................................................
US Navy ..................................................................................
UK Government's Technology Strategy Board .......................
European Union (WavePort project) .......................................
32%
29%
20%
13%
28%
52%
14%
-
9%
80%
-
-
These revenues were largely for the support of our product development efforts. Our goal, over time, is to
generate revenues from utilities and other non-government commercial customers and to have such revenues represent a
greater portion of our total revenues. In addition, our goal in the future is that an increased portion of our revenues will
be from the sale of products and maintenance services, as compared to revenue to support our product development
efforts.
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.
US Navy
Hawaii
Beginning in September 2001, we 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 final phase of the project, which was entered into in 2005 and expired in late 2011, we were
reimbursed for costs and paid a fixed fee. From December 2009 to January 2012, we deployed our PB40-rated
PowerBuoy. The PowerBuoy was connected to the grid in September 2010 in Hawaii. This project successfully met its
objective by demonstrating the potential of wave power to reduce fossil fuel consumption at Navy and Marine bases
around the world. We are currently exploring other potential wave power system projects in Hawaii with the US Navy.
LEAP
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 $2.75 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. 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, we built and deployed a LEAP PowerBuoy structure, incorporating that new power take-off
system. The LEAP system was deployed in 2011 by a US Coast Guard vessel and was ocean-tested approximately 20
miles off the coast of New Jersey. It was integrated with the Rutgers University-operated land-based radar network that
provides ocean current mapping data for the National Oceanographic and Atmospheric Administration (NOAA) and US
Coast Guard search and rescue operations. The ocean test of the LEAP vessel detection system demonstrated dual-use
capability of the radar network and helped to verify our technology as a persistent power source for systems requiring
remote power at sea. The LEAP PowerBuoy continued to operate during Hurricane Irene.
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DWADS
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.
Reedsport, Oregon Project
We are developing what we expect will be the first US commercial wave park off the coast of Reedsport, Oregon.
The project will be built in phases: one PB150 (non-grid connected); up to ten PB150s for a total of 1.5MW, grid-
connected, scaling up to 50MW, grid-connected. Phases subsequent to the deployment and commissioning of the initial
PB150 are dependent upon us achieving additional project funding. 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 50MW 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.
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 for the
Reedsport project from the DOE of $2.4 million. This award will be used for final assembly, deployment and ocean
trials of the first PowerBuoy.
This PowerBuoy is expected to be ready for deployment in 2012, with deployment timing principally dependent
on weather conditions.
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.
In September 2011, we announced that we will collaborate with Lockheed Martin in connection with our
proposed commercial-scale wave power generation project at Reedsport. Under this collaboration, Lockheed Martin is
providing design, manufacturing, system integration and supply chain management expertise to enhance our PowerBuoy
technology. This builds on previous work conducted by Lockheed Martin and us.
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
9
will focus on increasing the power extraction efficiency and reliability. Structural 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. Ocean trials of our first 150kW PowerBuoy were conducted in 2011. These
ocean trials were conducted at a site approximately 33 nautical miles from Invergordon, off Scotland’s northeast coast.
During the ocean trials, our 150kW rated PowerBuoy produced power in excess of our expectations of performance. Our
utility scale PB150 structure and mooring system achieved independent certification from Lloyd’s Register. This
certification from Lloyd’s Register confirms that the PB150 design complies with the requirements of Lloyd’s 1999
Rules and Regulations for the Classification of Floating Offshore Installations at Fixed Locations.
We are seeking a customer for the commercial utilization of the buoy, including its deployment at various
potential sites.
Spain
2006 Spain Project
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 (2006 Spain Construction Agreement). In January 2007, the parties entered into a
corresponding operations and maintenance agreement. Under the 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 construction agreement and were to be separately agreed upon.
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. In
November 2010, we agreed to negotiate with Iberdrola Cantabria with the goal of cancelling the remaining obligations
between the parties under the 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. Negotiations are underway for such efforts and are still ongoing. If no
modification to the 2006 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 construction agreement, for the failure
of the PowerBuoy to meet certain performance thresholds. We do not expect the termination of the 2006 Spain
Construction Agreement or potential liability for damages to materially adversely affect our financial condition.
WavePort Project
In March 2010, we announced the award of €2.2 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 €4.5 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. We commenced work under this grant in fiscal 2012.
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Australia
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. In 2009, Leighton
formed Victorian Wave Partners Pty. Ltd. (VWP), a special purpose company for the development of a 19MW 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
subject to certain terms, including funding milestones, which require significant additional funding to enable the receipt
of the grant funds and the completion of the project.
In March 2012, our Australian subsidiary Ocean Power Technologies (Australasia) Pty Ltd acquired 100%
ownership of Victorian Wave Partners from Leighton. Leighton may still participate as a service provider to the project.
In July 2012, we entered into a teaming agreement with Lockheed Martin with the goal of developing a 19MW
wave energy project in Victoria, Australia. In order to expedite development of this project, Lockheed Martin plans to
assist us with PowerBuoy design, lead the production and system integration of the wave energy converters, and support
overall program management. Working with Lockheed Martin, we are assessing various financing opportunities for the
project as well as potential purchase power agreements with local industry and utilities.
Japan
We are presently working with Mistui Engineering & Shipbuilding Co. (MES) to identify prospective sites for a
demonstration wave power station in Japan. 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 2012, we are currently working with
MES in testing the feasibility of our technology to perform in Japanese sea conditions, with the near-term goal of
deploying one of our PowerBuoys in Japan and a longer-term goal of a Japan-based scaleable power station of at least
10MW capacity. In 2012, we recorded $191,000 of revenue in connection with these efforts with MES.
United Kingdom
In February 2006, we received approval from the UK Government’s Technology Strategy Board 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 seeking funding for the deployment of our PowerBuoy
systems at this site.
Backlog
At April 30, 2012, our total negotiated backlog was $6.8 million compared with $8.9 million at April 30, 2011.
This backlog consists largely of orders to support our product development. 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 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 DOE 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 $4.8 million and $6.9 million at April 30, 2012 and 2011,
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.
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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:
• 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.
• 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.
• 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.
• Continue to increase PowerBuoy system output. Our product development and engineering efforts are focused
on increasing the energy output of the design of our PowerBuoy systems from up to 40kW, and 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 increase the output of the
system. We believe that by increasing system output of the individual PowerBuoy, and also by increasing
volume production of the PowerBuoys, we will be able to decrease the cost per kilowatt of our PowerBuoy
system and the cost per kilowatt hour of the energy generated.
• 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 may serve as a prototype wave power
station for the installation of wave power stations at other US Navy bases and at other international sites. 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.
• 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 autonomous 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, offshore oil and gas
platforms, aquaculture and ocean-based communication and data gathering such as for tsunami warnings and
seismic surveys. 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.
• 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 DOE and $2.3 million from
the UK Government’s Technology Strategy Board for PB500 development.
• 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 Lockheed Martin in the US and Australia,
and with Mitsui Engineering and Shipbuilding in Japan.
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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 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, offshore 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 performance 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
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control over the course of construction, subject to our review of the quality test procedures and results. After each vendor
completes testing of the component, it is transported ready-to-install to the project site.
Upon arrival at the project site, the generator and control modules are integrated with the balance of the
components of the PowerBuoy system. We are highly dependent on our third-party suppliers; however, we actively
manage key steps in the supply chain. We act as the general contractor, and retain the ultimate responsibility for building
the PowerBuoy wave power station, and installing, testing and deploying the complete wave power station at the project
site. This process requires significant project and contract management by us. We currently employ individuals who
have experience with all aspects of both the manufacturing and engineering contracting processes, and demonstrated
organizational capabilities in these critical areas.
Deployment
For our existing and currently planned deployments, we purchase from subcontractors the mooring system and
cables needed to install the PowerBuoy system and connect it to either the power grid or a remote power site. The
vendor usually transports these components to the project site.
Each step in the deployment process for our existing and currently planned deployments is outsourced to
subcontractors located near the project site. First the mooring system, consisting of floats, anchors and chains, 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 USP, which would then be connected to the
grid or the distributed power site. At this point, we would have a fully assembled PowerBuoy, which subject to final
testing, would be ready for operation. An array of PowerBuoys would be installed using a similar approach, but would
add the deployment of the USP to serve as an aggregator for the energy output of multiple PowerBuoys.
We expect that the subcontractor services required for deployment of a wave power station will be readily
available in the locations where we currently plan to deploy our systems, although we are dependent on third parties for
the entire process. We actively manage each step with personnel who have significant project management and
deployment experience.
Research and Development
Our research and development team consists of employees with a broad range of experience in mechanical
engineering, electrical engineering, hydrodynamics and systems engineering. We engage in extensive research and
development efforts to improve PowerBuoy efficiency, reliability and power output and to reduce manufacturing cost
and complexity. Our research and development efforts are currently focused on 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 technologies. 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 $8.3 million for fiscal 2012, $13.3 million for fiscal 2011
and $13.0 million for fiscal 2010.
We are currently working on the design for our 500kW PowerBuoy. The key to increasing the energy 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 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 are developing, as well as our work on 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 complete 40kW
PowerBuoy systems are transported to the onshore deployment sites using standard flatbed trucks; however, the fully-
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.
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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 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, 2012, we owned a total of 51 issued United States patents and 15 United States patent
applications. We have pending foreign counterparts to 21 of our issued patents and 12 of our pending non-provisional
patent applications.
Our patent portfolio includes patents and patent applications with claims directed to:
• system design;
• control systems;
• power conversion;
• anchoring and mooring; and
• 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 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 Related 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 Water®, CellBuoy® and PowerTower® marks and
our Making Waves in Power® service 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.
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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 most are focused on offshore systems. Only a few of
these companies, like ourselves, have conducted long-term 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 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 (1.5MW). 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.
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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.
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.
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
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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 PTC legislation may expire in 2013.
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 July 1, 2014.
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 price (currently
£0.033 per kilowatt hour) or purchase Renewables Obligation Certificates (ROC) 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, the UK Government announced new
policies on Electricity Market Reform (EMR) which included, among other measures, a floor price for carbon for
electricity generators. 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. In 2017, the existing ROC regime for revenue
support will be replaced by a feed-in-tariff system based on a Contract for Difference mechanism, which will ensure a
fixed revenue for renewable generators, regardless of the market price for “brown” power. Consultation on the exact
structure of the mechanism is ongoing at this time.
In 2011, the Australian Government passed a Carbon Tax Law, which set the initial carbon price at A$23 per ton.
Revenue from this tax will fund A$10 billion to invest in renewable energy, low pollution and energy efficiency
technologies, A$3.2 billion to support R&D, demonstration and commercialization of renewable energy and A$200
million to support business development of clean technologies.
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, 2012, we had 47 employees, consisting of 17 employees in manufacturing, 14 in research,
development and engineering functions and 16 in selling, general and administrative functions. Of these employees, 41
are located in Pennington, New Jersey and 6 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.
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ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors together with the other information contained in this
Annual Report on Form 10-K, and in prior reports pursuant to the Securities Exchange Act of 1934, as amended and the
Securities Act of 1933, as amended. 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 and positive cash flow.
We have incurred net losses since we began operations in 1994, including net losses attributable to Ocean Power
Technologies, Inc. of $15.1 million in fiscal 2012 and $20.4 million in fiscal 2011. As of April 30, 2012, we had an
accumulated deficit of $126.0 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. As we continue to
develop our proprietary technologies, we expect to have a net decrease in cash from operating activities unless or until
we achieve positive cash flow from the planned commercialization of our products and services.
We do not know whether or when we will become profitable because of the significant uncertainties with respect
to our ability to successfully commercialize our PowerBuoy systems in the emerging renewable energy market. Even if
we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we
are unable to achieve and then maintain profitability, the market value of our common stock may decline.
If existing resources are insufficient to satisfy our liquidity requirements or if we acquire or license rights to
additional products or technologies, we may seek to sell additional equity or debt securities or obtain a credit facility.
The sale of additional equity or convertible securities could result in dilution to our stockholders. If additional funds are
raised through the issuance of debt securities, these securities could have rights senior to those associated with our
common stock and could contain covenants that would restrict our operations. Financing may not be available in
amounts or on terms acceptable to us. If we are unable to obtain required financing, we may be required to reduce the
scope of our planned product development and commercialization efforts, which could adversely affect our financial
condition, operating results and the market value of our common stock.
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:
• performance, reliability and cost-effectiveness of wave energy technology compared to conventional and other
renewable energy sources and products;
• developments relating to other renewable energy generation technologies;
• 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;
• overall growth in the renewable energy equipment market;
• availability and terms of government subsidies and incentives to support the development of renewable energy
sources, including wave energy;
• fluctuations in capital expenditures by utilities and independent power producers, which tend to decrease when
the economy slows and interest rates increase; and
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• 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 but have
not yet achieved successful commercialization 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 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 opportunity 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 are substantial and may increase in the future.
Our product development costs primarily relate to our efforts to increase the output, durability and commercial
scalability of our utility PowerBuoy system. Our product development costs were $8.3 million in fiscal 2012 and
$13.3 million in fiscal 2011. 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 increase.
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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 25-year useful life.
We began developing and testing wave energy technology nearly 15 years ago. However, to date we have only
manufactured 15 PowerBuoy systems for use in ocean testing and development. The longest continuous in-ocean
deployment of our PowerBuoy system had been from December 2009 to January 2012. As a result, our PowerBuoy
systems do not have a sufficient operating history to confirm how they will perform over their estimated 25-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.
Our future success in the utility power markets depends on our ability to increase the power, or energy, output of
our utility PowerBuoy system. If we are unable to increase the power 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 power 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.
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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, 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 power output
of our PowerBuoy systems, 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 negotiating a suitable settlement related to the 2006 Spain Construction Agreement, it
could adversely affect our business, financial condition and results of operations.
The initial PB40 PowerBuoy system for our 2006 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 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. If negotiations are unsuccessful and no modification to the existing 2006 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 construction agreement, for failure of the PowerBuoy to meet certain performance
thresholds.
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.
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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 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 revenues and harm
our operating results.
The DOE accounted for 32% of our revenues and the US Navy accounted for 29% of our revenues during fiscal
2012. In fiscal 2011, revenues from the DOE accounted for 28% of our total revenues and the US Navy accounted for
52% of our revenues. In order to receive future funding from the DOE or US Navy, we would be required to enter into
additional contracts with the DOE or US Navy, which would require appropriation by the US Congress and other
government agencies. Additional funding for projects may not be approved or we may not be able to negotiate future
agreements 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, either of 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
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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 project with the Commonwealth of
Australia is conditional upon our receipt of significant 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 companies, due
to their greater capital resources and substantial technical expertise, may be better positioned than we are 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.
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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 2012 and fiscal 2011, we derived 61% and
80%, respectively, of our total revenue from contracts with the DOE and US Navy.
25
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, environmental, 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 36% of our revenues in fiscal 2012 and 16% of our revenues in fiscal 2011. Risks
inherent in international operations include, but are not limited to, the following:
• changes in general economic and political conditions in the countries in which we operate;
• unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to
renewable energy, environmental protection, permitting, export duties and quotas;
• 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;
• 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;
• difficulty with staffing and managing widespread operations;
• 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;
• inability to obtain, maintain or enforce intellectual property rights; and
• 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. The current economic environment, particularly the macroeconomic pressures in certain
European countries, may increase these risks.
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.
26
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:
• delays in permitting or acquiring necessary regulatory consents;
• delays in the timing of contract awards and determinations of work scope;
• delays in funding for or deployment of wave energy projects;
• 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;
• 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;
• reductions in the availability or level of subsidies and incentives for renewable energy sources;
• decisions made by parties with whom we have commercial relationships not to proceed with anticipated
projects;
• increases in the length of our sales cycle; and
• 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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If the renewable energy industry continues to develop and if 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. 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 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 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.
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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 vice-chairman, and Charles Dunleavy, our
chairman and 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 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.
29
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 DOE help fund research and development of our PowerBuoy system.
When new technologies are developed with US federal government funding, the government obtains certain rights in any
resulting patents, technical data and software, generally including, at a minimum, a nonexclusive license authorizing the
government to use the invention, technical data or software for non-commercial purposes. These rights may permit the
government to disclose our confidential information to third parties and to exercise "march-in" rights. March-in rights
refer to the right of the US government to require us to grant a license to the technology to a responsible applicant or, if
we refuse, the government may grant the license itself. US government-funded inventions must be reported to the
government. US government funding must be disclosed in any resulting patent applications, and our rights in such
inventions will normally be subject to government license rights, periodic post-contract utilization reporting, foreign
manufacturing restrictions and march-in rights.
The government can exercise its march-in rights if it determines that action is necessary because we fail to
achieve practical application of the technology or because action is necessary to alleviate health or safety needs, to meet
requirements of federal regulations or to give preference to US industry. Our government-sponsored research contracts
are subject to audit and require that we provide regular written technical updates on a monthly, quarterly or annual basis,
and, at the conclusion of the research contract, a final report on the results of our technical research. Because these
reports are generally available to the public, third parties may obtain some aspects of our sensitive confidential
information. Moreover, if we fail to provide these reports or to provide accurate or complete reports, the government
may obtain rights to any intellectual property arising from the related research. Funding from government contracts also
may limit when and how we can deploy our technology developed under those contracts.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our
technology and products could be adversely affected, which could in turn adversely affect our 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 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.
30
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:
• advance notice requirements for stockholder proposals and nominations;
• the inability of stockholders to act by written consent or to call special meetings; and
• the ability of our board of directors to designate the terms of and issue new series of preferred stock without
stockholder approval, which could be used to institute a "poison pill" that would work to dilute the stock
ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by
our board of directors.
The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to
amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of
directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our
shares of capital stock entitled to vote.
31
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, 2012, the 52-week high and low prices for our common stock were $5.60 and
$2.33, 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 fluctuations could result
in fluctuations in the price of our common stock, which could cause purchasers of our common stock to incur substantial
losses. The market price for our common stock may be influenced by many factors, including:
• the success of competitive products or technologies;
• regulatory developments in the United States and foreign countries;
• developments or disputes concerning patents or other proprietary rights;
• the recruitment or departure of key personnel;
• quarterly or annual variations in our financial results or those of companies that are perceived to be similar to us;
• market conditions in the conventional and renewable energy industries and issuance of new or changed securities
analysts' reports or recommendations;
• the failure of securities analysts to cover our common stock or changes in financial estimates by analysts;
• the inability to meet the financial estimates of analysts who follow our common stock;
• investor perception of our company and of the renewable energy industry; and
• general economic, political and market conditions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
32
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.
We also have an office in Warwick, United Kingdom, where we occupy 1,390 square feet under a lease expiring
on January 1, 2013. Six 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.
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)
33
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."
As of June 30, 2012, there were 315 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
Low
High
Year Ended April 30, 2012
First quarter ....................................................................... $
Second quarter ..................................................................
Third quarter .....................................................................
Fourth quarter ....................................................................
Year Ended April 30, 2011
First quarter ....................................................................... $
Second quarter ..................................................................
Third quarter .....................................................................
Fourth quarter ....................................................................
5.15
5.60
3.92
3.90
7.20
6.85
6.80
5.73
$ 3.25
2.33
2.52
2.60
$ 4.82
4.55
5.12
4.70
Dividend Policy
We have never declared or paid any cash dividends on our common stock, and we do not currently anticipate
declaring or paying cash dividends on our common stock in the foreseeable future. We currently intend to retain all of
our future earnings, if any, to finance the growth and development of our business. Any future determination relating to
our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors,
including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and
covenants and other factors that our board of directors may deem relevant.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains information about our purchases of our equity securities during February, March and
April 2012.
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 1-29, 2012 ........................
March 1-31, 2012 ............................
April 1-30, 2012 ..............................
1,349
―
―
$ 2.87
―
―
―
―
―
―
―
―
(1) Represents shares delivered back to the Company by employees to pay taxes related to the vesting of
restricted shares.
34
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
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 seeking to commercialize proprietary systems that generate electricity by harnessing the
renewable energy of ocean waves. Our PowerBuoy® systems use proprietary technologies to convert the mechanical
energy created by the rising and falling of ocean waves into electricity. We currently offer two PowerBuoy products,
which consist of our utility PowerBuoy system and our autonomous PowerBuoy system. We also offer our customers
operations and maintenance services for our PowerBuoy systems. In addition, we market our undersea substation pod
product and undersea power connection infrastructure services to other companies in the marine energy sector. Since
fiscal 2002, the US Navy and other government agencies have accounted for a significant portion of our
revenues. These revenues were largely for the support of our product development efforts. Our goal, over time, is to
generate revenues from utilities and other non-government commercial customers and to have such revenues represent a
greater portion of our total revenues. In addition, our goal in the future is that an increased portion of our revenues will
be from the sale of products and maintenance services, as compared to revenue to support our product development
efforts. As we continue to advance our proprietary technologies, we expect to have a net decrease in cash from operating
activities unless or until we achieve positive cash flow from the planned commercialization of our products and services.
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 business operations in 1994, and were re-incorporated
in Delaware in 2007. We currently have three wholly-owned subsidiaries, 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 (OPTA). In March 2012, OPTA acquired 100% of Victorian Wave
Partners 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 project for the development and testing
of our wave power systems at the US Marine Corps Base in Oahu, Hawaii. This project included the grid-connection of
one of our utility-grade PowerBuoys at the Marine Corps Base. We generated our first revenue relating to our
autonomous PowerBuoy system from contracts with Lockheed Martin Corporation, or Lockheed Martin, 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. Subsequently, we received
a contract from the US Navy to test our autonomous PowerBuoy system as a power source for the Navy’s Deep Water
Active Detection System (DWADS). In 2011, an autonomous PowerBuoy was deployed for ocean trials off the coast of
New Jersey under a contract from the US Navy under its Littoral Expeditionary Autonomous PowerBuoy (LEAP)
program. The LEAP PowerBuoy, incorporating a unique power take-off and on-board storage system, is significantly
35
smaller and more compact than our standard utility PowerBuoy. It is designed to provide persistent, off-grid clean
energy in remote ocean locations for a wide variety of maritime security, monitoring and other commercial applications.
Also in 2011, ocean trials of our first 150kW PowerBuoy were conducted. These ocean trials were conducted at a site
approximately 33 nautical miles from Invergordon, off Scotland’s northeast coast. During the ocean trials, our 150kW-
rated PowerBuoy produced power in excess of our expectations of performance. Our utility scale PB150 structure and
mooring system achieved independent certification from Lloyd’s Register. This certification from Lloyd’s Register
confirms that the PB150 design complies with the requirements of Lloyd’s 1999 Rules and Regulations for the
Classification of Floating Offshore Installations at Fixed Locations.
At April 30, 2012, our total negotiated backlog was $6.8 million compared with $8.9 million at April 30, 2011.
The decrease in backlog is a result of revenue recognized during the period offset by new orders during fiscal 2012, of
$3.9 million and changes in foreign currency of $0.3 million. New orders during 2012 included a $3.2 million grant from
the European Union related to our WavePort project to enhance the efficiency of our PowerBuoy. We anticipate that a
majority of our backlog will be recognized as revenue over the next 12 months. Most of our backlog at April 30, 2012
and 2011 consisted of cost-sharing contracts as described in the Financial Operations Overview section of this
Management’s Discussion and Analysis. 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 (DOE) 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 $4.8 million and
$6.9 million at April 30, 2012 and 2011, respectively.
Our fiscal year ends on April 30. For fiscal 2012, we generated revenues of $5.7 million and incurred a net loss
attributable to Ocean Power Technologies, Inc. of $15.1 million, and 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. As of April 30,
2012, our accumulated deficit was $126.0 million. We have not been profitable since inception, and we do not know
whether or when we will become profitable because of the significant uncertainties with respect to our ability to
successfully commercialize our PowerBuoy systems in the emerging renewable energy market.
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,
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 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 PTC legislation may expire in 2013.
Further, the US federal and state governments may increase their investments in the renewable energy sector
under various economic stimulus measures. The American Recovery and Reinvestment Act of 2009 provided 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 continue to 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, particularly the macroeconomic pressures in certain European countries,
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
36
additional government funding. In addition, 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 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 the percentage-of-
completion method based on the maximum awarded contract amount. In certain cases, we may choose to incur costs in
excess of the maximum awarded contract amounts 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 that are specified in the contract. Revenue is typically recorded using the
percentage-of-completion method 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 the percentage-of-
completion method 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. Most of our projects in fiscal year 2012 were under cost-sharing contracts.
The following table provides information regarding the breakdown of our revenues by customer for fiscal years
2012 and 2011:
Years Ended
April 30,
($ millions)
2012
2011
US Department of Energy ....................................................... $
US Navy .................................................................................
UK Government's Technology Strategy Board ......................
European Union (WavePort project) ......................................
Others ......................................................................................
$
1.8
1.6
1.1
0.8
0.4
5.7
$
$
1.9
3.5
0.9
-
0.4
6.7
37
The revenue decrease for fiscal 2012 reflected significant decreases in revenue from the US Navy attributable to
the LEAP program and the DWADS project in addition to revenues related to our 150kW PowerBuoy project off the
cost of Oregon. The revenue decrease was partially offset by an increase in revenue from the European Union related to
our WavePort project off the coast of Spain and revenues related to our PB500 PowerBuoy development project. 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 2006 Spain Construction Agreement, and there was no corresponding reduction in cost of revenues.
Overall, the US Navy has been our largest customer since fiscal 2002. The DOE was our largest customer in fiscal
2012 and also a significant customer in fiscal 2011. Combined, these two customers accounted for 61% of our revenues
in fiscal 2012 and 80% of our revenues in fiscal 2011. We anticipate that, if our commercialization efforts are successful,
the relative contribution of these customers to our revenue may decline in the future.
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 2012 and 2011:
Years Ended
April 30,
2012
2011
United States .......................................
Europe .................................................
Asia and Australia ...............................
64%
33%
3%
100%
84%
13%
3%
100%
Cost of revenues
Our cost of revenues consists primarily of incurred material, labor and manufacturing overhead expenses, such as
engineering expense, equipment depreciation and maintenance and facility related expenses, and includes the cost of
PowerBuoy parts and services supplied by third-party suppliers. Cost of revenues also includes PowerBuoy system
delivery and deployment expenses and may include anticipated losses at completion on some contracts.
We operated at a gross profit of $0.1 million and $0.4 million in fiscal 2012 and 2011, respectively. Most of our
revenue recorded in fiscal 2012 was generated from cost-sharing contracts, which result in zero 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. 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
2006 Spain Construction Agreement, and there was no corresponding reduction in cost of revenues.
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.
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
38
securities were $33.2 million as of April 30, 2012 and $48.3 million as of April 30, 2011. Interest income decreased due
to a decline in interest rates and a decline in cash, cash equivalents and marketable securities.
Interest income reported in future years may decrease from fiscal 2012 as a result of a decrease in invested cash.
Foreign exchange loss
We transact business in various countries and have exposure to fluctuations in foreign currency exchange rates.
Foreign exchange gains and losses arise in the translation of foreign-denominated assets and liabilities, which may result
in realized and unrealized gains or losses from exchange rate fluctuations. Since we conduct our business in US dollars
and our functional currency is the US dollar, our main foreign exchange exposure, if any, results from changes in the
exchange rate between the US dollar and the British 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
$2.8 million as of April 30, 2012 and $4.8 million as of April 30, 2011, compared to our total cash, cash equivalents,
restricted cash, and marketable securities balances of $33.2 million as of April 30, 2012 and $48.3 million as of April 30,
2011.
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, 2012 and 2011 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, 2012, we had federal and foreign net operating loss carryforwards of $81.7 million and $18.3
million, respectively, and federal and foreign research and development tax credits of $2.1 million and $0.7 million,
respectively which may be used to offset future taxable income. As of April 30, 2012, we had state net operating loss
carryforwards of $57.7 million. If not utilized, the net operating loss carryforwards and credit carryforwards will expire
at various dates through 2032. 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 $43.7 million as of April 30, 2012 and $39.9 million as of
April 30, 2011.
During the years ended April 30, 2012 and 2011, we sold New Jersey State net operating losses in the amount of
$12.9 million and $4.4 million, respectively, resulting in the recognition of income tax benefits of $1.1 million and $0.4
million, respectively, 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 $15.1 million in fiscal 2012 and $20.4 million in fiscal 2011. As of April 30, 2012, we had an
accumulated deficit of $126.0 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
39
will need to increase revenues and gross profit, control our fixed costs and possibly reduce our unfunded research and
development expenditures.
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, 2012 and 2011
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, 2012 and 2011:
Revenues .................................................................... $ 5,738,506
100 %
Amount
As a % of
Revenues(1)
Amount
$ 6,691,082
As a % of
Revenues(1)
100 %
2011
Period
(14)%
Fiscal Year Ended
April 30, 2012
Fiscal Year Ended
April 30, 2011
% Change
2012
Period to
Cost of revenues .........................................................
5,683,731
99
6,255,437
Gross profit .................................................
54,775
1
435,645
93
7
Operating expenses:
Product development costs .................................
Selling, general and administrative costs ............
8,337,424
8,274,096
145
144
13,319,110
8,399,325
199
126
Total operating expenses ............................ 16,611,520
289
21,718,435
325
Operating loss ............................................................. (16,556,745)
(289)
(21,282,790)
(318)
Interest income, net ....................................................
418,052
Foreign exchange loss ................................................
(104,739)
7
(2)
689,276
(229,415)
10
(3)
Loss before income taxes ........................................... (16,243,432)
(283)
(20,822,929)
(311)
Income tax benefit ......................................................
1,053,427
18
364,105
5
Net loss ....................................................................... (15,190,005)
(265)
(20,458,824)
(306)
(9)
(87)
(37)
(1)
(24)
22
(39)
54
22
189
26
Less: Net loss attributable to the noncontrolling
interest in Ocean Power Technologies (Australasia)
Pty Ltd ........................................................................
Net loss attributable to Ocean Power Technologies,
Inc ............................................................................... $(15,140,502)
49,503
(1) Certain subtotals may not add due to rounding.
—
22,950
—
116
(264)%
$(20,435,874)
(305)%
26%
40
Revenues
Revenues decreased by $1.0 million in fiscal 2012, or 14%, to $5.7 million as compared to $6.7 million in fiscal
2011. The change in revenues was attributable primarily to the following factors:
• Revenues relating to our utility PowerBuoy system increased by $0.7 million due primarily to an increase in
billable work on our PB500 PowerBuoy development project and our WavePort project off the coast of Spain.
This was partially offset by a decrease in revenue related to our 150kW PowerBuoy project off the coast of
Oregon, reflecting a decrease in billable work on the project, which was in a land-based cycle testing phase for a
significant portion of fiscal 2012. Additionally, during fiscal 2011, revenue was reduced by $0.2 million due to a
change in estimate of revenue to be recognized in connection with our 2006 Spain Construction Agreement.
• Revenues relating to our autonomous PowerBuoy system decreased by $1.7 million as a result of a decrease in
billable work on our projects to provide our PowerBuoy technology to the LEAP program and DWADS. The
LEAP program has been completed and the DWADS project is nearing completion.
Cost of revenues
Cost of revenues decreased by $0.6 million, or 9%, to $5.7 million in fiscal 2012, as compared to $6.3 million in
fiscal 2011. This decrease in the cost of revenues reflected the decreased activity related to our 150kW PowerBuoy
project off the coast of Oregon as well as our DWADS, LEAP, and Hawaii projects with the US Navy. This was
partially offset by the increased activity on our PB500 PowerBuoy development project and WavePort project off the
coast of Spain.
We operated at a gross profit of $0.1 million in fiscal 2012 and a gross profit of $0.4 million in fiscal 2011. Most
of our projects in fiscal 2012 and 2011 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 the
percentage-of-completion method 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. 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 our fixed price contracts. During fiscal 2011, revenue was reduced by $0.2 million due to a change in
estimate of revenue to be recognized in connection with our 2006 Spain Construction Agreement. There was no
corresponding reduction in cost of revenue. This resulted in a $0.2 million gross loss being recognized on the 2006 Spain
Project during fiscal 2011.
Product development costs
Product development costs decreased by $5.0 million, or 37%, to $8.3 million in fiscal 2012, as compared to
$13.3 million in fiscal 2011. 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. The decrease in
product development costs is related primarily to decreases in activity related to our 150kW PowerBuoy project off the
coast of Scotland, as this was completed in fiscal 2012, and our Hawaii project with the US Navy, as this project neared
completion during fiscal 2012. There was also a decrease in activity related to our 150kW PowerBuoy project off the
coast of Oregon, which was in a land-based cycle testing phase for significant portion of fiscal 2012. Over the next
several years, it is our intent to fund the majority of our research and development expenses, including cost-sharing
arrangements, with sources of external funding. If we are unable to obtain external funding, we may reduce 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 increase. During fiscal 2012, the majority of funding for our PB500 PowerBuoy
development project was from external sources.
Selling, general and administrative costs
Selling, general and administrative costs were $8.3 million for fiscal 2012 and $8.4 million for fiscal 2011. Fiscal
2012 selling, general and administrative costs were reduced as a result of approximately $0.3 million in funding that we
received related to our 150kW PowerBuoy project off the coast of Oregon and our WavePort project off the coast of
Spain, which reimbursed part of these costs. Equity-based compensation also decreased in fiscal 2012. The decreases in
41
selling, general and administrative costs were partially offset by an increase in costs resulting from an approximately
$0.6 million allowance for a doubtful accounts receivable and impairment of an investment related to our 2006 Spain
Construction Agreement.
Interest income
Interest income decreased by $0.3 million, or 39%, to $0.4 million in fiscal 2012, compared to $0.7 million in
fiscal 2011, due to a decrease in cash, cash equivalents and marketable securities and a decrease in interest rates. The
average interest yield was approximately 1.03% during fiscal 2012 and approximately 1.20% during fiscal 2011.
Foreign exchange loss
Foreign exchange loss was $0.1 million in fiscal 2012, compared to a foreign exchange loss of $0.2 million in
fiscal 2011. 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 the years ended April 30, 2012 and 2011, we sold New Jersey state net operating losses in the amount of
$12.9 million and $4.4 million, respectively, resulting in the recognition of income tax benefits of $1.1 million and $0.4,
respectively, recorded in our Statement of Operations.
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 two years ended April 30, 2012, our
revenues were $12.4 million, our net losses were $35.6 million and our net cash used in operating activities was
$32.7 million.
Years Ended April 30,
2012
2011
Net loss ............................................................................................. $(15,190,005) $(20,458,824)
Adjustments for noncash operating items .........................................
2,338,085 2,112,952
Net cash operating loss ..................................................................... (12,851,920) (18,345,872)
Net change in operating assets and liabilities ...................................
(1,062,923)
(424,230)
Net cash used in operating activities ................................................. $(13,914,843) $(18,770,102)
Net cash provided by investing activities ......................................... $ 19,311,329 $ 18,431,358
Net cash (used in) provided by financing activities .......................... $
(199,032) $
207,701
Effect of exchange rates on cash and cash equivalents ..................... $
(220,130) $
270,582
Net cash used in operating activities
Net cash used in operating activities was $13.9 million for fiscal 2012 and $18.8 million for fiscal 2011. The
change was the result of a decrease in net loss of $5.3 million and an increase in non-cash operating items of $0.2
million partially offset by an increase in cash used by operating assets and liabilities of $0.7 million.
The increase in cash used by operating assets and liabilities was primarily the result of an increase in cash used by
accrued expenses of $1.4 million and a decrease in cash provided by other assets of $0.9 million, offset by an increase in
cash provided by unearned revenues of $1.5 million. The change in accrued expenses reflects a decrease in accruals
related to our 150kW PowerBuoy project off the coast of Scotland, which was completed during fiscal 2012, and our
42
150kW PowerBuoy project off the coast of Oregon. The change in other assets reflects collection of value added tax
from Spanish authorities in fiscal 2011. The change in unearned revenue includes $0.9 million related to advance
payments for our WavePort project off the coast of Spain.
Included in the net loss amounts are the cash receipts related to income tax benefits of $1.1 million and $0.4
million for fiscal 2012 and 2011, respectively.
Net cash provided by investing activities
Net cash provided by investing activities was $19.3 million and $18.4 million for fiscal 2012 and 2011,
respectively. The change was primarily the result of a net decrease in purchases of marketable securities during fiscal
2012 offset by an increase in purchases of equipment of $0.5 million. These purchases consisted largely of marine
operations equipment and were accrued for in fiscal 2011, but paid for in fiscal 2012.
Net cash (used in) provided by financing activities
Net cash used in financing activities was $0.2 million in fiscal 2012 and net cash provided by financing activities
was $0.2 million in fiscal 2011, 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.
Effect of exchange rates on cash and cash equivalents
Effect of exchange rates on cash and cash equivalents was a decrease in cash of $0.2 million in fiscal 2012 and an
increase in cash of $0.3 million in fiscal 2011. The change was primarily the result of exchange rate 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 planned commercialization of the
PowerBuoy system. Our future capital requirements will depend on a number of factors, including:
• the cost of development efforts for our PowerBuoy systems;
• the success of our commercial relationships with major customers;
•
the ability to obtain project-specific financing for some of our projects;
• the cost of manufacturing activities;
• the cost of commercialization activities, including demonstration projects, product marketing and sales;
• our ability to establish and maintain additional commercial relationships;
• the implementation of our expansion plans, including the hiring of new employees;
• potential acquisitions of other products or technologies; and
• 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 2014. 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
43
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.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet financing activities.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations set forth above are based on our
consolidated financial statements, which have been prepared in accordance with US generally accepted accounting
principles (US GAAP). 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
Our contracts are either cost plus or fixed price contracts. Under cost plus contracts, customers are billed for
actual expenses incurred plus an agreed-upon fee. 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. 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.
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 the 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 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. Accruals
related to losses on contracts in the amount of approximately $785,000 are included in accrued expenses in the
accompanying consolidated balance sheets as of April 30, 2012 and 2011. During the year ended April 30, 2011,
revenue was reduced by approximately $243,000 due to a change in estimated revenue to be recognized in connection
with the 2006 Spain Construction Agreement.
Under cost plus and firm fixed price contracts there is a profit or loss on the project depending on whether actual
costs are more or less than the agreed upon amount. Under cost-sharing contracts, an amount corresponding to the
revenue is recorded in cost of revenues, resulting in gross profit on these contracts of zero. 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 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
44
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 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 until
we voluntarily delisted in 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. 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 $1.0 million and $1.4 million in fiscal 2012 and 2011, 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 $43.7 million as of
April 30, 2012 and $39.9 million as of April 30, 2011. During the years ended April 30, 2012 and 2011, we sold New
Jersey State net operating losses in the amount of $12.9 million and $4.4 million, respectively, resulting in the
45
recognition of income tax benefits of $1.1 million and $0.4 million, respectively, recorded in our Statement of
Operations.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued 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 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.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income in financial
statements. This amendment provides companies the option to present the components of net income and other
comprehensive income either as one continuous statement of comprehensive income or as two separate but consecutive
statements. It eliminates the option to present components of other comprehensive income as part of the statement of
changes in stockholders' equity. The guidance is effective for fiscal years and interim periods within those years
beginning after December 15, 2011. The adoption of this new guidance will not impact our financial position, results of
operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
During the quarter ended April 30, 2012, 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.
46
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 2012 Annual Meeting of
Stockholders (the "Proxy Statement") under the headings "Election of Directors," "Executive Officers," "Section 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.
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.
47
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 50 to 51.
48
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 13, 2012
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
Chairman of the Board of Directors,
Chief Executive Officer
(Principal Executive Officer)
July 13, 2012
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
BRUCE A. PEACOCK
Bruce A. Peacock
DAVID L. DAVIS
David L. Davis
Executive Vice-Chairman of the Board of Directors
July 13, 2012
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
July 13, 2012
Director
July 13, 2012
Director
July 13, 2012
Director
July 13, 2012
Director
July 13, 2012
49
Exhibit
Number
Exhibits Index
Description
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
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)*
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)*
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)
Lease Agreement, dated August 30, 2005 between Ocean Power Technologies, Inc. and Reed Road
Industrial Park LLC #1, as amended on January 27, 2006 (incorporated by reference from Exhibit 10.16 to
Form S-1 filed November 13, 2006)
Lease, dated January 15, 2007, between University of Warwick Science Park Innovation Centre Limited
and Ocean Power Technologies Ltd. (incorporated by reference from Exhibit 10.17 to Form S-1/A filed
March 19, 2007)
Agreement for Renewable Energy Economic Development Grants, dated November 3, 2003, between State
of New Jersey Board of Public Utilities and Ocean Power Technologies, Inc. (incorporated by reference
from Exhibit 10.18 to Form S-1/A filed March 19, 2007)
Contract Number DM259735, dated September 17, 2005 between Lockheed Martin Corporation Maritime
Systems and Sensors (MS2) and Ocean Power Technologies, Inc., as modified (incorporated by reference
from Exhibit 10.20 to Form S-1/A filed March 19, 2007)
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)
50
Exhibit
Number
10.18
10.19
10.20
10.21
10.22
10.23
10.24
21.1
23.1
31.1
31.2
32.1
32.2
101
Description
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)+
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
The following materials formatted in eXtensible Business Reporting Language (XBRL) from Ocean Power
Technologies, Inc Annual Report on Form 10-K for the fiscal years ended April 30, 2012 and 2011: (i)
Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of
Cash Flows, (iv) Consolidated Statements of Stockholders’ Equity and Comprehensive Loss and (v) Notes
to Consolidated Financial Statements.**
*
Management contract or compensatory plan or arrangement
+
Indicates that confidential treatment has been requested for this exhibit.
**
As provided in Rule 406T of Regulation S-T, this exhibit shall not be deemed “filed” or a part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and shall not
be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the
liability under those sections.
51
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Reports of Management ............................................................................................................................................... F-2
Report of Independent Registered Public Accounting Firm ........................................................................................ F-3
Consolidated Balance Sheets, April 30, 2012 and 2011 .............................................................................................. F-4
Consolidated Statements of Operations, Years ended April 30, 2012 and 2011 .......................................................... F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Loss, Years ended April 30, 2012 and 2011 . F-6
Consolidated Statements of Cash Flows, Years ended April 30, 2012 and 2011 ........................................................ F-7
Notes to Consolidated Financial Statements ................................................................................................................ F-8
Page
F-1
Management's Report on Consolidated Financial Statements
Reports of Management
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:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
• 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
• 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, 2012. 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, 2012.
/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 the accompanying consolidated balance sheets of Ocean Power Technologies, Inc. and
subsidiaries as of April 30, 2012 and 2011, and the related consolidated statements of operations, stockholders' equity
and comprehensive loss, and cash flows for each of the years in the two-year period ended April 30, 2012. 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, 2012 and 2011, and the results of
their operations and their cash flows for each of the years in the two-year period ended April 30, 2012, in conformity
with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
July 13, 2012
F-3
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30,
2012
2011
ASSETS
Current assets:
Cash and cash equivalents ..............................................................................
Marketable securities ......................................................................................
Accounts receivable, net .................................................................................
Unbilled receivables .......................................................................................
Other current assets .........................................................................................
Total current assets ..................................................................................
Property and equipment, net ..................................................................................
Patents, net .............................................................................................................
Restricted cash .......................................................................................................
Marketable securities .............................................................................................
Other noncurrent assets ..........................................................................................
Total assets ..............................................................................................
$
$
9,353,460
22,369,484
1,064,796
223,050
842,820
33,853,610
682,933
1,269,457
1,453,712
—
181,925
37,441,637
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................................................................
Accrued expenses ...........................................................................................
Deferred credits payable .................................................................................
Unearned revenues ..........................................................................................
Current portion of long-term debt ...................................................................
Total current liabilities .............................................................................
Long-term debt .......................................................................................................
Deferred credits ......................................................................................................
Total liabilities .........................................................................................
$
440,773
2,770,094
600,000
1,073,389
100,000
4,984,256
350,000
—
5,334,256
Commitments and contingencies (note 13)
Ocean Power Technologies, Inc. Stockholders’ equity:
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
53,552,578
1,224,728
4,302,952
—
344,022
139,378
6,011,080
450,000
600,000
7,061,080
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
10,407,389 and 10,419,183 shares, respectively .........................................
Treasury stock, at cost; 23,544 and 7,685 shares, respectively .......................
Additional paid-in capital ...............................................................................
Accumulated deficit ........................................................................................
Accumulated other comprehensive (loss) income ..........................................
Total Ocean Power Technologies, Inc. stockholders’ equity ...................
Noncontrolling interest in Ocean Power Technologies (Australasia) Pty Ltd .......
Total equity .....................................................................................................
Total liabilities and stockholders’ equity .................................................
—
—
10,407
(102,388)
158,296,458
(125,989,474)
(78,990)
32,136,013
(28,632)
32,107,381
37,441,637
10,419
(42,734)
157,174,930
(110,848,972)
175,907
46,469,550
21,948
46,491,498
53,552,578
$
See accompanying notes to consolidated financial statements.
F-4
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Revenues ...................................................................................................................... $
Cost of revenues ...........................................................................................................
Gross profit ...........................................................................................................
Year Ended April 30,
2011
2012
6,691,082
5,738,506
6,255,437
5,683,731
435,645
54,775
Operating expenses:
Product development costs .......................................................................................
Selling, general and administrative costs ..................................................................
Total operating expenses .......................................................................................
8,337,424
8,274,096
16,611,520
13,319,110
8,399,325
21,718,435
Operating loss ..............................................................................................................
Interest income, net ......................................................................................................
Foreign exchange loss ..................................................................................................
Loss before income taxes .............................................................................................
Income tax benefit ........................................................................................................
Net loss ............................................................................................................
(16,556,745)
418,052
(104,739)
(16,243,432)
1,053,427
(15,190,005)
(21,282,790)
689,276
(229,415)
(20,822,929)
364,105
(20,458,824)
Less: Net loss attributable to the noncontrolling interest in Ocean Power
Technologies (Australasia) Pty Ltd. .....................................................................
49,503
22,950
Net loss attributable to Ocean Power Technologies, Inc. ............................................. $ (15,140,502)
(20,435,874)
Basic and diluted net loss per share ............................................................................. $
(1.47)
(1.99)
Weighted average shares used to compute basic and diluted net loss per share ..........
10,277,661
10,246,921
See accompanying notes to consolidated financial statements.
F-5
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Balance, April 30, 2010 .................................
10,391 (1,072) $
(6,443) 155,726,672 (90,413,098)
(503,322)
Common Shares
Treasury Shares
Paid-In Accumulated
Additional
Amount Shares Amount Capital
Deficit
Shares
10,390,563 $
Accumulated
Other
Comprehensive
Loss
Total Ocean Power
Technologies, Inc,
Stockholders Equity
64,814,200
Noncontrolling
Interest
Total
Equity
40,890 64,855,090
Net loss ..........................................................
—
—
—
Foreign currency translation adjustment .......
Total comprehensive loss ........................
—
—
—
—
—
— (20,435,874)
—
(20,435,874 )
(22,950) (20,458,824)
—
—
679,229
679,229
(19,756,645 )
4,008
683,237
(18,942) (19,775,587)
Stock based compensation .............................
—
—
—
—
964,000
Issuance (forfeiture) of restricted stock, net ..
28,620
28
—
—
484,258
—
—
—
—
964,000
—
964,000
484,286
—
484,286
Acquisition of treasury stock .........................
Balance, April 30, 2011 .................................
—
10,419,183 $
— (6,613)
—
10,419 (7,685) $ (42,734) 157,174,930 (110,848,972)
(36,291)
—
—
175,907
(36,291 )
46,469,550
—
(36,291)
21,948 46,491,498
Net loss .........................................................
—
—
—
Foreign currency translation adjustment .......
Total comprehensive loss ........................
—
—
—
—
—
— (15,140,502)
—
(15,140,502 )
(49,503) (15,190,005)
—
—
(254,897)
(254,897 )
(15,395,399 )
(1,077)
(255,974)
(50,580) (15,445,979)
Stock based compensation .............................
—
—
—
—
1,008,473
Issuance (forfeiture) of restricted stock, net ..
(11,794)
(12)
—
—
113,055
—
—
—
—
1,008,473
— 1,008,473
113,043
—
113,043
Acquisition of treasury stock .........................
Balance, April 30, 2012 .................................
—
10,407,389 $
— (15,859)
—
10,407 (23,544) $(102,388) 158,296,458 (125,989,474)
(59,654)
—
—
(78,990)
(59,654 )
32,136,013
—
(59,654)
(28,632) 32,107,381
See accompanying notes to consolidated financial statements.
F-6
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended April 30,
2012
2011
Cash flows from operating activities:
Net loss .................................................................................................................................. $ (15,190,005) (20,458,824)
Adjustments to reconcile net loss to net cash used in operating activities:
229,415
Foreign exchange loss .......................................................................................................
358,722
Depreciation and amortization ..........................................................................................
5,293
Loss on disposals of property, plant and equipment .........................................................
—
Impairment of long-lived assets ........................................................................................
—
Provision for doubtful accounts ........................................................................................
Treasury note (discount) premium amortization ...............................................................
71,236
Compensation expense related to stock option grants and restricted stock ...................... 1,121,528 1,448,286
Changes in operating assets and liabilities:
104,739
436,062
52,128
358,447
298,534
(33,353)
(126,722)
Accounts receivable .....................................................................................................
226,840
Unbilled receivables ....................................................................................................
(17,291)
Other current assets ......................................................................................................
43,504
Other noncurrent assets ................................................................................................
Accounts payable .........................................................................................................
(546,709)
Accrued expenses ........................................................................................................ (1,371,912)
729,367
Unearned revenues .......................................................................................................
—
Other noncurrent liabilities ..........................................................................................
277,115
1,396
198,569
903,729
(891,417)
(7,923)
(761,473)
(144,226)
Net cash used in operating activities ......................................................................... (13,914,843) (18,770,102)
Cash flows from investing activities:
Purchases of marketable securities ........................................................................................ (18,574,454) (7,993,642)
Maturities of marketable securities ........................................................................................ 38,559,110 27,059,601
(302,871)
Restricted cash .......................................................................................................................
(72,998)
Purchases of equipment ........................................................................................................
(258,732)
Payments of patent costs ........................................................................................................
Net cash provided by investing activities .................................................................. 19,311,329 18,431,358
53,936
(547,252)
(180,011)
Cash flows from financing activities:
Proceeds from long-term debt ...............................................................................................
Repayment of long-term debt ................................................................................................
Acquisition of treasury stock .................................................................................................
Net cash (used in) provided by financing activities ..................................................
Effect of exchange rate changes on cash and cash equivalents ...............................................
—
(139,378)
(59,654)
(199,032)
(220,130)
Net increase in cash and cash equivalents ................................................................. 4,977,324
250,000
(6,008)
(36,291)
207,701
270,582
139,539
Cash and cash equivalents, beginning of period ..................................................................... 4,376,136 4,236,597
Cash and cash equivalents, end of period ............................................................................... $ 9,353,460 4,376,136
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 and accrued
expenses .................................................................................................................................
—
41,722
42,344
314,824
See accompanying notes to consolidated financial statements.
F-7
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).
During the fourth quarter of fiscal 2012, the Company evaluated the realizability of this investment and concluded that it
was impaired. Representing 100% of the Company’s investment, the amount of the impairment was $0.3 million which
was recorded as selling, general, and administrative expense on the accompanying statement of operations. This
assessment was based upon the specific business activities currently being performed by Iberdrola Cantabria as well as
the current overall economic environment in Europe. Additionally, net accounts receivable and unbilled receivables from
Iberdrola Cantabria were $0 and $0.3 million as of April 30, 2012 and 2011, respectively. See Note 13(c). As discussed
above, given the uncertainty surrounding this investment, outstanding receivables from Iberdrola Cantabria in the
amount of $0.3 million as of April 2012 were fully reserved during the fourth quarter of fiscal 2012.
(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.
F-8
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(c)
Revenue Recognition
The Company’s contracts are either cost plus or fixed price contracts. Under cost plus contracts, customers are
billed for actual expenses incurred plus an agreed-upon fee. Currently, the Company has two types of fixed price
contracts, firm fixed price and cost-sharing. Under firm fixed price contracts, the Company receives an agreed-upon
amount for providing products and services specified in the contract. 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.
Generally, the Company recognizes 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 the 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 the Company is unable to reasonably estimate the total costs of the project prior to
completion. Because the Company has 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
revenue for the periods involved. Upon anticipating a loss on a contract, the Company recognizes the full amount of the
anticipated loss in the current period. Accruals related to losses on contracts in the amount of approximately $785,000
are included in accrued expenses in the accompanying consolidated balance sheets as of April 30, 2012 and 2011.
During the year ended April 30, 2011, the Company’s revenue was reduced by approximately $243,000 due to a change
in estimated revenue to be recognized in connection with the 2006 Spain Construction Agreement.
Under cost plus and firm fixed price contracts there is a profit or loss on the project depending on whether actual
costs are more or less than the agreed upon amount. Under cost sharing contracts, an amount corresponding to the
revenue is recorded in cost of revenues, resulting in gross profit on these contracts of zero. The Company’s share of the
costs is recorded as product development expense.
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 and cash collections exceed costs incurred plus applicable profit
margin, they are recorded as unearned revenues. During the year ended April 30, 2012, the Company received a $1.1
million advance payment, which was recorded as unearned revenues, related to a grant from the European Union for the
WavePort project in Spain. As of April 30, 2012, $467,000 of the advanced payment remained in unearned revenue.
(d)
Cash and Cash Equivalents
Cash equivalents consist of investments in short-term financial instruments with initial maturities of three months
or less from the date of purchase. Cash and cash equivalents include the following:
April 30,
2012
2011
Checking and savings accounts ........................................................ $ 2,051,918 3,621,136
273,000
Certificates of deposits and US Treasury obligations ....................... 5,998,925
482,000
Money market funds ......................................................................... 1,302,617
$ 9,353,460 4,376,136
F-9
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(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, 2012 and 2011, all
of the Company's investments were classified as held-to-maturity.
(f)
Restricted Cash and Credit Facility
A portion of the Company’s 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 €800,000 ($1,060,000 at April 30,
2012) 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, 2012, there were €266,000 ($352,000) 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.
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. 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.
See Note 7.
Cash restricted under security agreements is as follows:
April 30,
2012
2011
Barclays Bank agreement ................ $
NJBPU agreement ...........................
Escrow account ................................
953,712 1,068,336
500,000
500,000
56,333
—
$ 1,453,712 1,624,669
(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.
(h)
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. 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 gains and
losses are included in foreign exchange loss in the accompanying consolidated statements of operations.
F-10
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Year Ended April 30,
2012
2011
Foreign exchange loss ..................................................................................... $ (104,739) (229,415)
April 30,
2012
2011
Foreign currency denominated certificates of deposit and cash accounts ....... $ 2,826,000 4,793,000
(i)
Patents
Prior to February 1, 2012, external patent costs were amortized on a straight-line basis over a 17-year period
commencing with the issuance date of each patent. The Company operates in the renewable energy industry. Wave
energy technology is still at an early stage of development, and as a result, it continues to evolve and change as such
technology is developed. Costs are expensed when it is no longer probable that such technology will be utilized.
Additionally, the Company continually re-assesses the remaining useful lives of its long-lived assets. Patents are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the patent
may not be recoverable. In the fourth quarter of fiscal 2012, the Company performed its recurring assessment of the
realizability of its patents and recorded impairment expenses of $13,240. Based on the Company’s assessment, the
Company also evaluated the remaining useful lives of its existing patents, as of February 1, 2012, and concluded that the
remaining amortization should be recorded over periods ranging from three to seven years. Amortization expense was
$109,857, and $47,877 for the years ended April 30, 2012 and 2011, respectively. Amortization expense for the next five
fiscal years related to amounts capitalized for patents as of April 30, 2012 is estimated to be approximately $207,000 per
year. As a result of the change in estimated useful life, amortization expense was higher by approximately $53,000 in
fiscal 2012 and estimated to be higher by approximately $150,000 per year for the next five years.
(j)
Long-Lived Assets
Long-lived assets, such as property and equipment, and patents subject to amortization and cost-basis
investments, 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 for the years ended April 30, 2012 and 2011. The Company recorded impairment charges of
$358,447 in the year ended April 30, 2012 related to patents and an investment in a joint venture. The Company
determined there was no impairment for the year ended April 30, 2011.
(k)
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 money market funds) and does not
believe that it is exposed to any significant risks related to its cash accounts, money market funds or certificates of
deposit.
F-11
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
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,
2012
2011
US Department of Energy ......................................................
US Navy .................................................................................
UK Government's Technology Strategy Board ......................
European Union (WavePort project) ......................................
32%
29%
20%
13%
28 %
52 %
14 %
-
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.
(l)
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, options to purchase shares of common stock and non-vested restricted
stock issued to employees and non-employee directors, totaling 1,447,313 and 1,504,888 for the years ended April 30,
2012 and 2011, respectively, were excluded from the computations as the effect would be anti-dilutive due to the
Company's losses.
(m)
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, 2012 and 2011
was approximately $1,121,000 and $1,448,000 respectively.
F-12
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Valuation Assumptions for Options Granted During the Years Ended April 30, 2012 and 2011
The fair value of each stock option granted during the years ended April 30, 2012 and 2011 was 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,
2012
2011
Risk-free interest rate ...................
Expected dividend yield ..............
Expected life ................................ 5.83 years
Expected volatility .......................
1.83 %
0.0 %
94.5 %
2.29 %
0.0 %
6.39 years
93.8 %
The above assumptions were used to determine the weighted average per share fair value of $2.98 and $4.18 for
stock options granted during the years ended April 30, 2012 and 2011 respectively.
(n)
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.
(o)
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 the period.
The unrealized gains or losses resulting from such translation are included in accumulated other comprehensive loss
within stockholders' equity.
F-13
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(p)
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued 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 (US 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.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income in financial
statements. This amendment provides companies the option to present the components of net income and other
comprehensive income either as one continuous statement of comprehensive income or as two separate but consecutive
statements. It eliminates the option to present components of other comprehensive income as part of the statement of
changes in stockholders' equity. The guidance is effective for fiscal years and interim periods within those years
beginning after December 15, 2011. The adoption of this new guidance will not impact the Company's financial position,
results of operations or cash flows.
(q)
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
(3) Marketable Securities
Marketable securities are classified as current assets and are summarized as follows:
April 30,
2012
2011
Certificates of deposit denominated in Australian Dollars ........................................... $
Certificates of deposit denominated in US Dollars ......................................................
US Treasury obligations ...............................................................................................
556,437
3,806,808
18,006,239
491,895
-
25,526,699
$
22,369,484
26,018,594
The Company had no marketable securities classified as noncurrent assets as of April 30, 2012. Marketable
securities classified as noncurrent assets as of April 30, 2011 are summarized below. These marketable securities all
mature more than one year from the balance sheet date but less than two years, are all classified as held-to-maturity and
are carried at amortized cost.
Gross
Gross
Amortized unrealized unrealized Market
value
losses
gains
cost
April 30, 2011
US Treasury obligations .................... $ 12,516,208
Certificate of deposit .......................... 3,806,808
164,107
-
$ 16,323,016
164,107
-
-
-
12,680,315
3,806,808
16,487,123
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:
April 30,
Life
2012
2011
Computers and software ..........................................................................................
696,784
Equipment ................................................................................................................ 3 to 7 years 1,080,039
287,492
Office furniture and equipment ................................................................................ 3 to 7 years
149,505
Leasehold improvements ......................................................................................... 3 to 8 years
3 years $
713,779
990,283
297,612
149,505
Less accumulated depreciation and amortization ....................................................
2,213,820 2,151,179
(1,530,887 ) (1,359,087)
$
682,933
792,092
Depreciation expense was $326,205 and $310,268 for the years ended April 30, 2012 and 2011, respectively.
(5) Balance Sheet Detail
April 30,
2012
2011
Accounts receivable, net
Accounts receivable ...................................................................... $ 1,369,400 1,285,000
—
Allowance for doubtful accounts ..................................................
$ 1,064,796 1,285,000
(304,604)
Patents
Patents .......................................................................................... $ 1,574,044 1,556,277
(333,909)
Accumulated amortization ...........................................................
$ 1,269,457 1,222,368
(304,587)
Accrued expenses
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 ...........................................................................
244,892 1,505,981
785,000
785,000
749,464
661,328
282,999
185,320
364,799
354,966
219,632
166,092
197,318
176,110
157,616
193,720
40,143
2,666
$ 2,770,094 4,302,952
F-15
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(6) Related Party Transactions
In August 1999, the Company entered into a consulting agreement with an individual for the provision of
marketing services. Currently, this agreement provides for fees at a rate of $950 per day of services provided. The
individual became a member of the board of directors in June 2006. In addition, this individual is also the chief
executive officer of a company that provides engineering and technical services to the Company. The Company also
provides services to the company where this individual is the chief executive officer. Financial details of this relationship
are summarized as follows:
Related party consulting expense ...................................................... $
Expenses for services provided by related party company ...............
Revenue for services provided to related party company .................
86,000
29,000
126,000
2012
2011
85,000
207,000
77,000
Year Ended April 30,
April 30,
2012
2011
Consulting fees payable to related party ........................................... $
Payable to related party company .....................................................
Receivable from related party company ...........................................
7,000
-
-
7,000
56,000
27,000
(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 was required to repay the amount funded, without interest, by July 15, 2012. The
amounts to be repaid each year were determined as a percentage of revenues (as defined in the loan agreement) the
Company received that year from its customer contracts that met criteria specified in the loan agreement. The Company
has repaid the entire award of $250,000 as of April 30, 2012, with the final payment of $89,378 made in May 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, 2012 and
April 30, 2011, $100,000 and $50,000, respectively, was included in current portion of long-term debt on the
accompanying consolidated balance sheets. The terms also required the Company to assign to the NJBPU a certificate of
deposit in an amount equal to the outstanding grant balance. See Note 2(f).
F-16
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(8) Deferred Credits Payable and 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 payable and deferred credits in the
accompanying consolidated balance sheets as of April 30, 2012 and April 30, 2011, respectively. 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). As of April 30, 2012, the Company has not generated any emissions credits
eligible for purchase under the agreement, and the Company does not expect to generate any eligible emissions credits
before December 31, 2012. Accordingly, this amount has been classified as a current liability as of April 30, 2012.
(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, 2012 and 2011, no shares of preferred stock had been issued.
(11) Share-Based Compensation
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, 2012, the Company had issued or reserved 315,175 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, 2012, the Company had issued share-based awards for 1,235,333 shares of common stock and
had reserved an additional 417,882 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. Vesting provisions of stock options are determined by the board of directors. The contractual
term of these stock options is up to ten years. The 2006 Stock Incentive Plan is administered by the Company's board of
directors who may delegate authority to one or more committees or subcommittees of the board of directors or to the
Company's officers. If the board of directors delegates authority to an officer, the officer has the power to make awards
to all of the Company's employees, except to executive officers. The board of directors will fix the terms of the awards to
be granted by such officer. No award may be granted under the 2006 Stock Incentive Plan after December 7, 2016, but
the vesting and effectiveness of awards granted before that date may extend beyond that date.
F-17
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(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 April 30, 2010 ..................................................... 1,375,453
11.87
5.2
Forfeited .................................................................................. (305,223)
Granted ................................................................................... 283,705
12.79
5.36
Outstanding April 30, 2011 ..................................................... 1,353,935
10.30
5.7
Forfeited .................................................................................. (268,784)
Granted ................................................................................... 268,322
10.94
3.97
Outstanding April 30, 2012 ..................................................... 1,353,473
8.92
6.1
Exercisable April 30, 2012 ..................................................... 789,473
11.26
4.6
There was no intrinsic value of outstanding and exercisable options as of April 30, 2012, as the exercise price of
the options exceeded the market price of the Company’s common stock. As of April 30, 2012, approximately 564,000
additional options were expected to vest, which have no of intrinsic value and a weighted-average remaining contractual
term of 8.1 years. There was $931,553 and $940,309 of total recognized compensation cost related to employees for
stock options during the years ended April 30, 2012 and 2011, respectively. As of April 30, 2012, there was
approximately $1,446,000 of total unrecognized compensation cost related to non-vested stock options granted under the
plans. This cost is expected to be recognized over a weighted-average period of 2.9 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, 2012 and 2011. The Company has
charged compensation expense of $76,920 and $23,691 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, 2012 and 2011, respectively.
F-18
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(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 14,634 and 33,620 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, 2012 and 2011, respectively.
A summary of non-vested restricted stock under the plans is as follows:
Weighted
Average
Number Price per
of Shares Share
Issued and unvested at April 30, 2010 ........................ 157,124
6.35
Granted ....................................................................... 33,620
Forfeited .....................................................................
(5,000)
Vested ......................................................................... (34,791)
5.32
6.40
6.17
Issued and unvested at April 30, 2011 ........................ 150,953
6.16
Granted ....................................................................... 14,634
Forfeited ..................................................................... (26,428)
Vested ......................................................................... (45,319)
Issued and unvested at April 30, 2012 ........................ 93,840
3.86
5.93
6.18
5.86
There was $99,658 and $476,789 of total recognized compensation cost relating to restricted stock granted to
employees during the years ended April 30, 2012 and 2011, respectively. Certain shares of restricted stock were granted
to non-employee directors during the years ended April 30, 2012 and 2011, respectively. The Company recorded
compensation expenses of $13,385 and $7,497 in 2012 and 2011, respectively. As of April 30, 2012, there was
approximately $134,000 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 2 years.
(c)
Treasury Stock
During the years ended April 30, 2012 and 2011, 15,859 and 6,613 shares of common stock, respectively, were
purchased by the Company from employees to pay taxes related to the vesting of restricted stock.
F-19
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(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:
Years Ended April 30,
2012
2011
(34 )%
(34 )%
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 .................................................................................................
(5 )
2
(2 )
2
2
6
Increase in valuation allowance ........................................................
23
(5 )
1
(2 )
1
1
3
33
Income tax benefit ............................................................................
(6 )%
(2 )%
F-20
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
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,
2012
2011
Deferred tax assets:
Federal net operating loss carryforwards .......................................... $ 27,788,000 23,978,000
4,875,000 4,905,000
Foreign net operating loss carryforwards ..........................................
3,567,000 3,587,000
New Jersey state operating loss carryforwards .................................
2,149,000 1,914,000
Federal research and development tax credits ..................................
Foreign research and development tax credits ..................................
731,000
2,548,000 2,548,000
Stock compensation ..........................................................................
766,000
Capitalized research and development costs, net of amortization .....
333,000
Unrealized foreign exchange loss .....................................................
737,000
Accrued expenses .............................................................................
407,000
Other .................................................................................................
676,000
291,000
726,000
342,000
715,000
Gross deferred tax assets ................................................................... 43,677,000 39,906,000
Valuation allowance ......................................................................... (43,677,000) (39,906,000)
Net deferred tax assets ...................................................................... $
-
-
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, 2012 and 2011, based upon the level of historical
taxable losses, valuation allowances of $43,677,000 and $39,906,000, respectively, were recorded to fully offset deferred
tax assets. The valuation allowance increased $3,771,000 and $6,807,000 during the years ended April 30, 2012 and
2011, respectively.
As of April 30, 2012, the Company had net operating loss carryforwards for federal income tax purposes of
approximately $81,700,000, which begin to expire in 2013. The Company also had federal research and experimental tax
credit carryforwards of approximately $2,149,000 as of April 30, 2012, which begin to expire in 2013. 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, 2012, the Company had state net
operating loss carryforwards of approximately $57,700,000, which begin to expire in 2026, which also may be limited to
utilization limitations. As of April 30, 2012, the Company had foreign net operating loss carryforwards of approximately
$18,300,000, which begin to expire in 2024. The ability to utilize these carryforwards may also be limited in the event of
a historic ownership change.
F-21
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
During the years ended April 30, 2012 and 2011, the Company sold New Jersey State net operating losses in the
amount of $12,862,000 and $4,446,000, respectively, resulting in the recognition of income tax benefits of $1,053,427
and $364,105, respectively, 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, 2012 and 2011, 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 and fiscal 2010,
respectively. 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 and Warwick,
United Kingdom, under operating leases that expire on various dates through April 30, 2013. Rent expense under
operating leases was approximately $507,000 and $525,000 for the years ended April 30, 2012 and 2011, respectively.
The Company’s operating leases expire within one year and future minimum lease payments under these leases as of
April 30, 2012 are $276,000.
(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)
2006 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, 2012, 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.
F-22
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(14) 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 and operating
subsidiaries in the UK and in Australia. Revenues and expenses are generally attributed to the operating unit that bills
the customers.
Geographic information is as follows:
Year Ended April 30, 2012
North
America Europe
Revenues from external customers ..... $ 4,603,652 1,134,854
Operating loss ..................................... (14,432,825) (1,672,636)
Long-lived assets ................................
97,115
Total assets.......................................... 35,181,637 1,619,973
585,818
Asia and
Australia Total
— 5,738,506
(451,284 ) (16,556,745)
682,933
640,027 37,441,637
—
Year Ended April 30, 2011
North
America Europe
Revenues from external customers ..... $ 5,609,789
853,939
Operating loss ..................................... (19,443,565) (1,676,354)
Long-lived assets ................................
172,231
Total assets.......................................... 47,697,028 4,935,922
619,861
Asia and
Australia Total
227,354 6,691,082
(162,871 ) (21,282,790)
792,092
919,628 53,552,578
—
F-23
OCEAN POWER TECHNOLOGIES, INC.
Directors
Senior Management Team
Company Secretary
Charles F. Dunleavy*
Chairman and Chief Executive Officer
Brian M. Posner
David L. Davis
Vice President, PJM Development of
NRG Energy, Inc.
Charles F. Dunleavy
Chairman and Chief Executive Officer of
Ocean Power Technologies, Inc.
Thomas J. Meaney
President and Chief Executive Officer of
Mikros Systems Corp.
Bruce A. Peacock
Chief Business Officer of Opthotech
Corporation, Venture Partner of SV Life
Science Advisors, LLC
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 Vice Chairman of
Ocean Power Technologies, Inc.
Philip R. Hart
Chief Technology Officer
Michael G. Kelly
Vice President Operations
Brian M. Posner*
Chief Financial Officer, Treasurer
and Secretary
Timothy Stiven
Managing Director of UK and
European Business
Dr. George W. Taylor*
Executive Vice 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 Trust Company, N.A.
250 Royall 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, NJ 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.
Contact Us
Ocean Power Technologies, Inc.
Ocean Power Technologies Limited
1590 Reed Road
Pennington, NJ 08534
USA
Warwick Innovation Centre
Gallows Hill
Warwick CV34 6UW
UK
Website Address: www.oceanpowertechnologies.com
Ocean Power Technologies
(Australasia) Pty Ltd
PO Box 12 Collins Street West
Melbourne
Victoria 3000
AU
Scotland PowerBuoy
Fully assembled PowerBuoy
Dockside preparations
for tow out
Deployment process
Rear cover:
Fully deployed and operational
Scotland PowerBuoy
1590 Reed Road, Pennington, New Jersey USA 08534