Annual Report
for the Year Ended
April 30, 2013
Fully Assembled Mark 3 PowerBuoy - Scotland
Dear Shareholder,
We are pleased to provide an update on Ocean Power Technologies’ achievements during the twelve
months ended April 30, 2013 (“Fiscal 2013”) and to make note of important priorities for the twelve
months ending April 30, 2014 (“Fiscal 2014”). 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 2013 include the following:
●
●
●
●
●
●
Ocean Power Technologies reported a reduction in the level of cash used in its business, with a
net decrease in cash and investments of $11.4 million for Fiscal 2013 versus a net decrease of
$15.2 million for the twelve months ended April 30, 2012 (“Fiscal 2012”).
The Company’s net loss for Fiscal 2013 declined to $14.8 million from $15.2 million in Fiscal
2012.
Further progress was made in Australia, where OPT and Lockheed Martin are working together
on a planned 62.5MW peak generator rated wave power project off the coast of Portland,
Victoria, which would be one of the largest wave energy projects in the world.
A contract worth ¥70 million (approximately US$0.7 million) was received from Mitsui
Engineering & Shipbuilding Co. Ltd. for further work on PowerBuoy enhancements that, under
Japanese wave conditions, provide for improved power capture.
The Company’s Waveport project in Spain achieved an important milestone. Following
extensive design, construction and land testing activity during Fiscal 2013, OPT shipped its
advanced modular power take-off in May 2013.
OPT established a new business unit to assess, target and develop opportunities for the
Company’s Autonomous PowerBuoys.
Australia was a major focus for OPT in Fiscal 2013, where we have spent considerable time working
with Lockheed Martin on plans to develop a 62.5MW peak generator rated wave power station off the
coast of Victoria. We are pleased to report that we continue to build momentum in making this project a
reality and it continues to be a high priority in Fiscal 2014. A recent report issued by the Commonwealth
Scientific and Industrial Research Organisation (“CSIRO”), noted that Australia’s wave energy
resources are enough to provide five times the power needs of the country.
We recently announced that we have engaged the Victoria-based company, Professional Diving
Services, to conduct a detailed survey for our wave power station. The seabed survey will fine-tune
selection of the best area off the coast of Portland, Victoria, for the project, taking into account seabed
conditions, as well as environmental, recreational and commercial interests. The project recognizes the
importance that the ocean represents for Australia and offers an opportunity to provide power to up to
10,000 local residents. The project also is expected to create or sustain at least 300 jobs. Finally, we
continue to work with our financial advisor to obtain power purchase agreements and additional
required funding for the project. We expect to report continued progress in Fiscal 2014.
In Japan, during Fiscal 2013 we received from Mitsui Engineering & Shipbuilding (“MES”) a contract
worth ¥70 million (approximately US$0.7 million), which provided follow-on work related to a number of
PowerBuoy enhancements. These improvements should result, under Japanese wave conditions, in a
greater amount of power capture, thus increasing the buoy’s overall performance. We completed the
analysis and design work for this contract, and we and MES are now considering the next steps toward
prospective ocean trials of a demonstration PowerBuoy system – which would help lead the way for a
commercial-scale wave power station in Japan. It is a privilege to have MES as a partner in Japan, and
we are confident that, working together, we can penetrate the market in Japan for ocean-based energy
generation. Notably, the Japanese Ministry of the Environment put forth a strategy in Fiscal 2013 meant
to increase the generating capacity of renewable energy by more than six times, and specifically
identified wave energy as a key component of this policy – setting a goal of 1,500 megawatts in new
power generation capacity by the year 2030 using wave and tidal power sources. This strategic power
generation goal is an important driver of the Company’s business in Japan.
We also made headway in other countries, particularly in Europe, where conditions continue to
encourage alternative energy applications. In May 2013, we shipped our advanced modular power
take-off (“MPTO”) for use in the WavePort project in Spain. For this initiative, worth €2.2 million and
awarded in Fiscal 2012, OPT is working with a consortium of European companies and institutions to
advance the energy conversion system of the PowerBuoy through the development of a new wave
prediction model. The new system is expected to assess the characteristics of incoming waves before
they reach the PowerBuoy. This is expected to boost the power output of the PowerBuoy and reduce
cost per megawatt hour of energy produced. We are very pleased with the results of our work including
the MPTO, which demonstrated improved efficiencies of the system. The WavePort PowerBuoy is
expected to be deployed at a site off the north coast of Spain, along with other components of the
project to be provided by members of the consortium.
While Fiscal 2013 was a year of continued development towards commercialization of our cutting-edge
PowerBuoys, we had several challenges to meet. In Oregon, we completed certain work towards
deployment, including buoy assembly and land testing of a Mark 3 PowerBuoy, and were prepared to
deploy the anchors, mooring and PowerBuoy off the coast of Reedsport in late September 2012.
Unfortunately, the anchor/mooring system was unable to be deployed before the onset of unfavorable
weather conditions. Further, in February 2013, we received notice from the staff of the Federal Energy
Regulatory Commission (“FERC”) that this first non-grid connected PowerBuoy would be subject to
FERC jurisdiction. In other words, OPT would need to meet all FERC requirements associated with a
full grid-connected array of PowerBuoys. This means that OPT would need to comply with further
reporting and related expenditures prior to deployment of the first buoy. This has had a significant
impact on both timing and anticipated expense. We are working with FERC and stakeholders in Oregon
to see how best to move forward. We have also recently engaged a consultant to serve as our Pacific
Northwest representative, and he will help manage this process as well as work with interested local
groups in Oregon.
We need to seek additional funding specific to this project for deployment of this PowerBuoy in view of
increased project costs, including those associated with weather delays and regulatory issues.
Deployment of this initial buoy will depend on resolution of these financial and regulatory issues, and
such deployment is expected to be delayed beyond calendar 2013.
Late in Fiscal 2013, we changed the nomenclature of our PowerBuoys to focus on product classes.
Among the utility PowerBuoy products, the PB150 is now called the Mark 3 PowerBuoy, which currently
drives a peak rated generator with a maximum power output of 866 kW. The PB500 is now called the
Mark 4 PowerBuoy, which is planned to drive a peak rated generator with a maximum output of 2,400
kW. This method of power rating is more closely aligned with that utilized by other renewables such as
wind and solar, as well as conventional fossil-fueled generation.
Among our Autonomous PowerBuoy (“APB”) products, the LEAP system is now called the APB 350,
and the OPT MicroBuoy will be called the APB 10. The power rating for our Autonomous PowerBuoys
denotes the amount of continuous power that can be maintained for deep-sea applications.
We increased our focus on the Autonomous PowerBuoy market during Fiscal 2013, making a
concerted effort this fiscal year to move APBs towards being a significant area of potential growth for
OPT. We dedicated more resources to the advancement of this line of smaller PowerBuoys across a
broader power spectrum and investigated new avenues for bringing these products to market. Our
APBs are not grid connected but rather designed to operate remotely and autonomously, in deeper
ocean environments under a variety of applications. We continue to view certain key areas as offering
significant pathways to growth – including offshore oil and gas operations, defense and homeland
security, and oceanographic data gathering. We are researching a number of opportunities within these
end markets and won a Cooperative Research and Development Agreement (“CRADA”), with the U.S.
Department of Homeland Security Science & Technology Directorate in Fiscal 2013. A new contract
tied to the CRADA, provided to OPT by the Maryland Technology Development Corporation, has been
utilized to improve our APB 350 Autonomous PowerBuoy, which was previously deployed in 2011 as
part of the U.S. Navy’s LEAP program and performed well even during Hurricane Irene. Under the new
contract, we are adding a sonar detection system. We are excited about this expanded vessel detection
and ocean surveillance capability, and we are looking at other potential markets within the defense and
homeland security arena.
Within offshore oil and gas markets, we are targeting remote field applications for monitoring activities
and other subsea operations near well sites. We have identified many areas where our APB technology
can bring a unique solution for in-ocean energy requirements. Likewise, our products can be used for
oceanographic studies related to global warming, weather prediction or other purposes. Overall, there
are many attractive markets for these smaller Autonomous PowerBuoys. While gaining entry to the
markets is taking time, we hope to see increased market traction in Fiscal 2014.
In addition, we are pursuing other opportunities in Europe and North America that can leverage our
PowerBuoy technology for both on-grid and off-grid applications – speaking with utilities, governments,
and industry alike. We are also applying for additional grants and seeking partners to expedite the
development of our Utility and Autonomous PowerBuoys, and we are optimistic that Fiscal 2014 should
bring new opportunities that will utilize wave energy production in many parts of the world.
During Fiscal 2013, two important additions were made to the Company’s leadership team. Terence J.
Cryan joined the Company’s Board of Directors. He is co-founder and managing director of Concert
Energy Partners, a New York-based private equity firm focused on the alternative energy, power and
natural resources industries. The Company also announced the appointment of Dr. Mike Mekhiche to
the position of Vice President, Engineering. Dr. Mekhiche was previously with BAE Systems, where he
had most recently held the position of Director of Programs. In that capacity, he oversaw the design,
development, production and systems integration of an advanced power management and hybrid
propulsion product line for various industrial and defense applications.
In closing, Ocean Power Technologies is well positioned to continue leading the way towards
commercialization of our PowerBuoy wave energy systems. While we faced some challenges in Fiscal
2013, we believe the Company remains at the forefront of some very exciting and diversified
opportunities for growth. Throughout Fiscal 2013, we kept an eye on costs and worked diligently to
reduce overhead and streamline operations, resulting in a reduction of nearly $4.0 million of the
Company’s annualized cash burn rate. We remain focused on disciplined cost management in Fiscal
2014.
We thank our investors for their continued support and interest in Ocean Power Technologies and look
forward to reporting on more achievements in Fiscal 2014 and beyond – as we work to gain further
traction with our PowerBuoys across the globe.
Charles F. Dunleavy
Chairman & Chief Executive Officer
Dr. George W. Taylor
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, 2013
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 (§232.405 of this chapter) 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 (§229.405 of this chapter) 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 ☐
(Do not check if a smaller reporting company)
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, 2012, the last business day of
the registrant's most recently completed second fiscal quarter, was $23.8 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, 2013 was 10,355,140.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 2013 Annual Meeting of Stockholders, to be filed within 120 days of April 30, 2013, are
incorporated by reference in Part III. Such Proxy Statement, except for the parts therein which have been specifically incorporated by
reference, shall not be deemed “filed” for the purposes of this Annual Report or Form 10-K.
OCEAN POWER
TECHNOLOGIES, INC.
INDEX TO REPORT ON FORM 10-K
PART I
Item 1:
Business ..................................................................................................................................................
Item 1A: Risk Factors ............................................................................................................................................
Item 1B: Unresolved Staff Comments ...................................................................................................................
Properties ................................................................................................................................................
Item 2:
Item 3:
Legal Proceedings ...................................................................................................................................
Item 4: Mine Safety Disclosures .........................................................................................................................
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities .....................................................................................................................................
Item 6:
Selected Financial Data ...........................................................................................................................
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations ..................
Item 7A: Quantitative and Qualitative Disclosures About Market Risk ................................................................
Financial Statements and Supplementary Data .......................................................................................
Item 8:
Item 9:
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .................
Item 9A: Controls and Procedures .........................................................................................................................
Item 9B: Other Information ...................................................................................................................................
Item 10: Directors, Executive Officers and Corporate Governance ......................................................................
Item 11: Executive Compensation .........................................................................................................................
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13: Certain Relationships and Related Transactions, and Director Independence ........................................
Item 14: Principal Accountant Fees and Services .................................................................................................
PART III
Page
1
19
33
33
33
33
34
34
34
46
46
46
46
47
48
48
48
48
48
Item 15: Exhibits, Financial Statement Schedules ................................................................................................
49
PART IV
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 Annual 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.
Our fiscal year ends on April 30. References to fiscal 2013 are to the fiscal year ended April 30, 2013.
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 and continue to develop two
PowerBuoy product lines, 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 continue to develop
and expect to 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 is that an increased portion of our revenues 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 and until we achieve positive cash flow from the planned
commercialization of our products and services.
Our PowerBuoy system is based on modular, ocean-going buoys, which we have been ocean testing for over 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 product lines 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 Mark 3
PowerBuoy (previously referred to as the “150kW PowerBuoy” or “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 Mark 3’s structure, hydrodynamics,
mooring and anchoring. This PowerBuoy was deployed off the coast of Scotland from April 2011 through October
2011.
● 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 APB-350 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 APB-350 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. The APB-350 Autonomous PowerBuoy is designed to provide persistent, off-grid clean energy in remote
ocean locations. 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. Within the Homeland Security market sector, in 2012 we were awarded
by the U.S. Department of Homeland Security a Cooperative Research and Development Agreement, or CRADA,
which will utilize the same APB-350 Autonomous PowerBuoy as was deployed off the coast of New Jersey in
2011 under the LEAP program.
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, with the goal of generating electricity from our technology at a
levelized cost of energy competitive with other alternative sources of energy. Currently, we are marketing Mark 3
PowerBuoys that drive a peak rated generator with a maximum output of 866 kW. We have also initiated product
development efforts in connection with our Mark 4 PowerBuoy (previously referred to as the “500 kW PowerBuoy” or
“PB500”). The Mark 4 PowerBuoy is planned to drive a peak rated generator of 2.4 MW. Under a multi-year planned
program, structural development of the Mark 4’s major subsystems is in progress, and wave tank tests of models have been
performed. Assuming we are able to reach significant annual manufacturing volume levels of our Mark 4 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 Mark 3 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 continue to develop and 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 marine energy devices are also included in the USP.
An important element of our business strategy is to expand our partnerships in key market areas. Our recent
relationships are with the following:
● The Commonwealth of Australia, which granted Victorian Wave Partners Pty. Ltd (VWP) an A$66.5 million
conditional grant in connection with a planned 19 megawatt (MW) (62.5 MW peak generator rating) wave power
project off the cost of Victoria, Australia. Our Australian subsidiary Ocean Power Technologies (Australasia) Pty.
Ltd owns 100% of VWP.
● 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 Mark 3 PowerBuoy project near
Reedsport, Oregon. This builds on previous work we conducted with Lockheed Martin. In addition, both
companies entered into a teaming agreement relating to the VWP wave energy project in Victoria, Australia.
● Mitsui Engineering and Shipbuilding, with which we are working to develop a wave power project in Japan.
● The United States Navy:
— From 2009 to 2011, we ocean-tested our PowerBuoy at the US Marine Corps Base Hawaii at Kaneohe 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 Mark 3 PowerBuoy
off the coast of Oregon.
2
● The Scottish Government, to develop a Mark 3 PowerBuoy, which was deployed off the coast of Invergordon,
Scotland in 2011.
● The European Union (EU) has awarded funding to deploy a PowerBuoy off the coast of northern Spain. We
commenced work under the EU 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.
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,
is
telephone number
Pennington, New Jersey 08534, and our
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.
(609) 730-0400. Our website address
is
Our Market
The World Energy Council has stated that 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 an April 2013 report from Bloomberg New Energy Finance, annual spending on clean energy projects
that do not contribute to greenhouse-gas pollution may rise to $630 billion by 2030 from $190 billion in 2012. 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.
3
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 — 50MW and above — can be installed in a relatively small area. We estimate that, upon completion of
the development of our Mark 4 PowerBuoy system, we will be able to construct a wave power station that we
expect would occupy less of the ocean surface than many offshore wind power stations of equivalent capacity.
● 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 on-shore
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 near shore 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 near shore
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 near shore 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
4
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 Mark 3 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 visibility from the shore.
Utility PowerBuoy System
The utility PowerBuoy system is designed to transmit electricity to shore by an underwater power cable, which would
then be connected to a power grid. Our utility PowerBuoy system presently being marketed to customers, the Mark 3,
drives a peak rated generator of 866 kW. 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, 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 Mark 3 PowerBuoy were conducted in 2011. These ocean trials were conducted at a site
approximately 33 nautical miles from Invergordon, off Scotland’s northeast coast. Our utility scale Mark 3 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 with the goal of generating electricity from our technology at a
levelized cost of energy consistent with other alternative sources of energy. Currently we are marketing our Mark 3
PowerBuoys. We have also initiated product development efforts in connection with our Mark 4 PowerBuoy that will drive
a peak rated generator of 2.4 MW. Development of the Mark 4’s major subsystems is in progress, and wave tank tests of
models have been performed. Assuming we are able to reach significant annual manufacturing volume levels of our Mark 4
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.
5
If we achieve economies of scale for our Mark 3 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.
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 continuous output from 10 watts to
350 watts, depending on the application. In addition, the Mark 3 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 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. During its deployment, the system successfully
endured Hurricane Irene’s storm force waves as high as 50 feet. 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. The U.S. Department of
Homeland Security has awarded to us a CRADA, which will utilize the same APB-350 Autonomous PowerBuoy as was
deployed off the coast of New Jersey in 2011 under the LEAP program. In addition to the radar system payload included
under the LEAP program, this next deployment of the APB-350 will include an acoustic sensor array which will expand the
maritime surveillance capability.
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 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 over 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 Mark 3 PowerBuoy were conducted
in 2011. These ocean trials were conducted at a site approximately 33 nautical miles from Invergordon, off
Scotland’s northeast coast. 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 Mark 3 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 by Intertek 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 EU, 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.
● Our relationship with the US Navy has allowed us 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:
2013
2012
2011
US Department of Energy .................................................................
US Navy ............................................................................................
UK Government's Technology Strategy Board .................................
EU (WavePort project) ......................................................................
Mitsui Engineering & Shipbuilding ..................................................
51%
3%
3%
17%
20%
32%
29%
20%
13%
3%
28%
52%
14%
-
3%
These revenues were largely for the support of our product development efforts. Our goal in the future is that an
increased portion of our revenues 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.
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 (62.5 MW peak generator
rating) wave power project off the coast of Victoria, Australia. In November 2009, we announced that VWP was awarded
an A$66.5 million (approximately US$62 million) grant from the Federal Government of Australia for the wave power
project. The grant is subject to certain terms, including development and 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.
In July 2012, we entered into a teaming agreement with Lockheed Martin with the goal of developing the VWP wave
energy project in Australia. In order to expedite development of this project, Lockheed Martin plans to assist us with
PowerBuoy design and manufacturability, lead the production and system integration of the wave energy converters, and
support overall program management. We are assessing various financing opportunities for the project as well as potential
power purchase agreements with local industry and utilities.
We are in discussion with the Commonwealth agency that is managing the grant, Australian Renewable Energy
Agency, regarding variations to the grant’s funding deed proposed by us and progress toward funding milestones. We have
engaged a financial advisor to assist with the negotiations pertaining to power purchase agreements and for financing of
Stage 1 of this planned three-stage project.
Japan
In the fiscal year ended April 30, 2013 we worked with Mitsui Engineering & Shipbuilding under a contract worth
¥70 million (approximately US$0.7 million). This contract funded additional work to enhance our PowerBuoy technology
for Japanese sea conditions. We analyzed methods to maximize buoy power capture as well as modeling and wave tank
testing. We and Mitsui Engineering & Shipbuilding also evaluated novel mooring strategies. In fiscal year 2014, we expect
8
a decision to be made on the next steps toward ocean trials of a demonstration PowerBuoy off the coast of Japan. This
initial buoy would provide the basis for a potential build-out of a commercial-scale wave power station in Japan.
Reedsport, Oregon Project
Our plan has been to deploy a single, non-grid connected Mark 3 PowerBuoy off the coast of Reedsport, Oregon. This
PowerBuoy was to be the first PowerBuoy in a prospective build out of a 1.5 megawatt grid-connected wave power station
for 10 PowerBuoys at that location.
We received a License from the Federal Energy Regulatory Commission (FERC) in August 2012 which authorized
installation and operation of a grid connected wave energy array. The License was the culmination of negotiation and
collaboration between us and stakeholders which resulted in the execution of a comprehensive settlement agreement among
us and 13 federal and state agencies and non-governmental agencies in July 2010 (“Settlement Agreement”). 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 Adaptive Management Plan 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 negotiating the Settlement Agreement, we anticipated that we would deploy a single, non-
grid connected buoy prior to obtaining the FERC License and subject to separate approvals from the US Army Corp of
Engineers, National Marine Fisheries Service, Oregon Department of State Lands and others to ensure the legal and safe
deployment and operation of the buoy. This buoy was not deployed prior to FERC’s issuance of the License nor
immediately thereafter as had been planned.
FERC staff informed us in February 2013 of their view that the License’s various planning, reporting and other pre-
and post-deployment requirements may extend to this first, non-grid connected buoy. In May 2013, we filed a Motion for
Extensions to Comply with License Requirements with FERC. This motion sought to move those various requirements into
the future, aligning them with deployment of the full array of 10 PowerBuoys, so that they would not apply to the first non-
grid connected buoy. In June 2013, FERC issued an order extending certain requirements for one year rather than aligning
those requirements with the 10-buoy array as requested. By separate letter, we were informed by the FERC staff that the
agency’s position remains that the License’s various requirements extend to the deployment of this initial buoy, and that we
may request an amendment of its License seeking to modify various requirements. Pending ultimate resolution of this
matter, we may be required to submit certain reports and perform additional studies associated with the first buoy. This
process will require significant delay of the deployment of the first PowerBuoy, as well as impose additional costs on us.
We continue to evaluate various options in response to the FERC staff’s position; however, absent a successful request by
us either challenging FERC’s jurisdiction or seeking to modify the License to alleviate some or all of these new
requirements, we will have to comply with the current License in the first buoy deployment.
We intend to seek additional funding specific to this project for deployment of this PowerBuoy in view of costs
associated with regulatory issues and weather delays. Deployment of this initial buoy will depend on resolution of these
financial and regulatory issues, and such deployment is expected to be delayed beyond calendar 2013.
Previous milestones in connection with this project include the following:
●
●
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 Mark 3 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 was 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. The scope of this award is final assembly,
deployment and ocean trials of the first PowerBuoy.
In September 2011, we announced our collaboration 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.
9
Mark 4 PowerBuoy
In April 2010, we received a $1.5 million award from the DOE for the development of our next generation Mark 4
PowerBuoy wave power system. In the fiscal year ended April 30, 2011, we received awards of an additional $4.7 million
for development of the Mark 4, $2.4 million from the DOE and $2.3 million from the UK Government’s Technology
Strategy Board. We are using proceeds from these grants to help fund the scale-up of the power output per PowerBuoy. In
addition, the technology development effort will focus on increasing the power extraction efficiency and reliability. Further
design of the Mark 4 PowerBuoy and major subsystems are in progress, and wave tank tests of the models have been
performed.
US Navy:
LEAP – APB-350
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. We were awarded by the U.S. Department of Homeland Security a
Cooperative Research and Development Agreement, or CRADA, which will utilize the same APB-350 Autonomous
PowerBuoy as was deployed off the coast of New Jersey in 2011 under the LEAP program.
Scotland Project
In 2007, we received a $1.8 million contract from the Scottish Executive toward the construction and testing of a
Mark 3 grid-connected PowerBuoy system. Ocean trials of that PowerBuoy were conducted in 2011. These ocean trials
were conducted at a site approximately 33 nautical miles from Invergordon, off Scotland’s northeast coast. Our utility scale
Mark 3 structure and mooring system has achieved independent certification from Lloyd’s Register. This certification from
Lloyd’s Register confirms that the Mark 3 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:
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 a site on the north coast of
Spain. We commenced work under this grant in fiscal 2012.
During fiscal 2013, OPT completed testing of the innovative modular power take-off system for the PowerBuoy. This
work demonstrated improved efficiencies of the system. In addition, construction of various parts of the PowerBuoy was
completed. It is anticipated that the PowerBuoy will be deployed at a site off the north coast of Spain, along with other
components of the project to be provided by members of the consortium.
10
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 rated PowerBuoy system and the ocean-based substation and infrastructure required to connect nine
additional Mark 3 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.
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, 2013, our total negotiated backlog was $3.8 million compared with $6.8 million at April 30, 2012. We
anticipate that the majority of our backlog will be recognized as revenue over a period exceeding 12 months. The decrease
in backlog is a result of revenue recognized during the period offset by new orders during fiscal 2013 of $0.8 million and
changes in foreign currency of $0.2 million. New orders during fiscal 2013 included an approximately $0.7 million contract
from Mitsui Shipbuilding & Engineering to further work towards development of the Company’s PowerBuoy technology
for application in Japanese sea conditions. A portion of our backlog at April 30, 2013, is for our Oregon project, and we
intend to seek additional funding to enable completion of this project. Most of our backlog at April 30, 2013 and 2012
consisted of cost-sharing contracts as described in the Financial Operations Overview section of the Management’s
Discussion and Analysis included elsewhere in this Annual Report. Our backlog can include 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 $3.8 million and $4.8 million at April 30, 2013 and 2012, respectively.
11
The amount of contract backlog is not necessarily indicative of future revenue because modifications to or
terminations of present contracts and production delays can provide additional revenue or reduce anticipated revenue. A
substantial majority of our revenue is recognized using the percentage-of-completion method, and changes in estimates
from time to time may have a significant effect on revenue and backlog. Our backlog is also typically subject to large
variations from time to time due to the timing of new awards.
Our Business Strategy
Our business goals are to strengthen our leadership in developing wave energy technologies and to achieve
commercial status for our utility and autonomous product lines. In order to achieve these goals, we are pursuing the
following business strategies:
● 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, with the goal of generating electricity from
our technology at a levelized cost of energy competitive with that of other alternative sources of energy. If we
increase the size of a PowerBuoy system or increase its energy conversion efficiency, we expect to 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 megawatt of our PowerBuoy system and the cost per
megawatt hour of the energy generated.
● Sell turn-key power stations and operating and maintenance contracts. Our fundamental business plan for the
utility market sector 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.
● 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, 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. The U.S.
Department of Homeland Security has awarded to us a CRADA, which will utilize the same APB-350
Autonomous PowerBuoy as was deployed off the coast of New Jersey in 2011 under the LEAP program.
● 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 utility and
autonomous PowerBuoys because they combine appropriate wave conditions, political and economic stability,
large population centers, high levels of industrialization and significant and increasing electricity requirements.
● Leverage customer relationships to enhance the commercial acceptance of our PowerBuoy systems. We believe
that the work we have performed for the US Navy, including our grid-connected project at the US Marine Corps
base in Oahu, Hawaii and our APB-350 autonomous PowerBuoy under the LEAP program, may serve as the
prototype for similar projects for the US Government and at other international sites. Further, we believe that our
work with Mitsui Engineering and Shipbuilding will enhance our core PowerBuoy technology. 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,
independent power producers and governmental agencies.
● Maximize customer funding of technology development. We actively seek to obtain external funding for the
12
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 Mark 4
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 Mark 4 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.
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 technology, the decision process of a customer requires us to make 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.
In 2012, we established a new business unit to assess, target and develop opportunities in the potential markets for our
autonomous PowerBuoys.
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, 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, and similar governmental agencies in other countries
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, 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" power take-off 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.
13
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 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 is then connected to the USP, which in turn is connected to the grid or the
distributed power site. At this point, the fully assembled PowerBuoy would be ready for final testing and 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 Mark 3 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 $7.3 million for fiscal 2013 and $8.3 million for fiscal 2012.
14
We are currently working on the design for our Mark 4 PowerBuoy. The key to increasing the energy output of the
PowerBuoy system is to increase the system's efficiency as well as its wave energy capture 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-rated PowerBuoy systems are transported to the onshore deployment sites using standard flatbed trucks;
however, the fully-assembled Mark 3 PowerBuoy systems are too large for these trucks and need to be transported in
modules and assembled on-site. In addition, we will need to adjust the mooring system to account for the larger-sized
PowerBuoy systems.
We 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, 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.
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, 2013, we owned a total of 52 issued United States patents and 16 United States patent applications.
We have pending foreign counterparts to 23 of our issued patents and 13 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 2013 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.
15
Competition
We compete and will compete with power generation equipment suppliers in all segments of the electric power
industry, including wave energy, other forms of renewable energy and traditional fossil fuel. The renewable energy
industry is both highly competitive and continually evolving as participants strive to differentiate themselves within their
markets and compete within the larger electric power industry. Many of our competitors in certain of these segments have
established a stronger market position than ours and have greater resources and name recognition than we have. In addition,
there are many companies, including some of the largest multinational energy companies, that are developing or sponsoring
innovative technologies for renewable energy production. Accordingly, our success depends in part on developing and
demonstrating the commercial viability of wave energy solutions and identifying markets for and applications of our
PowerBuoy systems and technology.
Although the market for equipment that generates electricity from wave energy is in its early stage of commercial
development, there are a number of private companies, some with institutional funding, developing technologies to
generate electricity from wave energy, and we compete or will compete with them. We believe there are over 75 companies
worldwide developing wave energy technologies. Many 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 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
16
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. We received the License from FERC in August 2012 which
authorizes installation and operation of a grid connected wave energy array and cable at Reedsport, Oregon. The sale and
transmission of electricity outside the US is also subject to governmental rules and regulations.
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.
17
In 2008, the US enacted the Energy Improvement and Extension Act of 2008, which enables owners of wave power
projects in the US to receive federal tax credits, thereby improving the long-term economics of wave power as a renewable
energy source. The Act expands the definition of qualifying facilities for the Production Tax Credit (PTC) to include those
that generate power from marine renewables (including wave and tidal sources). As a result, the PTC is now available for
electricity produced and generated after October 3, 2008 from marine renewable energy facilities with a "nameplate
capacity" of at least 150kW, and that are placed in service anytime between October 3, 2008 and December 31, 2013. The
credit rate for marine renewables is $0.01 per kilowatt hour, and the duration of the credit will be ten years after the facility
is placed in service. The PTC legislation is scheduled to expire at the end of 2013.
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 is 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. Other similar programs are currently in place in Australia, but are
subject to amendment with possible changes in Government leadership.
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, 2013, we had 34 full-time employees. Of these employees, 28 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 the
deployment and storage of our PowerBuoy systems.
18
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 may not be able to raise sufficient capital to continue to operate our business.
We have incurred negative operating cash flows since our inception. We will require additional equity and/or debt
financing. 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 additional funding unavailable, or 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.
During the fourth quarter of fiscal 2013, we filed a shelf registration statement on Form S-3 in order to allow us to
access the capital markets. More recently, we have entered into an At the Market Offering Agreement, or ATM Agreement,
with Ascendiant Capital Markets, LLC (“Ascendiant”). Under the ATM Agreement, we may sell and issue from time to
time, through Ascendiant as sales agent and/or principal, shares of common stock at prevailing market prices in ordinary
brokerage transactions. The sale of common stock pursuant to the ATM Agreement, or of other equity or convertible
securities, would be dilutive to our stockholders. If additional funds are raised through the issuance of preferred stock or
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.
If we are unable to obtain financing to meet the requirements of government or other grants, we may be unable to
continue the development of our business.
Certain of our current projects depend on government grants to fund research and development, testing and
deployment of our PowerBuoy systems. Our receipt of funds under these government grants is frequently conditioned on
our obtaining other financing as a prerequisite to receiving all or portions of funds under the grant. For example, our VWP
project in Australia has received a grant of A$66.5 million from the Australian government, but receipt of funds under this
grant is contingent on the ability to raise significant external funds. If we are unable to secure sufficient external funding on
a timely basis, a granting agency could determine to withdraw the grant, change the terms of the grant in ways that make
the project less attractive for us, or require us to self-fund the project. We may be unable or unwilling to self-fund a project
now or in the future, so our projects are subject to the risk of substantial delay or abandonment based on the availability of
external funding. Our inability to obtain grants, or to meet funding or performance milestones related to grants we obtain,
could jeopardize the particular project and could damage our reputation and our relations with our commercial partners, any
of which could adversely affect our financial condition and results of operations.
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 $14.7 million in fiscal 2013 and $15.1 million in fiscal 2012. As of April 30, 2013, we had an
accumulated deficit of $140.7 million. These losses have resulted primarily from costs incurred in our research and
development programs and from our selling, general and administrative costs. 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
19
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.
Our future success in the utility power markets depends on our ability to increase the energy output of our utility
PowerBuoy system. If we are unable to increase the energy 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 energy output of our utility PowerBuoy system. Our success in meeting this
objective depends on our ability to significantly increase the energy 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 designing 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 energy 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.
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
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.
20
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, including 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 $7.3 million in fiscal 2013 and
$8.3 million in fiscal 2012. 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.
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
21
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 over 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 20 to 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.
We have not yet deployed a wave power station consisting of an array of two or more PowerBuoy systems in a single
geographic location. If we are unable to successfully 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
planned VWP project in Australia contemplates deploying an array of multiple PowerBuoys in one geographic location.
Whether we are able to do so, in Australia or elsewhere, is contingent upon, among other things, receipt of required
governmental permits, obtaining adequate financing, successful array design implementation and, finally, successful
deployment and connection of the PowerBuoy systems.
We have not yet 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 the use of an underwater
substation to connect the power transmission cables from, and collect the electricity generated by, each PowerBuoy system
in the array. We have not yet deployed an underwater substation connected to multiple PowerBuoys. If our underwater
substation does not work as we anticipate, we would 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.
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. We may be unsuccessful in accomplishing any of these tasks or doing
so on a timely basis.
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.
22
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. 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.
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. As such growth is realized, we may add sales,
marketing and engineering offices in additional locations, which may include Australia, Japan, and continental Europe.
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.
23
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 51% of our revenues and the US Navy accounted for 3% of our revenues during fiscal 2013.
In fiscal 2012, revenues from the DOE accounted for 32% of our total revenues and the US Navy accounted for 29% 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. A customer’s payment default, or the loss of a customer as a result of competition,
creditworthiness, our failure to perform, our inability to negotiate extensions or replacements of contracts or otherwise
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 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, in connection with our Victoria, Australia project,
a grant from 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, strategic 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.
24
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.
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.
25
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 2013 and fiscal 2012, we derived 54% and 61%,
respectively, of our total revenue from contracts with the DOE and US Navy.
US federal government contracts are also subject to contractual and regulatory requirements that may increase our
costs of doing business and could expose us to substantial contractual damages, civil fines and criminal penalties for
noncompliance. These requirements include business ethics, equal employment opportunity, 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. Revenues from
customers who are based outside of the United States accounted for 41% of our revenues in fiscal 2013 and 36% of our
revenues in fiscal 2012. 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;
26
●
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.
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
27
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.
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.
28
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.
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 Charles Dunleavy, our chairman and chief executive officer, and Dr. George
Taylor, our executive vice-chairman; 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
29
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.
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
30
be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise
become known or be independently developed by competitors.
If we infringe or are alleged to infringe intellectual property rights of third parties, our business, financial condition
and results of operations could be adversely affected.
Our products may infringe, or be claimed to infringe, patents or patent applications under which we do not hold
licenses or other rights. Third parties may own or control these patents and patent applications in the United States and
abroad. From time to time, we receive correspondence from third parties offering to license patents to us. Correspondence
of this nature might be used to establish that we received notice of certain patents in the event of subsequent patent
infringement litigation. Third parties could bring claims against us that would cause us to incur substantial expenses and, if
successfully asserted against us, could cause us to pay substantial damages. Further, if a patent infringement suit were
brought against us, we could be forced to stop or delay manufacturing or sales of the product or component that is the
subject of the suit.
As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a
license from the third party and be required to pay license fees, royalties or both. These licenses may not be available on
acceptable terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in
our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of
our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses
on acceptable terms. This could significantly and adversely affect our business, financial condition and results of
operations.
In addition to infringement claims against us, we may become a party to other types of patent litigation and other
proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition
proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and
technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. In
addition, if we were to license our intellectual property to others, we may be required to indemnify our licensee if the
licensed intellectual property is found to be infringing on a third party’s rights. Some of our competitors may be able to
sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources.
Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material
adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb
significant management time.
Risks Related to our Common Stock
Provisions in our corporate charter documents and under Delaware law may delay or prevent attempts by our
stockholders to change our management and hinder efforts to acquire a controlling interest in us.
As a result of our reincorporation in Delaware in April 2007, provisions of our certificate of incorporation and bylaws
may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable,
including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions may
also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:
●
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, 2013, the 52-week high and low prices for our common stock were $3.97 and $1.45,
respectively. The stock market in general has recently experienced 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.
We may become the target of securities litigation, which is costly and time-consuming to defend.
In the past, companies that experience significant volatility in the market price of their publicly-traded securities have
become subject to class action securities litigation. If the market value of our securities experiences adverse fluctuations
and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our
management’s attention could be diverted from the operation of our business, causing our business to suffer.
If securities or industry analysts fail to cover us, or do not publish research or publish unfavorable or inaccurate
research about our business, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts
may publish about us, our business or our industry from time to time. If one or more of these analysts cease coverage of our
company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could
cause the price or trading volume of our common stock to decline. Moreover, if one or more of the analysts who cover our
32
company downgrade our common stock or release a negative report, or if our operating results do not meet analyst
expectations, the price of our common stock could decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Pennington, New Jersey, where we occupy approximately 22,000 square
feet under a lease expiring on April 30, 2015. 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, 2014. 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, which may include
Australia, Japan and continental Europe and the west coast of North America.
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. MINE SAFETY DISCLOSURES
None.
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, 2013, there were 247 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.
Year Ended April 30, 2013
First quarter ..............................................................................................................
Second quarter ..........................................................................................................
Third quarter ............................................................................................................
Fourth quarter ...........................................................................................................
Year Ended April 30, 2012
First quarter ..............................................................................................................
Second quarter ..........................................................................................................
Third quarter ............................................................................................................
Fourth quarter ...........................................................................................................
$
$
Dividend Policy
Nasdaq Global Market
Low
High
$
$
3.97
3.50
3.42
2.19
5.15
5.60
3.92
3.90
2.00
2.31
2.00
1.45
3.21
2.33
2.45
2.60
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
There have been no unregistered sales of equity securities or purchases of equity securities by the Company that are
required to be disclosed.
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. Our fiscal
year ends on April 30. References to fiscal 2013 are to the fiscal year ended April 30, 2013.
34
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 and continue to develop two
PowerBuoy product lines, which consist of our utility PowerBuoy system and our autonomous PowerBuoy system. We also
offer operations and maintenance services for our PowerBuoy systems. In addition, we continue to develop and expect to
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 is that
an increased portion of our revenues 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 its 100% ownership 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, or APB-350,
incorporates a unique power take-off and on-board storage system, and is significantly 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 Mark 3
PowerBuoy (previously referred to as “150kW PowerBuoy” or “PB150”) 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 Mark 3 PowerBuoy produced power in excess of our expectations of performance. Our utility scale Mark 3
PowerBuoy structure and mooring system achieved independent certification from Lloyd’s Register in December 2010.
This certification confirms that the Mark 3 PowerBuoy design complies with the requirements of Lloyd’s 1999 Rules and
Regulations for the Classification of Floating Offshore Installations at Fixed Locations.
During fiscal 2013, we continued work on projects with Mitsui Engineering & Shipbuilding and the US Department
of Homeland Security, our WavePort project in Spain and our Mark 3 PowerBuoy in Oregon. We also continued to work
on developing our Mark 4 PowerBuoy (previously referred to as “PB500 PowerBuoy”).
We are planning for deployment of a second Mark 3 PowerBuoy, which would be located off the coast of Oregon.
However, deployment and commissioning of this PowerBuoy must take into consideration various regulatory, business,
and financial factors, including requirements of regulatory agencies and a significant use of funds. The FERC staff
informed us in February 2013 of their view that the License’s various planning, reporting and other pre- and post-
35
deployment requirements may extend to this first, non-grid connected buoy. In May 2013, we filed a Motion for Extensions
to Comply with License Requirements with FERC. This motion sought to move those various requirements into the future,
aligning them with deployment of the full array of 10 PowerBuoys, so that they would not apply to the first non-grid
connected buoy. In June 2013, FERC issued an order extending certain requirements for one year rather than aligning those
requirements with the 10-buoy array as requested. By separate letter, we were informed by the FERC staff that the agency’s
position remains that the License’s various requirements extend to the deployment of this initial buoy, and that we may
request an amendment of its License seeking to modify various requirements. Pending ultimate resolution of this matter, we
may be required to submit certain reports and perform additional studies associated with the first buoy. This process will
require significant delay of the deployment of the first PowerBuoy, as well as impose additional costs on us. We continue
to evaluate various options in response to the FERC staff’s position; however, absent a successful request by us either
challenging FERC’s jurisdiction or seeking to modify the License to alleviate some or all of these new requirements, we
will have to comply with the current License in the first buoy deployment.
OPT intends to seek additional funding specific to this project for deployment of this PowerBuoy in view of costs
associated with regulatory issues and weather delays. Deployment of this initial buoy will depend on resolution of these
financial and regulatory issues, and such deployment is expected to be delayed beyond calendar 2013.
Our efforts continued toward deployment of the planned 19MW (62.5MW peak generation rating) wave power
project off the coast of Victoria, Australia. Funding for this project includes a grant of A$66.5 million (approximately
US$62 million) awarded by the Commonwealth of Australia. The grant is subject to certain terms, including achievement
of significant external funding milestones, in order to enable our receipt of the grant funds. We have engaged a financial
advisor to lead efforts to structure power purchase agreements and secure appropriate financing for this project. The Board
of Directors of the Australian Renewable Energy Agency, the Commonwealth agency, that manages the grant, is reviewing
the status of the grant, including progress toward funding milestones and amendments to the grant as proposed by us.
At April 30, 2013, our total negotiated backlog was $3.8 million compared with $6.8 million at April 30, 2012. We
anticipate that the majority of our backlog will be recognized as revenue over a period exceeding 12 months. The decrease
in backlog is a result of revenue recognized during the period offset by new orders during fiscal 2013 of $0.8 million and
changes in foreign currency of $0.2 million. New orders during fiscal 2013 included an approximately $0.7 million contract
from Mitsui Shipbuilding & Engineering (“MES”) to further work towards development of the Company’s PowerBuoy
technology for application in Japanese sea conditions. A portion of our backlog at April 30, 2013, is for our Oregon project,
and we intend to seek additional funding to enable completion of this project. Most of our backlog at April 30, 2013 and
2012 consisted of cost-sharing contracts as described in the Financial Operations Overview section of this Management’s
Discussion and Analysis. Our backlog can include 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 $3.8 million and $4.8 million at April
30, 2013 and 2012, respectively.
For fiscal 2013, we generated revenues of $3.6 million and incurred a net loss attributable to Ocean Power
Technologies, Inc. of $14.7 million, and 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. As of April 30, 2013, our accumulated deficit was $140.7
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 continued global economic uncertainty may have a negative effect on our business, financial condition and
results of operations. Currently, the cost of electricity generated from wave energy, without the benefit of subsidies or other
economic incentives, substantially exceeds the prevailing price of electricity in many 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 magnitude of government
incentives and subsidies for wave energy. Federal, state and local governmental bodies in many countries 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. The timing, scope and size of new government programs
for renewable energy is uncertain, and there can be no assurances that we or our customers will be successful in obtaining
any additional government funding. We do not believe the continuing global economic uncertainty will have a material
36
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.
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 2013 were under cost-sharing contracts.
The following table provides information regarding the breakdown of our revenues by customer for fiscal years 2013
and 2012:
Years Ended April 30,
($ millions)
2013
2012
US Department of Energy ................................................................................................ $
Mitsui Engineering & Shipbuilding .................................................................................
European Union (WavePort project) ................................................................................
US Navy ...........................................................................................................................
UK Government's Technology Strategy Board ................................................................
Others ...............................................................................................................................
$
1.8 $
0.7
0.6
0.1
0.1
0.3
3.6 $
1.8
-
0.8
1.6
1.1
0.4
5.7
The revenue decrease for fiscal 2013 reflected significant decreases in revenue from the US Navy attributable to
completion of the LEAP program in 2012 and the revenue related to our Mark 4 PowerBuoy development project. The
revenue decrease was partially offset by increases in revenue from our project with Mitsui Engineering & Shipbuilding and
our PowerBuoy project off the coast of Oregon.
Overall, the US Navy has been our largest customer since fiscal 2002. The DOE was our largest customer in fiscal
2013 and in fiscal 2012. Combined, these two customers accounted for 54% of our revenues in fiscal 2013 and 61% of our
revenues in fiscal 2012.
37
We currently focus our sales and marketing efforts on the west coast of 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 2013 and 2012:
United States ................................................................................................................
Europe ..........................................................................................................................
Asia and Australia ........................................................................................................
Years Ended April 30,
2012
2013
59 %
21 %
20 %
64%
33%
3%
100 %
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 in both fiscal 2013 and 2012. Most of our revenue recorded in fiscal
2013 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.
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 power output and reliability of our utility PowerBuoy system, especially
our Mark 4 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. 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 curtail our research and development
expenses.
Selling, general and administrative costs
Our selling, general and administrative costs consist primarily of professional fees, salaries and other personnel-
related costs for employees and consultants engaged in sales and marketing and support of our PowerBuoy systems and
costs for executive, accounting and administrative personnel, professional fees and other general corporate expenses.
Interest income, net
Interest income consists of interest received on cash and cash equivalents, investments in commercial bank-issued
certificates of deposit and US Treasury bills and notes. Total cash, cash equivalents, restricted cash, and marketable
securities were $21.7 million as of April 30, 2013 and $33.2 million as of April 30, 2012. 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 2013 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
38
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, the Australian dollar and Japanese yen.
We invest our cash reserves 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 $2.5 million as of April 30, 2013 and $2.8 million as of April 30, 2012, compared to our total cash, cash
equivalents, restricted cash, and marketable securities balances of $21.7 million as of April 30, 2013 and $33.2 million as
of April 30, 2012.
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, 2013 and 2012 were recorded in Euros, British pounds sterling 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, 2013, we had federal and foreign net operating loss carryforwards of $74.7 million and $20.9 million,
respectively, and federal and foreign research and development tax credits of $2.1 million, which may be used to offset
future taxable income. As of April 30, 2013, we had state net operating loss carryforwards of $28.6 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, 2013 and April 30, 2012.
During the years ended April 30, 2013 and 2012, we sold New Jersey State net operating losses in the amount of
$18.7 million and $12.9 million, respectively, resulting in the recognition of income tax benefits of $1.5 million and $1.1
million, respectively, recorded in our Statement of Operations.
39
Results of Operations
This section should be read in conjunction with the discussion below under “Liquidity and Capital Resources”.
Fiscal Years Ended April 30, 2013 and 2012
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, 2013 and 2012:
Fiscal Year Ended
April 30, 2013
Fiscal Year Ended
April 30, 2012
Amount
As a % of
Revenues (1) Amount
As a % of
Revenues (1)
%
Change
2013
Period to
2012
Period
Revenues .............................................................. $ 3,616,129
3,480,821
Cost of revenues ...................................................
135,308
Gross profit ...................................................
100 % $ 5,738,506
5,683,731
54,775
96
4
100 %
99
1
(37)%
(39)
147
Operating expenses:
Product development costs ...............................
Selling, general and administrative costs ..........
7,327,766
9,126,757
Total operating expenses ............................... 16,454,523
Operating loss....................................................... (16,319,215)
126,377
Interest income, net ..............................................
Foreign exchange loss ..........................................
(83,416)
Loss before income taxes ..................................... (16,276,254)
Income tax benefit ................................................
1,453,243
Net loss ................................................................. (14,823,011)
203
252
455
(451)
3
(2)
(450)
40
(410)
8,337,424
8,274,096
16,611,520
(16,556,745)
418,052
(104,739)
(16,243,432)
1,053,427
(15,190,005)
145
144
289
(289)
7
(2)
(283)
18
(265)
(12)
10
(1)
1
(70)
20
0
38
2
Less: Net loss attributable to the
noncontrolling interest in Ocean Power
Technologies (Australasia) Pty Ltd ...............
141,174
—
49,503
—
185
Net loss attributable to Ocean Power
Technologies, Inc ................................................. $(14,681,837)
(406)% $(15,140,502)
(264)%
3%
(1) Certain subtotals may not add due to rounding.
Revenues
Revenues decreased by $2.1 million in fiscal 2013, or 37%, to $3.6 million as compared to $5.7 million in fiscal 2012.
The change in revenues was attributable primarily to the following factors:
• Revenues relating to our utility PowerBuoy system decreased by $0.6 million due primarily to a decrease in billable
work on our Mark 4 PowerBuoy development project and our WavePort project off the coast of Spain. This was
partially offset by increases in revenue related to our project with Mitsui Engineering & Shipbuilding and our
PowerBuoy project off the coast of Oregon.
• Revenues relating to our autonomous PowerBuoy system decreased by $1.5 million as a result of a decrease in
billable work on our project to provide our PowerBuoy technology to the US Navy’s LEAP program. The LEAP
program has been completed in fiscal 2012.
Cost of revenues
Cost of revenues decreased by $2.2 million, or 39%, to $3.5 million in fiscal 2013, as compared to $5.7 million in
fiscal 2012. This decrease in the cost of revenues reflected the decreased costs related to our Mark 4 PowerBuoy
development project as well as our LEAP project with the US Navy. This was partially offset by the increased activity on
our project with Mitsui Engineering & Shipbuilding and our PowerBuoy project off the coast of Oregon.
40
We operated at a gross profit of $0.1 million in fiscal 2013 and in fiscal 2012. Most of our projects in fiscal 2013 and
2012 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.
Product development costs
Product development costs decreased by $1.0 million, or 12%, to $7.3 million in fiscal 2013, as compared to
$8.3 million in fiscal 2012. Product development costs were attributable primarily to our efforts to increase the power
output and reliability of our PowerBuoy system, especially for our utility-scale PowerBuoy system. The decrease in product
development costs was due primarily to a decrease in activity related to our project off the coast of Scotland. The Scotland
project was completed in fiscal 2012. The decrease was partially offset by increases in activity related to our WavePort
project off the coast of Spain and our Oregon project. 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 curtail our research and development expenses. During fiscal 2013, the majority
of funding for our Mark 4 PowerBuoy development project was from external sources.
Selling, general and administrative costs
Selling, general and administrative costs increased by $0.9 million, or 10%, to $9.1 million for fiscal 2013 as
compared to $8.3 million for fiscal 2012. The increase was due primarily to an increase in business development-related
legal fees and site development expenses related to the planned VWP wave power station project in Australia.
Interest income
Interest income decreased by $0.3 million, or 70%, to $0.1 million in fiscal 2013, compared to $0.4 million in fiscal
2012, due to a decrease in cash, cash equivalents and marketable securities and a decrease in interest rates. The average
interest yield was approximately 0.46% during fiscal 2013 and approximately 1.03% during fiscal 2012.
Foreign exchange loss
Foreign exchange loss was $0.1 million in fiscal 2013 and in fiscal 2012. The losses in both years were attributable
primarily to the relative change in value of the British pound sterling, Euro, Australian dollar and Japanese yen compared
to the US dollar during the two periods.
Income tax benefit
During the years ended April 30, 2013 and 2012, we sold New Jersey state net operating losses in the amount of $18.7
million and $12.9 million, respectively, resulting in the recognition of income tax benefits of $1.5 million and $1.1,
respectively, recorded in our Statement of Operations.
Net Loss Outlook
We have incurred net losses since we began operations in 1994. To achieve profitability, we believe we will need to
increase revenue 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 market. Even if we do
achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
41
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, 2013, our revenues
were $9.4 million, our net losses were $30 million and our net cash used in operating activities was $24.8 million.
Years Ended April 30,
2012
2013
Net loss ..........................................................................................................................
$
(14,823,011 ) $
(15,190,005)
Adjustments for noncash operating items .....................................................................
1,484,011
2,338,085
Net cash operating loss ..................................................................................................
(13,339,000 )
(12,851,920)
Net change in operating assets and liabilities ................................................................
2,493,352
(1,062,923)
Net cash used in operating activities .............................................................................
$
(10,845,648 ) $
(13,914,843)
Net cash provided by investing activities ......................................................................
$
8,057,573 $
19,311,329
Net cash used in financing activities .............................................................................
$
(121,505 ) $
(199,032)
Effect of exchange rates on cash and cash equivalents .................................................
$
(71,092 ) $
(220,130)
Net cash used in operating activities
Net cash used in operating activities was $10.8 million for fiscal 2013 and $13.9 million for fiscal 2012. The change
was a result of a decrease in net loss of $0.4 million and a decrease in cash used by operating assets and liabilities of $3.6
million, offset by a decrease in adjustments for noncash operating items of $0.9 million.
The decrease in cash used by operating assets and liabilities was primarily the result of a decrease in cash used by
accrued expenses of $2.5 million and a decrease in cash used by other current assets of $0.7 million.
The change in accrued expenses reflects an increase in accruals related to our Mark 3 PowerBuoy project off the coast
of Oregon offset by a decrease in employee related costs. The change in other assets includes an approximate $0.7 million
decrease in prepaid insurances and interest receivable on treasury bills.
Included in the net loss amounts are the cash receipts related to income tax benefits of $1.5 million and $1.1 million
for fiscal 2013 and 2012, respectively.
Net cash provided by investing activities
Net cash provided by investing activities was $8.1 million and $19.3 million for fiscal 2013 and 2012, respectively.
The change was primarily the result of a decrease of $11.6 million in net maturities of marketable securities during fiscal
2013, a decrease in purchases of equipment of $0.2 million and a decrease in capitalized payments of long-lived assets of
$0.2 million.
Net cash used in financing activities
Net cash used in financing activities was $0.1 million in fiscal 2013 and $0.2 million for fiscal 2012. The changes
were primarily due to a decrease in the repayment of debt.
Effect of exchange rates on cash and cash equivalents
Effect of exchange rates on cash and cash equivalents was a decrease in cash of $0.1 million in fiscal 2013 and $0.2
million in fiscal 2012. The change was primarily the result of exchange rate losses on consolidation of foreign subsidiaries
and foreign denominated cash and cash equivalents.
42
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
systems. Our future capital requirements will depend on a number of factors, including:
•
•
•
•
•
•
•
•
•
the cost of development efforts for our PowerBuoy systems;
our success in developing commercial relationships with major customers;
the ability to obtain project-specific financing, grants, subsidies and other sources of funding 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 customer relationships;
the implementation of our expansion plans, including the hiring of new employees as our business increases;
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 are planning for deployment of a Mark 3 PowerBuoy off the coast of Oregon. However, deployment and
commissioning of this PowerBuoy must take into consideration various regulatory, business, and financial factors,
including requirements of regulatory agencies and a significant use of funds. Therefore, we intend to seek additional
funding specifically for this project, in view of risks associated with weather delays, operational needs and other factors.
During the year ended April 30, 2013, we experienced a reduction in employee headcount from 47 to 34 due
primarily to attrition. In the coming year we intend fill a portion of these positions, as needed.
We have incurred negative operating cash flows since our inception. As of April 30, 2013, our cash and cash
equivalents, marketable securities and restricted cash balance was approximately $21.7 million. Based upon cash and cash
equivalents and marketable securities balance as of April 30, 2013, we believe that we will be able to fund our capital
requirements and operations through, at least, July 31, 2014.
During 2013 and 2012, we have continued to make investments in ongoing product development efforts in
anticipation of future growth. Our future results of operations involve significant risks and uncertainties. Factors that could
affect our future operating results and cause actual results to vary materially from expectations include, but are not limited
to risks from competition, new products, technological change, recent economic activity and dependence on key personnel.
In order to complete our future growth strategy, we will require additional equity and/or debt financing. There is no
assurance that additional equity and/or debt financing will be available to us as needed. However, if financing is not
achieved, we may be required to further curtail or limit certain product development costs, and/or selling, general and
administrative activities in order to reduce our cash expenditures.
In January 2013, we filed a shelf registration statement on Form S-3 with the SEC registering the sale of up to
$40,000,000 of debt, equity and other securities (the “S-3 Shelf”). The S-3 Shelf was declared effective in February 2013
and affords us additional financial flexibility. On June 6, 2013, we entered into an At the Market Offering Agreement (the
“Offering Agreement”) with Ascendiant Capital Markets, LLC (the “Manager”). Pursuant to the Offering Agreement, we
may offer and sell shares of our common stock having an aggregate offering price of up to $10,000,000 from time to time
over the three-year term of the Offering Agreement, through or to the Manager, acting as sales agent and/or principal.
Subject to certain limited exceptions, these sales will be made in ordinary brokerage transactions at prevailing market
prices. The sale of shares under the Offering Agreement will be made pursuant to our instructions (including any price,
time or size limits or other customary conditions or parameters that we may impose) and in reliance on, and subject to the
limitations of, General Instruction I.B.6 of Form S-3 and other applicable law and regulation. The sale of shares pursuant to
the Offering Agreement has been registered on the S-3 Shelf.
We have not sold any shares pursuant to the Offering Agreement as of the date of filing of this Annual Report on
Form 10-K.
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
43
or on terms acceptable to us, or at all. If we are unable to obtain required financing, we may be required to reduce the scope
of our current projects, 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.
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 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,
44
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 $0.8 million and $1.0 million in fiscal 2013 and 2012, 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, 2013 and April 30, 2012.
During the years ended April 30, 2013 and 2012, we sold New Jersey State net operating losses in the amount of $18.7
million and $12.9 million, respectively, resulting in the recognition of income tax benefits of $1.5 million and $1.1 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
45
Reporting Standards (IFRS). The guidance is effective for fiscal years and interim periods within those years beginning
after December 15, 2011.
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 Company adopted both of these pronouncements during fiscal 2013. The adoption of these
two pronouncements did not impact the Company’s financial position, results of operations or cash flows.
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting
Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to
enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow
investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under
International Financial Reporting Standards (IFRS). The new standards are effective for annual periods beginning January
1, 2013, and interim periods within those annual periods. Retrospective application is required. We are currently assessing
the impact of this guidance.
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
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the
Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
As of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-
15(b). Based upon that evaluation, as of April 30, 2013, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective.
The annual report of management on the Company’s internal control over financial reporting is provided under
“Reports of Management” on page F-2.
46
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the quarter ended April 30, 2013 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
In December 2012, we amended the employment agreements of our Executive Vice Chairman, Dr. George W. Taylor,
and our Chief Executive Officer, Charles F. Dunleavy (each, an “Officer”) to provide for a temporary salary reduction for
the period running from January 1, 2013 through July 31, 2013. On July 11, 2013, we and each Officer agreed to extend his
temporary salary reduction period through December 31, 2013 (the “Extension”). The other terms of their employment
agreements, as modified by the prior amendments, remain unchanged.
In consideration of his agreement to accept the Extension, each Officer will receive, at his election, incentive stock
options or restricted stock equal in value to his aggregate salary reduction (an “Equity Grant”). Each Equity Grant will be
fully vested on the grant date and will be issued pursuant to the terms of our 2006 Stock Incentive Plan.
47
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 2013 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 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.
48
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 51 to 52.
49
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 12, 2013
OCEAN POWER TECHNOLOGIES, INC.
/s/ Charles F. Dunleavy
By: 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
/s/ CHARLES F. DUNLEAVY
Charles F. Dunleavy
/s/ GEORGE W. TAYLOR
George W. Taylor
/s/ BRIAN M. POSNER
Brian M. Posner
/s/ SEYMOUR S. PRESTON III
Seymour S. Preston III
/s/ TERENCE J. CRYAN
Terence J. Cryan
/s/ BRUCE A. PEACOCK
Bruce A. Peacock
/s/ DAVID L. DAVIS
David L. Davis
Chairman of the Board of Directors,
Chief Executive Officer
(Principal Executive Officer)
Date
July 12, 2013
Executive Vice-Chairman of the Board of Directors
July 12, 2013
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
Director
Director
Director
Director
July 12, 2013
July 12, 2013
July 12, 2013
July 12, 2013
July 12, 2013
50
Exhibit
Number
Exhibits Index
Description
3.1 Restated Certificate of Incorporation of the registrant (incorporated by reference from Exhibit 3.1 to Form 10-Q
filed September 14, 2007)
3.2 Amended and Restated Bylaws of the registrant (incorporated by reference from Exhibit 3.2 to Form 10-Q filed
September 14, 2007)
4.1 Specimen certificate of common stock (incorporated by reference from Exhibit 4.1 to Form S-1/A filed March 19,
2007)
10.1 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)
10.2 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)
10.3 2001 Stock Plan (incorporated by reference from Exhibit 10.7 to Form S-1 filed November 13, 2006)*
10.4 2006 Stock Incentive Plan (incorporated by reference from Exhibit 10.8 to Form S-1/A filed March 19, 2007)*
10.5 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)
10.6 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)
10.7 Amended and Restated Employment Agreement, dated April 8, 2009, between Charles F. Dunleavy and Ocean
Power Technologies, Inc. (incorporated by reference from Exhibit 10.2 to Form 8-K filed April 13, 2009)*
10.8 Amended and Restated Employment Agreement, dated April 8, 2009, between George W. Taylor and Ocean
Power Technologies, Inc. (incorporated by reference from Exhibit 10.1 to Form 8-K filed April 13, 2009)*
10.9 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)
10.10 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)
10.11 Lease, dated January 15, 2007, between University of Warwick Science Park Innovation Centre Limited and
Ocean Power Technologies Ltd. (incorporated by reference from Exhibit 10.17 to Form S-1/A filed March 19,
2007)
10.12 Agreement for Renewable Energy Economic Development Grants, dated November 3, 2003, between State of
New Jersey Board of Public Utilities and Ocean Power Technologies, Inc. (incorporated by reference from
Exhibit 10.18 to Form S-1/A filed March 19, 2007)
10.13 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)
10.14 Marketing Cooperation Agreement, dated September 9, 2006, between Ocean Power Technologies, Inc. and
Lockheed Martin Corporation through its Maritime Systems and Sensors business unit (incorporated by reference
from Exhibit 10.21 to Form S-1/A filed April 10, 2007)
10.15 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)
10.16 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)
10.17 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)
10.18 Financial Assistance Award agreement between Ocean Power Technologies, Inc. and US Department of Energy
dated September 23, 2008 (incorporated by reference from Exhibit 10.1 to Form 10-Q filed December 10, 2008)+
51
Exhibit
Number
Description
10.19 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)+
10.20 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)
10.21 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)*
10.22 Form of Restricted Stock Agreement (incorporated by reference from Exhibit 10.1 to Form 10-Q filed March 14,
2011)*
10.23 Amended Option Agreement for Purchase of Emissions Credits, dated December 4, 2012, between Ocean Power
Technologies, Inc. and its affiliates and Metasource Pty Ltd (formerly known as Woodside Sustainable Energy
Solutions Pty Ltd)
10.24 Second Addendum to Lease Agreement, dated June 1, 2008, between Ocean Power Technologies, Inc. and Reed
Road Industrial Park LLC #1
10.25 Third Addendum to Lease Agreement, dated March 11, 2013, between Ocean Power Technologies, Inc. and Reed
Road Industrial Park LLC #1
10.26 Amendment Letter to Employment Agreement, dated December 12, 2012, between George W. Taylor and Ocean
Power Technologies, Inc. (incorporated by reference from Exhibit 10.1 to Form 10-Q filed December 14, 2012)*
10.27 Amendment Letter to Employment Agreement, dated December 12, 2012, between Charles F. Dunleavy and
Ocean Power Technologies, Inc. (incorporated by reference from Exhibit 10.2 to Form 10-Q filed December 14,
2012)*
10.28 At the Market Offering Agreement, dated as of June 6, 2013, by and between Ocean Power Technologies, Inc.
and Ascendiant Capital Markets, LLC (incorporated by reference from Exhibit 10.1 to Form 8-K filed June 7,
2013)
10.29 Amendment Letter to Employment Agreement, dated July 11, 2013, between George W. Taylor and Ocean
Power Technologies, Inc.*
10.30 Amendment Letter to Employment Agreement, dated July 11, 2013, between Charles F. Dunleavy and Ocean
Power Technologies, Inc.*
21.1 Subsidiaries of the registrant
23.1 Consent of KPMG LLP
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101 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, 2013 and 2012: (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.
52
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
F-2
Reports of Management ..................................................................................................................................................
F-3
Report of Independent Registered Public Accounting Firm ............................................................................................
F-4
Consolidated Balance Sheets, April 30, 2013 and 2012 ..................................................................................................
Consolidated Statements of Operations, Years ended April 30, 2013 and 2012 .............................................................
F-5
Consolidated Statements of Comprehensive Loss, Years ended April 30, 2013 and 2012 ............................................. F-6
F-7
Consolidated Statements of Stockholders' Equity, Years ended April 30, 2013 and 2012 .............................................
F-8
Consolidated Statements of Cash Flows, Years ended April 30, 2013 and 2012 ............................................................
F-9
Notes to Consolidated Financial Statements ...................................................................................................................
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, 2013. 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, 2013.
/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, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, stockholders'
equity, and cash flows for each of the years in the two-year period ended April 30, 2013. 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, 2013 and 2012, and the results of
their operations and their cash flows for each of the years in the two-year period ended April 30, 2013, in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
July 12, 2013
F-3
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30,
2013
2012
Current assets:
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 .................................................................................................................
Other noncurrent assets ....................................................................................................
Total assets ............................................................................................................ $
6,372,788
13,996,705
796,332
127,598
152,962
21,446,385
700,968
1,044,902
1,366,256
272,548
24,831,059
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 unearned revenues ..........................................................................................
Long-term debt .................................................................................................................
Deferred credits payable-noncurrent ................................................................................
Total liabilities .......................................................................................................
510,031
3,900,623
—
1,117,115
100,000
5,627,769
232,033
250,000
600,000
6,709,802
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:
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 10,403,215
and 10,407,389 shares, respectively .............................................................................
Treasury stock, at cost; 33,771 and 23,544 shares, respectively ...................................
Additional paid-in capital .............................................................................................
Accumulated deficit ......................................................................................................
Accumulated other comprehensive loss .......................................................................
Total Ocean Power Technologies, Inc. stockholders’ equity.................................
Noncontrolling interest in Ocean Power Technologies (Australasia) Pty Ltd. .................
Total equity ...................................................................................................................
Total liabilities and stockholders’ equity ............................................................... $
—
—
10,403
(123,893 )
10,407
(102,388)
159,155,365 158,296,458
(140,671,311 ) (125,989,474)
(78,990)
32,136,013
(28,632)
32,107,381
37,441,637
(79,786 )
18,290,778
(169,521 )
18,121,257
24,831,059
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 ...............................................................................................................
Operating expenses:
Product development costs ...........................................................................................
Selling, general and administrative costs ......................................................................
Total operating expenses ...........................................................................................
Operating loss...................................................................................................................
Interest income, net ..........................................................................................................
Foreign exchange loss ......................................................................................................
Loss before income taxes .................................................................................................
Income tax benefit ............................................................................................................
Net loss .............................................................................................................................
Less: Net loss attributable to the noncontrolling interest in Ocean Power
Year Ended April 30,
2012
2013
5,738,506
3,616,129
5,683,731
3,480,821
54,775
135,308
7,327,766
9,126,757
16,454,523
(16,319,215 )
126,377
(83,416 )
(16,276,254 )
1,453,243
(14,823,011 )
8,337,424
8,274,096
16,611,520
(16,556,745)
418,052
(104,739)
(16,243,432)
1,053,427
(15,190,005)
Technologies (Australasia) Pty Ltd. .........................................................................
Net loss attributable to Ocean Power Technologies, Inc .................................................. $
Basic and diluted net loss per share .................................................................................. $
Weighted average shares used to compute basic and diluted net loss per share ...............
141,174
(14,681,837 )
(1.42 )
10,304,044
49,503
(15,140,502)
(1.47)
10,277,661
See accompanying notes to consolidated financial statements.
F-5
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
Year Ended April 30,
2012
2013
Net Loss ........................................................................................................................... $
(14,823,011 )
(15,190,005)
Foreign currency translation adjustment ..........................................................................
(511 )
(255,974)
Total comprehensive loss .................................................................................................
(14,823,522 )
(15,445,979)
Comprehensive loss attributable to the noncontrolling interest in Ocean Power
Technologies (Australasia) Pty Ltd. .................................................................................
140,889
50,580
Comprehensive loss attributable to Ocean Power Technologies, Inc. .............................. $
(14,682,633 )
(15,395,399)
See accompanying notes to consolidated financial statements.
F-6
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Common Shares
Treasury Shares
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Loss
Total Ocean
Power
Technologies,
Inc,
Stockholders'
Equity
Noncontrolling
Interest
Total
Equity
Balance, April 30,
2011 ........................... 10,419,183
Net loss .....................
—
Foreign currency
translation
adjustment .................
—
Total
comprehensive
loss .......................
(11,794 )
—
Stock based
compensation ............
Issuance (forfeiture)
of restricted stock,
net ..............................
Acquisition of
treasury stock ............
Balance, April 30,
2012 ........................... 10,407,389
—
Net loss ......................
Foreign currency
translation
adjustment .................
—
—
Total
comprehensive
loss .......................
—
Stock based
compensation ............
Issuance (forfeiture)
of restricted stock,
net ..............................
Acquisition of
treasury stock ............
Balance, April 30,
2013 ........................... 10,403,215
—
(4,174 )
$ 10,419
(7,685 )
—
—
$ (42,734)
157,174,930
—
(110,848,972)
(15,140,502)
—
175,907
—
46,469,550
(15,140,502)
21,948
(49,503)
46,491,498
(15,190,005)
—
—
—
—
—
(254,897)
(254,897)
(1,077)
(255,974)
—
—
—
1,008,473
—
—
1,008,473
—
1,008,473
(15,395,399)
(50,580)
(15,445,979)
(12)
—
—
113,055
— (15,859 )
(59,654)
—
—
—
—
113,043
—
113,043
—
(59,654)
—
(59,654)
$ 10,407
(23,544 )
—
$ (102,388)
158,296,458
—
—
(125,989,474)
(14,681,837)
(78,990)
—
32,136,013
(14,681,837)
(28,632)
(141,174)
32,107,381
(14,823,011)
—
—
—
—
—
—
(796)
(796)
285
(511)
—
—
—
814,407
—
—
814,407
—
814,407
(14,682,633)
(140,889)
(14,823,522)
(4)
—
—
44,500
— (10,227 )
(21,505)
—
—
—
—
44,496
—
44,496
—
(21,505)
—
(21,505)
$ 10,403
(33,771 )
$ (123,893)
159,155,365
(140,671,311)
(79,786)
18,290,778
(169,521)
18,121,257
See accompanying notes to consolidated financial statements.
F-7
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended April 30,
2012
2013
Cash flows from operating activities:
Net loss .......................................................................................................................... $
Adjustments to reconcile net loss to net cash used in operating activities:
(14,823,011)
(15,190,005)
Foreign exchange loss ................................................................................................
Depreciation and amortization ...................................................................................
Loss on disposals of property, plant and equipment ..................................................
Impairment of long-lived assets .................................................................................
Provision for doubtful accounts .................................................................................
Treasury note discount amortization ..........................................................................
Compensation expense related to stock option grants and restricted stock ...............
Changes in operating assets and liabilities:
Accounts receivable ...............................................................................................
Unbilled receivables ...............................................................................................
Other current assets ................................................................................................
Other noncurrent assets ..........................................................................................
Accounts payable ...................................................................................................
Accrued expenses ...................................................................................................
Unearned revenues-ST ...........................................................................................
Unearned revenues-LT ...........................................................................................
Net cash used in operating activities ..................................................................
Cash flows from investing activities:
Purchases of marketable securities ................................................................................
Maturities of marketable securities ...............................................................................
Restricted cash ..............................................................................................................
Purchases of equipment ................................................................................................
Payments of patent costs ...............................................................................................
Net cash provided by investing activities ...........................................................
Cash flows from financing activities:
Repayment of debt ........................................................................................................
Acquisition of treasury stock .........................................................................................
Net cash used in financing activities ..................................................................
Effect of exchange rate changes on cash and cash equivalents .........................................
Net (decrease) increase in cash and cash equivalents .........................................
Cash and cash equivalents, beginning of period ...............................................................
Cash and cash equivalents, end of period ......................................................................... $
83,416
502,099
44,067
7,718
—
(12,191)
858,902
264,077
95,451
685,523
(93,700)
105,036
1,158,481
46,451
232,033
(10,845,648)
(16,678,329)
25,055,534
75,000
(394,632)
—
8,057,573
(100,000)
(21,505)
(121,505)
(71,092)
(2,980,672)
9,353,460
6,372,788
104,739
436,062
52,128
358,447
298,534
(33,353)
1,121,528
(126,722)
226,840
(17,291)
43,504
(546,709)
(1,371,912)
729,367
—
(13,914,843)
(18,574,454)
38,559,110
53,936
(547,252)
(180,011)
19,311,329
(139,378)
(59,654)
(199,032)
(220,130)
4,977,324
4,376,136
9,353,460
Supplemental disclosure of noncash investing and financing activities:
Capitalized purchases of equipment financed through accounts payable and accrued
expenses ..................................................................................................................... $
—
42,344
See accompanying notes to consolidated financial statements.
F-8
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Background and Liquidity
(a) Background
Ocean Power Technologies, Inc. (the “Company”) was incorporated in April 1984 in New Jersey, commenced
business operations in 1994 and re-incorporated in Delaware in April 2007. The Company develops and is seeking to
commercialize proprietary systems that generate electricity by harnessing the renewable energy of ocean waves. The
Company markets its products in the United States and internationally. Since fiscal 2002, the US Navy and other
government agencies have accounted for a significant portion of the Company’s revenues. These revenues were largely for
the support of product development efforts. The Company’s goal is that an increased portion of its revenues be from the
sale of products and maintenance services, as compared to revenue to support its product development efforts. As the
Company continues to advance its proprietary technologies, it expects to continue to have a net decrease in cash from
operating activities unless and until it achieves positive cash flow from the planned commercialization of its products and
services.
(b) Liquidity
The Company has incurred net losses and negative operating cash flows since inception. As of April 30, 2013, the
Company had accumulated deficit of $140.7 million. As of April 30, 2013, the Company’s cash and cash equivalents,
marketable securities and restricted cash balance was approximately $21.7 million. Based upon the Company’s cash and
cash equivalents and marketable securities balance as of April 30, 2013, the Company believes that it will be able to
finance its capital requirements and operations through, at least, July 31, 2014.
During 2013 and 2012, the Company has continued to make investments in ongoing product development efforts in
anticipation of future growth. The Company’s future results of operations involve significant risks and uncertainties.
Factors that could affect the Company’s future operating results and cause actual results to vary materially from
expectations include, but are not limited, to risks from competition, new products, technological change, recent economic
activity and dependence on key personnel. In order to complete its future growth strategy, the Company will require
additional equity and/or debt financing. There is no assurance that additional equity and/or debt financing will be available
to the Company as needed. If financing is not achieved, the Company may be required to further curtail or limit certain
product development costs, and/or selling, general and administrative, activities in order to reduce its cash expenditures. On
June 6, 2013, the Company entered into an At the Market Offering Agreement. See Subsequent Event - Note 15.
(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
as a noncontrolling interest in the Company's Consolidated Balance Sheets and Statements of Operations, which adjusts the
Company's consolidated results of operations to reflect only the Company's share of the earnings or losses of the
consolidated subsidiary. As of April 30, 2013, there was one noncontrolling interest, consisting of 11.8% of the Company's
Australian subsidiary, Ocean Power Technologies (Australasia) Pty. Ltd.
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. As of April 30, 2013, there
were no such entities.
F-9
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
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. Accordingly, the Company recorded an impairment expense of $0.3 million representing 100% of the investment
amount. In addition, 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. The investment in Iberdrola Cantabria and net accounts receivable
and unbilled receivables from Iberdrola Cantabria were $0 as of April 30, 2013 and April 30, 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.
(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.
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.
F-10
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(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,
2013
2012
Checking and savings accounts ........................................................................................ $
Certificates of deposits and US Treasury obligations ......................................................
Money market funds ........................................................................................................
$
2,184,322
―
4,188,466
6,372,788
2,051,918
5,998,925
1,302,617
9,353,460
(e) Marketable Securities
Marketable securities with original maturities longer than three months but 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, 2013 and 2012, 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 ($1,046,000 at April 30,
2013) 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, 2013, there were €266,000 ($348,000) in letters of credit outstanding under this agreement.
Subsequent to the year ended April 30, 2013, the Company issued two additional letters of credit for €278,828 ($364,512)
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:
Barclays Bank agreement ..............................................................................................
NJBPU agreement .........................................................................................................
$
$
April 30,
2013
2012
941,256
425,000
1,366,256
953,712
500,000
1,453,712
F-11
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(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.
Year Ended April 30,
2012
2013
Foreign exchange loss ...................................................................................................... $
(83,416 )
(104,739)
Foreign currency denominated certificates of deposit and cash accounts ........................ $
(i) Patents
April 30,
2013
2,491,714
2012
2,826,000
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. Based
on the Company’s prior year assessment, the Company 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. In the fourth quarter of fiscal 2013, the Company performed its recurring assessment of the realizability of its
patents and recorded impairment expenses of approximately $8,000. Amortization expense was approximately $217,000
and $110,000 for the years ended April 30, 2013 and 2012, respectively. This increase in amortization expense was largely
as a result of this change in estimated useful life. Amortization expense for the next five fiscal years related to amounts
capitalized for patents as of April 30, 2013 is estimated to be approximately $191,000 per year.
(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, 2013 and 2012. The Company recorded impairment charges of approximately $8,000 related to
patents in the year ended April 30, 2013 and approximately $358,000 related to patents and an investment in a joint venture
in the year ended April 30, 2012.
F-12
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(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.
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
2013
US Department of Energy ..............................................................................................
Mitsui Shipbuilding & Engineering ...............................................................................
European Union (WavePort project) ..............................................................................
US Navy .........................................................................................................................
UK Government's Technology Strategy Board ..............................................................
51 %
20 %
17 %
3 %
3 %
32%
3%
13%
29%
20%
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 its customers to post collateral.
(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 1,360,790 and 1,447,313 for the years ended April 30, 2013 and
2012, 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, 2013 and 2012 was
approximately $859,000 and $1,121,000 respectively.
Valuation Assumptions for Options Granted During the Years Ended April 30, 2013 and 2012
The fair value of each stock option granted during the years ended April 30, 2013 and 2012 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.
F-13
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Years Ended April 30,
2012
2013
Risk-free interest rate ....................................................................................................
Expected dividend yield ................................................................................................
Expected life (in years) .................................................................................................
Expected volatility ........................................................................................................
0.88 %
0.0 %
6.06
86.15 %
1.83%
0.0%
5.83
94.5%
The above assumptions were used to determine the weighted average per share fair value of $1.58 and $2.98 for stock
options granted during the years ended April 30, 2013 and 2012 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.
(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.
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 Company adopted both of these pronouncements during fiscal year ended April 30, 2013.
The adoption of these two pronouncements did not impact the Company’s financial position, results in operation or cash
flow.
F-14
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting
Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to
enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow
investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under
International Financial Reporting Standards (IFRS). The new standards are effective for annual periods beginning January
1, 2013, and interim periods within those annual periods. Retrospective application is required. We are currently assessing
the impact of this guidance.
(3) Marketable Securities
Marketable securities are classified as current assets and are summarized as follows:
April 30,
2013
2012
Certificates of deposit denominated in Australian Dollars ............................................. $
Certificates of deposit denominated in US Dollars ........................................................
US Treasury obligations .................................................................................................
$
—
—
13,996,705
13,996,705
556,437
3,806,808
18,006,239
22,369,484
The Company had no marketable securities classified as noncurrent assets as of April 30, 2013 and April 30, 2012.
(4) Property and Equipment
The components of property and equipment are as follows:
Life (in years)
2013
2012
April 30,
Computers and software ............................................................
Equipment .................................................................................
Office furniture and equipment .................................................
Leasehold improvements ...........................................................
3
3 to 7
3 to 7
2
Less accumulated depreciation and amortization ......................
$
$
566,353
1,170,473
293,880
182,285
2,212,991
(1,512,023)
700,968
696,784
1,080,039
287,492
149,505
2,213,820
(1,530,887)
682,933
Depreciation expense was $285,263 and $326,205 for the years ended April 30, 2013 and 2012, respectively.
F-15
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(5) Balance Sheet Detail
Accounts receivable, net
Accounts receivable ...................................................................................................
Allowance for doubtful accounts ...............................................................................
Patents
Patents........................................................................................................................
Accumulated amortization .........................................................................................
Accrued expenses
Project costs ...............................................................................................................
Contract loss reserves ................................................................................................
Employee incentive payments ...................................................................................
Accrued salary and benefits .......................................................................................
Investment in joint venture ........................................................................................
Legal and accounting fees .........................................................................................
Other ..........................................................................................................................
April 30,
2013
2012
1,086,847
(290,515 )
796,332
1,369,400
(304,604)
1,064,796
1,558,630
(513,728 )
1,044,902
1,574,044
(304,587)
1,269,457
1,698,959
785,000
249,469
547,404
173,842
214,891
231,058
3,900,623
244,892
785,000
661,328
521,058
176,110
193,720
187,986
2,770,094
$
$
$
$
$
$
(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. This individual did not stand for re-election to the board of directors at
the Company’s Annual Meeting on October 4, 2012, and is no longer considered a related party. Accordingly, transactions
after such date are not included in the amounts below.
Related party consulting expense ..................................................................................
Expenses for services provided by related party company ............................................
Revenue for services provided to related party company ..............................................
$
42,000
-
32,000
86,000
29,000
126,000
Year Ended April 30,
2012
2013
April 30,
2013
2012
Consulting fees payable to related party ........................................................................ $
Payable to related party company ..................................................................................
Receivable from related party company .........................................................................
-
-
-
7,000
-
-
F-16
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(7) Debt
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. 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).
April 30, 2013 April 30, 2012
Total debt ......................................................................................................................
Current portion of long-term debt .................................................................................
Long-term debt ..............................................................................................................
$
$
350,000
(100,000 )
250,000
450,000
(100,000)
350,000
(8) Deferred Credits Payable
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. If the Company received emission credits under applicable laws and failed to sell to the investor the credits up to the
full amount of emission credits covered by the option, the investor was 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). Under the terms of the agreement, if the Company did not become entitled under applicable laws to the full
amount of emission credits covered by the option by December 31, 2012, the Company was 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. In December
2012, the Company and the investor agreed to extend the period for the sale of emission credits until December 31, 2017.
As of April 30, 2013, the Company has not generated any emissions credits eligible for purchase under the agreement and
the Company does not believe it is probable that it will generate any eligible emissions credits before December 31, 2017.
Accordingly, the $600,000 has been classified as a noncurrent liability as of April 30, 2013 and 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. See Subsequent Event – Note 15.
(10) Preferred Stock
The Company has authorized 5,000,000 shares of undesignated preferred stock with a par value of $0.001 per share.
As of April 30, 2013, and 2012, 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, 2013, the Company had issued or reserved 196,675 shares for issuance under the 2001 Stock Plan. After the
effectiveness of the 2006 Stock Incentive Plan, no further options or other awards have been or will be granted under the
2001 Stock Plan.
F-17
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
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, 2013, the Company had issued share-based awards for 1,302,174 shares of common stock and
had reserved an additional 351,041 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
any of the Company's employees, other than executive officers. The board of directors will fix the terms of the awards to be
granted by such officer. No award may be granted under the 2006 Stock Incentive Plan after December 7, 2016, but the
vesting and effectiveness of awards granted before that date may extend beyond that date.
(a) Stock Options
A summary of stock options under the plans described above is as follows:
Shares Under
Option
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
(In Years)
Outstanding April 30, 2011 ...............................................................
Forfeited ............................................................................................
Granted ..............................................................................................
Outstanding April 30, 2012 ...............................................................
Forfeited ............................................................................................
Granted ..............................................................................................
Outstanding April 30, 2013 ...............................................................
Exercisable April 30, 2013 ................................................................
1,353,935
(268,784 )
268,322
1,353,473
(429,244)
381,759
1,305,988
836,026
10.30
10.94
3.97
8.92
7.29
1.98
7.43
9.64
5.7
6.1
5.9
4.5
As of April 30, 2013, the total intrinsic value of outstanding options was approximately $0 and the total intrinsic
value of exercisable options was $0. As of April 30, 2013, approximately 470,000 additional options were expected to vest,
which have approximately $0 of intrinsic value and a weighted-average remaining contractual term of 8.3 years. There was
approximately $713,000 and $932,000 of total recognized compensation cost related to employees for stock options during
the years ended April 30, 2013 and 2012, respectively. As of April 30, 2013, there was approximately $670,000 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 2.6 years. The Company normally issues new shares to satisfy option
exercises under these plans.
Certain options were granted to non-employee directors and consultants during the years ended April 30, 2013 and
2012. The Company has charged compensation expense of approximately $101,000 and $77,000 related to these option
grants for which the majority relates to non-employee directors. These expenses have been included in selling, general and
administrative costs in the accompanying consolidated statements of operations for the years ended April 30, 2013 and
2012, 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 31,744 and 14,634 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, 2013 and 2012, respectively.
A summary of non-vested restricted stock under the plans is as follows:
Number
of Shares
Weighted
Average
Price per
Share
Issued and unvested at April 30, 2011 ...........................................................................
Granted ...........................................................................................................................
Forfeited .........................................................................................................................
Vested.............................................................................................................................
Issued and unvested at April 30, 2012 ...........................................................................
Granted ...........................................................................................................................
Forfeited .........................................................................................................................
Vested.............................................................................................................................
Issued and unvested at April 30, 2013 ...........................................................................
150,953
14,634
(26,428 )
(45,319 )
93,840
31,744
(35,918 )
(34,864 )
54,802
6.16
3.86
5.93
6.18
5.86
2.39
4.70
6.02
4.52
There was approximately $28,000 and $100,000 of total recognized compensation cost relating to restricted stock
granted to employees during the years ended April 30, 2013 and 2012 respectively. Certain shares of restricted stock were
granted to non-employee directors during the years ended April 30, 2013 and 2012. The Company recorded compensation
expenses of approximately $16,000 and $13,000 in 2013 and 2012, respectively. As of April 30, 2013, there was
approximately $47,000 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 2.4 years.
(c) Treasury Stock
During the years ended April 30, 2013 and 2012, 10,227 and 15,859 shares of common stock, respectively, were
purchased by the Company from employees to pay taxes related to the vesting of restricted stock.
(12) Income Taxes
Loss before income taxes for the year ended April 30, 2013 and 2012 consist of the following components:
April 30,
2013
2012
Domestic .......................................................................................................................... $
Foreign .............................................................................................................................
Total loss before income taxes ..................................................................................... $
(13,630,946 )
(2,645,308 )
(16,276,254 )
(13,700,366)
(2,543,066)
(16,243,432)
F-19
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
The components of income taxes (benefit) for the year ended April 30, 2013 and 2012 are as follows:
April 30,
2013
2012
Curent:
Federal ..........................................................................................................................
State ..............................................................................................................................
Foreign ..........................................................................................................................
−
(1,453,243 )
−
Total current ..............................................................................................................
(1,453,243 )
−
(1,053,427)
−
(1,053,427)
Deferred:
Federal ..........................................................................................................................
State ..............................................................................................................................
Foreign ..........................................................................................................................
Total deferred ............................................................................................................
Total provision (benefit) for income taxes ................................................................ $
−
−
−
-
(1,453,243 )
−
−
−
-
(1,053,427)
Tax Rate Reconciliation
The effective income tax rate differed from the percentages computed by applying the US federal income tax rate of
34% to loss before income taxes as a result of the following:
Computed "expected" tax benefit ...................................................................................
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit .......................................................................
Stock-based compensation expense ...............................................................................
Federal research and development tax credits ................................................................
Foreign rate differential ..................................................................................................
Other non-deductible expenses ......................................................................................
Expiration of net operating losses and tax credit carryforwards ....................................
Expiration in compensatory options ...............................................................................
Proceeds of sale of New Jersey tax benefits ...................................................................
Other...............................................................................................................................
Increase in valuation allowance .....................................................................................
Income tax benefit ..........................................................................................................
Years Ended April 30,
2012
2013
(34)%
(34)%
(5)
1
(1)
2
―
23
9
(9)
5
―
(9)%
(5)
2
(2)
2
2
―
―
―
6
23
(6)%
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,
2013
2012
Deferred tax assets:
Federal net operating loss carryforwards ......................................................................... $
Foreign net operating loss carryforwards .........................................................................
New Jersey state operating loss carryforwards ................................................................
Federal research and development tax credits ..................................................................
Foreign research and development tax credits .................................................................
Stock compensation .........................................................................................................
Capitalized research and development costs, net of amortization ....................................
Unrealized foreign exchange loss .....................................................................................
Accrued expenses .............................................................................................................
Other.................................................................................................................................
Gross deferred tax assets ..................................................................................................
Valuation allowance .........................................................................................................
Net deferred tax assets...................................................................................................... $
25,396,000
5,340,000
1,741,000
2,630,000
659,000
721,000
5,692,000
289,000
610,000
647,000
43,725,000
(43,725,000 )
-
27,788,000
4,875,000
3,567,000
2,149,000
715,000
2,548,000
676,000
291,000
726,000
342,000
43,677,000
(43,677,000)
-
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, 2013 and 2012, based upon the level of historical taxable losses,
valuation allowances of $43,725,000 and $43,677,000, respectively, were recorded to fully offset deferred tax assets. The
valuation allowance increased $48,000 and $3,771,000 during the years ended April 30, 2013 and 2012, respectively.
As of April 30, 2013, the Company had net operating loss carryforwards for federal income tax purposes of
approximately $74,693,000, which begin to expire in 2013. The Company also had federal research and experimental tax
credit carryforwards of approximately $2,094,000 as of April 30, 2013, 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, 2013, the Company had state net operating loss carryforwards of
approximately $28,586,000, which begin to expire in 2026, which also may be limited to utilization limitations. As of
April 30, 2013, the Company had foreign net operating loss carryforwards of approximately $20,946,000, which begin to
expire in 2024. The ability to utilize these carryforwards may also be limited in the event of a significant change in
ownership.
During the years ended April 30, 2013 and 2012, the Company sold New Jersey State net operating losses in the
amount of $18,673,000 and $12,862,000, respectively, resulting in the recognition of income tax benefits of $1,453,000 and
$1,053,000, respectively, recorded in the Company’s Statement of Operations.
F-21
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
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,
2013 and 2012, 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, 2015. Rent expense under operating
leases was approximately $383,000 and $507,000 for the years ended April 30, 2013 and 2012, respectively. Future
minimum lease payments under this operating lease as of April 30, 2013 are as follows:
Year ending April 30:
2014 ....................................................................................................................................
2015 ....................................................................................................................................
$
$
257,000
257,000
514,000
(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, 2013, 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.
(d) Spain IVA (sales tax)
The Company received notice that the Spanish Tax Authorities are inquiring into its 2010 IVA (value-added tax)
filing for which the Company benefitted from the offset of approximately $250,000 of input tax. The Company believes
that the inquiry will find that the tax credit was properly claimed and, therefore, no liability has been recorded. Subsequent
to the year ended April 30, 2013, the Company issued two letters of credit in the amount of €278,828 ($364,512) at the
request of the Spanish tax authorities. This is a customary request during the inquiry period.
F-22
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(e) Commercial Dispute
The Company is subject to certain claims filed by a contractor and subcontractor in connection with a dispute over a
contract to perform certain work for the Company related to the deployment of an anchor/mooring system off the Oregon
coast. The Company has claimed that the contractor and subcontractor were responsible for damage to the system during
the deployment process. The parties are currently involved in ongoing settlement discussions. As of April 30, 2013, the
Company has accounted for the outcome of this matter in its financial statements.
(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:
Total
3,616,129
Revenues from external customers ................................................ $ 3,497,338
Operating loss................................................................................ (14,048,062) (1,091,473) (1,179,680) (16,319,215)
Long-lived assets ...........................................................................
700,968
24,128
215,380 24,831,059
Total assets .................................................................................... 23,097,183 1,518,496
118,791
675,354
1,486
—
North
America
Year Ended April 30, 2013
Asia and
Australia
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
(15) Subsequent Event
North
America
Year Ended April 30, 2012
Asia and
Australia
Europe
—
Total
5,738,506
(451,284) (16,556,745)
682,933
640,027 37,441,637
—
In January 2013, the Company filed a shelf registration statement on Form S-3 with the SEC registering the sale of up
to $40,000,000 of debt, equity and other securities (the “S-3 Shelf”). The S-3 Shelf was declared effective in February
2013. On June 6, 2013, the Company entered into an At the Market Offering Agreement (the “Offering Agreement”) with
Ascendiant Capital Markets, LLC (the “Manager”). Pursuant to the Offering Agreement, the Company may offer and sell
shares of its common stock having an aggregate offering price of up to $10,000,000 from time to time over the three-year
term of the Offering Agreement, through or to the Manager, acting as sales agent and/or principal. Subject to certain limited
exceptions, these sales will be made in ordinary brokerage transactions at prevailing market prices. The sale of shares under
the Offering Agreement will be made pursuant to the Company’s instructions (including any price, time or size limits or
other customary conditions or parameters that it may impose) and in reliance on, and subject to the limitations of, General
Instruction I.B.6 of Form S-3 and other applicable law and regulation. The sale of shares pursuant to the Offering
Agreement has been registered on the S-3 Shelf.
The Company has not sold any shares pursuant to the Offering Agreement as of the date of filing of this Annual
Report on Form 10-K.
F-23
OCEAN POWER TECHNOLOGIES, INC.
Directors
Terence J. Cryan
Co-Founder & Managing Director,
Concert Energy Partners, LLC
David L. Davis
President, Davis Enterprises LLC
Senior Management Team
Charles F. Dunleavy*
Chairman and Chief Executive Officer
Michael M. Mekhiche
Vice President, Engineering
Charles F. Dunleavy
Chairman and Chief Executive Officer of
Ocean Power Technologies, Inc.
Brian M. Posner*
Chief Financial Officer,
Treasurer and Secretary
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
Timothy Stiven
Managing Director of UK and
European Business
Dr. George W. Taylor*
Executive Vice Chairman
* Denotes Executive Officers
Dr. George W. Taylor
Executive Vice Chairman of
Ocean Power Technologies, Inc.
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, New Jersey 08540
USA
Share Price Information
The Company’s share price is quoted on the NASDAQ Global Market under the symbol OPTT. Go to www.nasdaq.com to
access the Company’s share price information. In addition, the share price and other publicly released information are available
at OPT’s website under the Investor Relations tab.
Contact Us
Ocean Power Technologies, Inc.
1590 Reed Road
Pennington, New Jersey 08534
USA
Ocean Power Technologies Limited
Warwick Innovation Centre
Gallows Hill
Warwick CV34 6UW
UK
Website Address: www.oceanpowertechnologies.com
Ocean Power Technologies (Australasia)
Pty Ltd/Victorian Wave Partners Pty Ltd.
PO Box 12 Collins Street West
Melbourne
Victoria 3000
AU
Back
Inside
Cover
PowerBuoy®
Product
Roadmap
Classes
Utility
PowerBuoys:
Mark
3
Mark
4
866
kilowatt
(peak
generator
rating)
2,400
kilowatt
(peak gen
erator rating est )
-‐
Autonomous
PowerBuoys:
APB-‐10
APB-‐35
10
watts
(continuous
power
rating)
35
watts
(continuous
power
rating)
APB-‐350
350
watts
(continuous
power
rating)
1590 Reed Road
Pennington, New Jersey 08534
USA