2018 Annual Report
SHIPSELLBUILD 1
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1 Eni S.p.A. customer visit, June 2018
2 OPT’s Monroe Township corporate headquarters, R&D center,
and manufacturing center housing multiple PowerBuoyTM builds
3 PowerBuoyTM under final quality check in preparation
for delivery to Eni S.p.A.
4 Certificate of Appreciation presented by Mr. Toshihiko Maemura,
Manager of the Renewable Energy Project Department, to
OPT’s CEO, George H. Kirby, commemorating the wave power
project at Kozu-Island, Japan
4
ENERGYINNOVATIONOPPORTUNITYGROWTH Dear Fellow Shareholder:
In fiscal year 2018, Ocean Power Technologies (OPT) undertook several critical steps to advance its leadership in
innovative ocean energy solutions. We augmented our leadership team, expanded our business development efforts,
and made the critical shift to business commercialization.
Commercialization Succeeding
OPT delivered on key milestones in the broader application of PB3 PowerBuoy™ technology across key end markets,
including oil and gas, security and defense, science and research, and communications.
Executing the Vision
In our first full year of commercialization, OPT signed two contracts in the oil and gas industry, relocated to a larger
facility to increase our manufacturing capabilities, and expanded the Company’s roster of talented employees. We
began the year with a strategic initiative to relocate our headquarters by moving into a larger facility in Monroe Township,
NJ. The new facility provides a significantly larger state-of-the-art workspace to foster the increasing demand for OPT’s
applications and technologies. A critical part of our growth strategy centers around our team, as we welcomed Chris
Phebus as Vice President of Engineering and Matthew May as Vice President of Global Business Development in
the past year. Chris’ experience will guide our world-class engineering team who continue to drive innovation and
organizational synergies, while Matthew’s team will help us capitalize on current contracts while exploring new
opportunities in crucial end markets.
Pipeline Expansion and Results
While we laid the groundwork early in fiscal 2018, we recently achieved several key milestones by announcing two
significant agreements in the oil and gas market for the PB3 PowerBuoy™. In March, Eni S.p.A. agreed to a multi-
year contract to advance Clean Sea technology in monitoring and subsea charging. Our contract with Premier Oil,
announced in June, presented another new application for monitoring oil decommissioning sites in the North Sea.
Our Premier Oil agreement was the result of a successful feasibility study that showcased the PB3 PowerBuoy™ and
related capabilities to solve safety and efficiency issues in remote offshore sites. A full realization of these contracts
alone could generate total revenue surpassing $3.1 million.
“Sell, Build, Ship”
In fiscal 2019, we remain steadfast in our mission to execute against our strategic plan for commercialization: creating
and commercializing a reliable and expanding product offering in subsea charging, monitoring, surveillance, and
connectivity. To maintain our foothold as a global leader, we stand by our mantra “Sell, Build, Ship,” which enables
us to focus on the whole lifecycle of commercialization, starting with the customer, expanding through the tailoring of
the technology, and culminating with a safe deployment and global customer support. Our team has embraced this
mantra and are proud to see their innovative ideas implemented in solving critical offshore issues in some of the most
challenging subsea environments.
Expanding and Renewable Success in 2019 and Beyond
As we look toward the future, we are keeping a close watch on managing our resources, while pursuing new
opportunities for growth and customer acquisition. We continue to engage prospective customers through direct
communications as well as participating in upcoming conferences and exhibitions to further demonstrate our strong
intellectual property, products, and technology. Our recent exhibitions included the Offshore Technology Conference
in Houston, the Sea, Air, and Space Exposition in Washington, D.C. and ONS2018 in Stavanger, Norway. We look
forward to participating in more of these events, and the resulting expansion of both our customer and revenue base.
In addition to aggressively marketing our PB3 PowerBuoy™, our team is focused on identifying product and service
solutions which may deliver additional value to our customers by reducing operational costs, while simultaneously
strengthening our PB3 PowerBuoy™ value proposition. These complimentary focus areas include cost-effective
deeper water mooring solutions, combined power and communications mooring solutions, and new methods for
increased power generation and energy storage. We believe that these solutions may both diversify our future revenue
streams in adjacent profit pools while further accelerating PB3 PowerBuoy™ commercialization.
Energizing Fiscal 2019
As part of our commitment to create enhanced and enduring shareholder value, we will continue to focus on growing
annual revenues, and we are doing this by improving our commercialization process, expanding our opportunity pipeline,
and customer expansion through the sale and deployment of our PB3 PowerBuoy™. We are controlling costs while
making strategic investments to continue innovating, particularly as we work with current and prospective customers to
hone new applications and further expand our product offering. Fiscal 2019 is a year focused on execution of existing
orders, and continued business development across each of our target end markets.
After a pivotal fiscal 2018, we strongly believe in the value of our product and technology offering. We wish to thank
all our stakeholders, including our customers who have embraced our technology, our employees for their vision, our
Board of Directors for their guidance, and our shareholders for their support. We look forward to another energized
year of continued success.
Sincerely yours,
Terence J. Cryan
Chairman of the Board
George H. Kirby
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2018
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
Ocean Power Technologies, Inc.
Delaware
(State or other jurisdiction of
incorporation or organization)
22-2535818
(I.R.S. Employer
Identification No.)
28 ENGELHARD DRIVE
MONROE TOWNSHIP, NJ 08831
(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 Capital 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 [X]
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 [X]
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 [X] 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 [X] 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. [X]
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 [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.[ ]
The aggregate market value of the common stock of the registrant held by non-affiliates as of October 31, 2017, the last business day of
the registrant’s most recently completed second fiscal quarter, was $22.6 million based on the closing sale price of the registrant’s common stock on
that date as reported on the NASDAQ Capital Market.
The number of shares outstanding of the registrant’s common stock as of July 5, 2018 was 18,368,286.
OCEAN POWER TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
PART I
Business .............................................................................................................................................
Risk Factors .......................................................................................................................................
Unresolved Staff Comments ..............................................................................................................
Properties ...........................................................................................................................................
Legal Proceedings ..............................................................................................................................
Mine Safety Disclosures ....................................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ................................................................................................................................
Selected Financial Data .....................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ............
Quantitative and Qualitative Disclosures About Market Risk ...........................................................
Financial Statements and Supplementary Data ..................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............
Controls and Procedures ....................................................................................................................
Other Information ..............................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance ................................................................
Executive Compensation ..................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ...............................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence ..................................
Principal Accountant Fees and Services ...........................................................................................
PART IV
Exhibits, Financial Statement Schedules ...........................................................................................
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PowerBuoy™ and the Ocean Power Technologies logo are trademarks 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 2018 are to the fiscal year ended April 30, 2018.
ii
ITEM 1. BUSINESS
Overview
PART I
Nearly 70% of the Earth’s surface is covered by water, and over 40% of the world’s population lives within
approximately 150 miles of a coast. Thousands of information gathering and/or power systems are deployed in the oceans today
to increase our understanding of weather, climate change, biological processes, and marine mammal patterns as well as
supporting exploration and operations for industries such as oil and gas. Most of these systems are powered by battery, solar,
wind, fuel cell, or fossil fuel generators that may be unreliable and expensive to operate while they also may be limited in their
ability to deliver ample electric power. These current systems often necessitate significant tradeoffs in sensor accuracy, data
processing and communications bandwidth and frequency in order to operate given limited available power. More persistent
power systems requiring less maintenance, such as our systems, may have the ability to save costs over these current systems.
Equally important are increases in available power which may allow for better sensors, faster data sampling and higher
frequency communication intervals up to real-time which could improve scientific and economic returns.
Founded in 1984 and headquartered in Monroe Township, New Jersey, we believe we are the leader in ocean wave
power conversion technology. Our PB3 PowerBuoy™ is our first fully commercial product which generates electricity by
harnessing the renewable energy of ocean waves. In addition to our PB3 PowerBuoy™, we continue to develop our
PowerBuoy™ product line based on modular, ocean-going buoys, which we have been periodically ocean testing since 1997.
The PB3 PowerBuoy™ generates power for use in remote offshore locations, independent of a conventional power
grid. It features a unique onboard power take-off (“PTO”) system, which incorporates both energy storage and energy
management and control systems. The PB3 generates a nominal name-plated capacity rating of up to 3 kilowatts (“kW”) of
peak power during recharging of the onboard batteries. Power generation is deployment-site dependent whereby average power
generated can increase substantially at very active sites. Our standard energy storage system (“ESS”) has an energy capacity
of up to a nominal 150 kilowatt-hours (“kWh”) to meet specific application requirements. We believe there is a substantial
addressable market for the current capabilities of our PB3, which we believe could be utilized in a variety of applications.
In addition to leveraging earlier design aspects of our autonomous PowerBuoy™, the PB3 has undergone extensive
factory and in-ocean design validation testing. Currently, our engineering efforts are continuing to expand the PowerBuoy™
capability with simplified deployment and mooring options and working together with our customer base to ensure flexible
systems integration and to optimize energy output. Our marketing efforts are focused on applications in remote offshore
locations that require reliable and persistent power and communications, either by supplying electric power to payloads that
are integrated directly in or on our PowerBuoy™ or located in its vicinity, such as on the seabed and in the water column.
Based on our market research and publicly available data, we believe that numerous markets have a direct need for
our PowerBuoy™ including oil and gas, science and research, defense and security, and communications. Depending on
payload power requirements, sensor types and other considerations, we have found that our PowerBuoy™ could satisfy several
application requirements within these markets. We believe that the PB3 consistently generates sufficient power to meet the
requirements of many potential customer applications within our target markets.
Since fiscal 2002, government agencies have accounted for a significant portion of our revenues. These revenues were
largely for the support of our development efforts relating to our technology. Today our goal is to generate the majority of our
revenue from the sale or lease of our products, and sales of services to support our business operations. As we continue to
develop and commercialize our products, we expect to have a net loss of cash from operating activities unless and until we
achieve positive cash flow from the commercialization of our products and services. During fiscal 2017 and 2018, we continued
work on projects with the U.S. Department of Defense (“DOD”) and Mitsui Engineering and Shipbuilding Co., Ltd. (“MES”),
Premier Oil (“PMO”) and Eni S.p.A. (“Eni”) while we continued to validate the reliability and power output of our PB3
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 28 Engelhard Drive,
Monroe Township, New Jersey 08831, and our telephone number is (609) 730-0400. Our website address is
www.oceanpowertechnologies.com. We make available free of charge on our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is filed electronically with the SEC. The information on our website is not a part of this Annual
Report. Our common stock has been listed on NASDAQ since April 24, 2007, and since July 2015, our common stock has
been listed on the NASDAQ Capital Market. Our fiscal year begins on May 1 and ends on April 30. When we refer to a
particular fiscal year, we are referring to the fiscal year ending on April 30 of that year.
1
Competitive Advantages
We are commercializing our PB3 PowerBuoy™ by targeting customers principally in four markets that require reliable
and persistent power sources in remote offshore locations (as discussed in further detail below). We believe that our wave
energy products and services, and our existing commercial relationships provide the following competitive advantages in our
target markets.
● Numerous applications within multiple, major market segments. We have designed our PB3 PowerBuoy™
to address multiple offshore applications around the world. In particular, we are targeting customers with
multiple applications within the oil and gas, defense and security, ocean observing, and communications
markets.
● Considerable life-cycle cost savings over current solutions for many applications. Our PB3 PowerBuoy™
is designed to operate over extended intervals between required servicing, compared to several current
solutions which we found to require more servicing using offshore vessels. We believe that our PB3
PowerBuoy™ reduces costs over multi-year operations compared with current solutions. These cost
reductions are mostly due to reduced vessel and personnel servicing activities.
● Real-time data communications. Some current solutions with less available power than our PowerBuoy™
may have limited communication capabilities or may be able to communicate data only over shorter periods
due to power limitations. Some current solutions may only make data accessible upon physical retrieval of
the sensor. Our PowerBuoy™ can be equipped with a variety of communications equipment, such as 4G
LTE, satellite (VSAT) and Wi-Fi, which enables the transmission of data on a more frequent basis. We
believe that more frequent data communication could enable an end-user to more quickly and proactively
make data-driven decisions which could result in economic advantages.
Increased power and persistence compared to certain current solutions. We have found that our
PowerBuoy™ may provide substantially increased power and persistence than certain existing battery and
solar powered systems. We believe that this may allow additional sensors to be employed at the same site, a
higher sensor data transmission rate to be achieved, extended operation and reduced downtime, and
improved operational costs for the customer. Enabling these new capabilities may contribute to enhanced
operations through real-time decision making and increased life-cycle cost savings.
●
● Standard transportation and deployment. Our PB3 PowerBuoy™ does not require special handling or
transportation, and instead uses conventional transportation and handling methods that are economical and
readily available in standard marine operations. This may result in lower global transportation and
deployment costs than current solutions. Our PB3 PowerBuoy™ can be deployed using conventional vessels
and conventional marine cranes and lifts.
● Modular and scalable designs. Our PB3 PowerBuoy™ is designed with a modular ESS which allows us to
tailor its configuration to specific application requirements, including expansion of energy storage capacity,
potentially allowing for a more customized solution and potential cost savings for our customers. We believe
that our PowerBuoy™ is scalable to higher power levels, and multiple PowerBuoys™ may also be installed
in an array in order to achieve higher levels of aggregate power, although we have not yet demonstrated a
PowerBuoy™ array.
● Flexible electrical, mechanical and communication interfaces for sensors. The PB3 PowerBuoy™ can be
equipped with payloads, either mounted on or within the PowerBuoy™, or tethered to the PowerBuoy™.
The PB3 PowerBuoy™ has mechanical and electrical interfaces which allow for simplified integration of
payloads, creating flexibility for the end-user.
● Environmentally benign and aesthetically non-intrusive system design. We believe that our PB3
PowerBuoy™ does not present significant risks to marine life, or emit significant levels of pollutants, and
therefore has minimal environmental impact as compared to some other current solutions. We believe there
is no significant audible impact and our system does not have a negative effect on marine life, as validated
by the U.S. Navy and DOE.
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● Ocean and factory-tested technology. Our PB3 PowerBuoy™ is designed to be durable, with a three-year
interval between required maintenance activities. The PB3 has survived hurricanes and tropical storms during
harsh sea conditions. Since 1997 we have conducted ocean tests to demonstrate the viability of our
technology. In 2011, we conducted multiple ocean tests of the predecessor PB3 PowerBuoy™ under a
contract with the U.S. Navy. More recently, we conducted multiple ocean tests of our current generation PB3
PowerBuoy™, including our now commercial version. In 2015, we instituted factory-based PTO-accelerated
life testing which simulates continuous operations under extremely harsh conditions. During the 2017 fiscal
year, we also implemented additional features to accommodate the feedback received from potential
customers and end-users in support of further simplifying ocean deployments and increasing product
application versatility. Further, we also focused on standardizing manufacturing and production testing
procedures and worked closely with our supply base in order to ensure production repeatability. To date, we
have achieved over 67 million cumulative strokes across our fleet of power takeoffs with no material failures
in our commercial PTO design. This is equivalent to more than four cumulative years of continuous typical
ocean operation for the markets we are pursuing.
● Efficient design in harnessing wave energy. We have designed and validated our PB3 PowerBuoy™ for
maximized power generation in average ocean wave conditions through optimized mechanical to electrical
wave energy conversion. We have designed the onboard ESS to provide several days of continuous rated
power during periods of low or no wave activity, depending on payload power consumption. The PB3
PowerBuoy™ is equipped with a variety of communication capabilities including satellite, cellular, and Wi-
Fi that are capable of transmitting payload data in real time (e.g., sensors or equipment that require power
and communications capabilities), subject to the limits of the service provider.
● Prior commercial relationships enabled the development of our technology. Our prior and existing
relationships with the U.S. Navy, DOE, U.S. Department of Homeland Security and MES have allowed us
to develop our PB3 PowerBuoy™ for a variety of needs in various industries. We believe these relationships
have helped position us within the private sector in support of commercialization, which we believe enhances
our market visibility and attractiveness to our prospective customers. For example, in 2011 our PowerBuoy™
provided persistent power to an integrated radar and sonar system, significantly extending the U.S. Navy’s
surveillance range. We have also demonstrated persistent maritime vessel detection with the U.S. Department
of Homeland Security by integrating a hydrophone onto our PowerBuoy™ and demonstrating enhanced
maritime traffic detection. In each instance, the resulting data have informed our next design iterations to
improve critical operations and reliability.
Business Strategy
We continue to commercialize our PB3 PowerBuoy™ for use in remote offshore power and real-time data
communications applications. In order to achieve this goal, we are pursuing the following business objectives:
● Sell and/or lease the PB3 PowerBuoy™. We believe our PB3 PowerBuoy™ is well suited for many remote
offshore applications. We have observed potential market demand for both PowerBuoy™ sales and leases
within our selected markets, and we intend to sell and lease the PB3 PowerBuoy™ to these markets.
Additionally, we intend to provide services associated with product sales and leases such as maintenance,
remote monitoring and diagnostic, application engineering, planning, training, and logistics support required
for the PB3 PowerBuoy™ life-cycle. We continue to increase our commercial capabilities through new hires
in marketing, sales, and application support, and through engagement of expert market consultants in various
geographies.
● Concentrate sales and marketing efforts in specific geographic markets. We are currently focusing our
marketing efforts in North America, Europe, Australia, and parts of Asia and South America. We believe
that each of these areas has sizable end market opportunities, political and economic stability, and high levels
of industrialization and economic development.
● Expand our relationships in key market areas through strategic partnerships and collaborations. We believe
that strategic partners are an important part of commercializing a new product. Partnerships and
collaborations can be used to improve the development of overall integrated solutions, create new market
channels, expand commercial know-how and geographic footprint, and bolster our product delivery
capabilities. We believe that offering a turn-key solution, and not just power, is key to securing long term
success.
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o Commercial collaborations. We believe that an important element of our business strategy is to
collaborate with other organizations to leverage our combined expertise, market presence and access,
and core competences across key markets. We have formed such a relationship with several well-known
groups, including MES in Japan, PMO in the United Kingdom, Eni in Italy, the National Data Buoy
Center (“NDBC”), the Wildlife Conservation Society (“WCS”), Sonalysts (with expertise in subsea and
surface communications, systems integration, and big-data management), and HAI Technologies (an
innovative company focusing on bringing new capabilities to the oil and gas industry). We continue to
seek other opportunities to collaborate with application experts from within our selected markets.
o Outsourcing of fabrication, deployment and service support. We outsource all fabrication, anchoring,
mooring, cabling supply, and in most cases deployment of our PowerBuoy™ in order to minimize our
capital requirements as we scale our business. Our PTO is a proprietary subsystem and is assembled and
tested at our facility. We believe this distributed manufacturing and assembly approach enables us to
focus on our core competencies and ensure a cost-effective product by leveraging a larger more
established supply base. We also continue to seek strategic partnerships with regard to servicing of our
PB3 PowerBuoy™.
● PB3 cost reduction and PowerBuoy™ product development. Our engineering efforts are focused on
customer application development for PB3 sales, cost reduction of our PB3 PowerBuoy™ and improving
the energy output, reliability, maintenance interval and expected operating life of our PowerBuoy™. We
continue to optimize manufacturability of our designs with a focus on cost competitiveness, and we believe
we will be able to address new applications by developing new products that increase energy output.
Market Opportunities
The National Oceanographic and Atmospheric Administration (“NOAA”) Ocean Enterprise Report for 2016 estimated
that the annual market for what NOAA describes as the “Ocean Enterprise” is $8.5 billion. The report addressed for-profit and
not-for-profit businesses that support ocean measurement, observation and forecasting. Among the market sectors included in
the report are oil and gas, science and research and security and defense sectors. We believe that this report addresses only a
segment of the potential market opportunities that we are targeting.
Oil and Gas
We believe the offshore oil and gas industry is undergoing a significant transformation as it continues to invest in new
technologies that enable cost savings and the digitization of operations. The industry encompasses more than 10,000 offshore
sites, including exploration, production, reservoir management, and sites pending decommissioning based on information from
the U.S. Bureau of Safety and Environmental Enforcement and industry organizations and publications. We believe that we
have opportunities to implement one or more PB3 PowerBuoys™ at a large number of these sites to provide power in
applications that are not currently possible, or to displace current power solutions.
Science and Research
Science and research provides environmental intelligence to the entire ocean enterprise, which supports ocean
measurement, observation and forecasting, and is an important provider of information to maritime commerce and the entire
“blue economy.” Maritime commerce and the scientific community depend on information from areas such as meteorology,
climate change, ocean seismometry currents, and biological processes in order to inform operations and development. These
groups often require a power and communications solution in remote offshore locations. According to NOAA’s 2016 Ocean
Enterprise report, the total U.S. available ocean observing market from 2017 through 2021 for ocean-based systems
infrastructure is projected to be $2.0 billion.
Security and Defense
We believe that our PB3 PowerBuoy™ is uniquely positioned to be used to provide power and communications for
multiple applications within the security and defense market. The PB3’s ability to power multiple payloads may be an attractive
feature for defense and security, as their systems can be easily integrated into other PowerBuoy™ applications allowing their
operation to be concealed. An example application for domestic and international defense departments and defense contractors
includes forward deployed energy and communications outposts (which is a current U.S. Department of Defense program),
both above and below sea surface. Other example applications include early detection and warning systems, remote sensing
stations, high frequency radar, sonar, electro-optical and infrared sensors for maritime security, network communications
systems, and unmanned underwater vehicle docking stations. According to a 2014 Frost and Sullivan report, market
expenditures for global security reached $29.0 billion in 2012 and are projected to reach $56.5 billion in 2022. Maritime security
expenditures were approximately 45% of the global security market.
4
Communications
We believe that opportunities also exist in other markets such as communications. The addition of near shore and
offshore cellular and Wi-Fi platforms with reliable and persistent power could open new market opportunities for
telecommunications carriers by displacing a portion of the maritime satellite communications market, while potentially
decreasing communications costs for the marine, offshore oil and gas, and airline industries. As an example, according to a
2015 Frost & Sullivan Oil & Gas Satellite Communications market report, the estimated 2020 annual spend on satellite
communications in the oil and gas market is projected to be $459 million. According to an industry research paper titled
“Prospects for Maritime Satellite Communications.” in 2015 the global maritime satellite communications market has already
reached close to 338,000 terminals, with $1.7 billion in revenue at the satellite communications service provider level. The
report also notes that the value of the maritime satellite communications market is expected to continue to grow over the next
decade, with a 10-year compound annual growth rate of 5% in terminals and revenue, primarily due to the increasing need for
maritime data communications.
Implementation Strategy
We have made significant progress in redesigning and validating our commercial-ready PB3 PowerBuoy™ for use in
remote offshore applications. Since 2015, we have brought the PB3 from initial concept to a full-scale design. We have
performed multiple prototype iterations. During this time, we have conducted a number of in-ocean tests in combination with
our facility-based accelerated life testing to validate our commercial-ready PB3 PowerBuoy™ and to prepare for low rate initial
production. In 2017, we relocated our corporate headquarters to Monroe Township, New Jersey. We believe that this will allow
us to expand our manufacturing capabilities and to move toward higher volume PowerBuoy™ production. In fiscal 2018 we
have made progress in marketing our PB3 PowerBuoy™, as evidenced by requests for proposals. We are developing a new
approach from R&D to commercialization of SELL, BUILD, SHIP as our motto and we intend to build on our success by
implementing processes and solutions that cover the entire life cycle, from demand generation to closing the contract, and from
channel strategies to customer care.
Since 2015, we have had initial introductions or meetings with nearly 200 companies and organizations within our
target markets. A large proportion of these engagements (approximately 75%) were U.S.-based, while the remaining
engagements occurred in Europe, Australia, and parts of Asia including Japan. One-third of all engagements have transitioned
from initial introductions to advanced, confidential discussions around specific customer applications. Many of these
discussions occur at the executive, decision-making level, as well as the implementation level.
As previously noted, several of these customer application discussions have resulted in requests for proposals. Many
proposal requests are for projects where our PB3 PowerBuoy™ is part of a larger solution demonstration, and typically include
the potential lease or sale of one or more PB3 PowerBuoys™, as well as required services and maintenance support.
Demonstration projects are a necessary step toward broad solution deployment and revenues associated with specific
applications. A proposal phase typically lasts from three months to more than one year. During the demonstration project
specification, negotiation and evaluation period, we are often subject to the prospective customer’s vendor qualification
process, which entails substantial due diligence of our company and capabilities and may include negotiation of standard terms
and conditions. Many proposals contain provisions which would mandate the sale or lease of the PB3 PowerBuoy™ upon
successful conclusion of the demonstration project.
We believe this is an accurate depiction of the overall sales cycle for new technology in each of our target markets,
including the PB3 PowerBuoy™. However, cycle times for each step of the sales cycle will vary depending on several customer
factors, including, but not limited to, technical evaluation, project priorities, the funding approval process, and alignment of
new technology integration with the customer’s broader operational strategy. We believe that the resulting evidence of potential
demand, vis-à-vis specific application proposal requests, are indicative of significant progress in our commercialization
strategy. We believe that we have the potential for growth as a result of our positioning for higher volume production of our
PB3 PowerBuoy™ and the initial indications of demand for our PB3 PowerBuoy™ in multiple customer applications.
Product and Technologies
The following is a summary of the development and history of our current PowerBuoy™ product and our technologies.
5
Wave Energy
The energy contained in ocean waves is a form of renewable energy that can be harnessed to generate electricity. 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 top of the waves becomes longer.
Wave size, and the amount of kinetic wave energy, depends on wind speed, wind duration and the distance covered. The vertical
motion of the waves moves the float component of our PowerBuoy™, creating mechanical energy which our proprietary
technologies convert into usable electricity.
We believe that using wave energy for electricity generation has the following potential benefits, compared to existing
incumbent solutions.
●
Scalability within a small site area. Due to the dense energy in ocean waves, we believe that multiple
PowerBuoys™ may be aggregated in an array that would occupy a reasonably small area to supply electricity
to larger payloads. We believe the aggregation of a larger number of PowerBuoys™ could offer end users a
variety of advantages in availability, reliability and scalability. To date, we have not deployed an array of
PowerBuoys™ to test and validate our hypothesis, and we cannot assure that a PowerBuoy™ array would
generate the energy required to meet the needs of every prospective customer.
● Predictability. The generation of power from wave energy can be forecasted several days in advance. Wave
energy can be calculated with a high degree of accuracy based on satellite images and meteorological data,
even when the wave is hundreds of miles away and days from reaching a PowerBuoy™. Therefore, we
believe end-users relying on PowerBuoys™ for power may be able to plan their logistics, payload scheduling
and other operational activities based on such data and proactively, although actual testing has not yet been
conducted.
● Constant source of energy. The annual flow of waves at certain specific sites can be relatively constant and
defined with relatively high accuracy. Based on our studies and analyses of various sites of interest, we
believe that we will be able to deploy our PowerBuoys™ in locations where the waves could produce usable
electricity for the majority of all hours during a year.
Methods for generating electricity from wave energy can be divided into two general categories: onshore systems and
offshore systems. Our PowerBuoys™ are the offshore type. Many offshore systems, including our PowerBuoy™, utilize a
flotation device to harness wave energy. The heaving or pitching of the flotation 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 before using it to drive an electrical generator. Although maintenance costs of onshore systems may be less than those
associated with offshore systems, we believe there are a variety of disadvantages to the former. As waves approach the shore,
their energy decreases, therefore, onshore and near shore wave power stations are not capable of exploiting the same amount
of energy produced by waves in deeper water. In addition, suitable sites for onshore and near shore systems are limited and
potential environmental and aesthetic issues may impede development of these systems due to wave power station size and
proximity to communities.
Our principal product is our PB3 PowerBuoy™, which is designed to generate power for use independent of the power
grid in remote offshore locations. It consists of a main hull structure surrounded by a floating buoy-like device. The hull is
loosely moored to the seabed so that floating buoy can freely move up and down in response to the rising and falling of the
waves. The PTO device that includes an electrical generator, a power electronics system, our control system, and our ESS are
sealed within the hull. As ocean waves pass the PowerBuoy™, the mechanical stroke action created by the rising and falling
of the waves is converted into rotational mechanical energy by the PTO, which in turn, drives the electrical generator. The
power electronics system then conditions the electrical output which is collected within an ESS. The operation of the
PowerBuoy™ is controlled by our customized, proprietary control system.
The control system uses sensors and an onboard computer to continuously monitor the PowerBuoy™ subsystems as
well as the characteristics of the waves which interact with the PowerBuoy™. The control system collects data from the sensors
and the payloads, and uses proprietary algorithms to electronically adjust the performance of the PowerBuoy™. We believe
that this ability to optimize and manage the electric power output of the PowerBuoy™ is a significant advantage of our
technology.
In the event of large storm waves, the control system automatically locks the PowerBuoy™ and electricity generation
is suspended. However, the load center (either the on-board payload or one in the vicinity of the PowerBuoy™) may continue
to receive power from the on-board ESS. When wave heights return to normal operating conditions, the control system
automatically unlocks the PowerBuoy™ and electricity generation and ESS replenishment recommences. This safety feature
helps to prevent the PowerBuoy™ from being damaged by storms.
6
In March 2016, we announced a rebranding of our PowerBuoy™ systems as part of our commercialization efforts and
to closely align our PowerBuoy™ products with the perceived best practices of analogous industries based on power generation
and on-board energy storage capabilities. Under our new naming conventions, our current PowerBuoy™ is referred to as the
“PB3,” corresponding to “PowerBuoy™ with a nominal name-plated capacity rating of three kilowatts.” References to the
“APB350” on our website, and in our SEC filings including this Annual Report refers to earlier prototype PowerBuoys™
containing earlier generation PTOs and other earlier technologies.
The PB3 has undergone design iterations focused on improving its reliability and survivability in the anticipated
operating ocean environment, and will continue to undergo further enhancements through customary product life cycle
management. The PB3-A1 was an initial prototype that has now undergone in-ocean and accelerated life testing, and we believe
that the PB3 achieved a maturity level for use by early adopters in fiscal 2017. We continue the process of commercialization
of our product and we cannot assure you that we will be successful in our efforts to do so. We believe that the PB3 will generate
and store sufficient power to address some application requirements in our target markets. Our engineering efforts are focused,
in part, on increasing the energy output and efficiency of our PowerBuoys™ and, if we are able to do so, we believe the
PowerBuoy™ would be useful for additional applications where cost savings and additional power are required by our potential
customers. We continue to explore opportunities in these target markets, and we have not yet developed any integrated solutions
and product offerings in these potential markets. We believe that by increasing the energy output of our PowerBuoys™ we
may be able to address larger segments of our target markets. By improving our design and manufacturing, we also seek to
reduce the cost of our PowerBuoys™ through further design iterations and manufacturing ramp-up. In so doing, we seek to
improve customer value, displace more incumbent solutions, and become a viable power source for additional applications in
our target market segments.
Research and Development
Our team has a broad range of experience in mechanical engineering, electrical engineering, hydrodynamics and
systems engineering. We have engaged in extensive efforts to develop the PowerBuoy™, improve PowerBuoy™ efficiency,
reliability and power output, and improve manufacturability while reducing cost and complexity. Our recent efforts have been
focused on optimizing the size of our PowerBuoys™ in order to balance customer cost (both capital and operating expenses)
with power output of our PowerBuoys™. Such efforts include reducing overall product size and weight by considering the use
of materials other than steel for the external structure of our PowerBuoys™. Other recent efforts included the development of
scalable, higher efficiency, lower cost, higher reliability and less customized PTO systems, and the use of higher energy density
and lower weight energy storage technologies. We continue to seek to increase the capabilities of our PowerBuoy™ systems
by designing flexible interfaces and rendering them sensor and payload agnostic.
We have also focused on the development and implementation of accelerated testing regimens and techniques known
as accelerated life testing. Such methods accelerate failures in a laboratory environment, as compared to more lengthy and
expensive full-scale ocean deployments during normal use and extreme conditions. This testing allows us to quantify the life
characteristics of critical components and subsystems which would normally require several years of operation in ocean
conditions to achieve similar levels of wear and tear. Accelerated life testing is used successfully in other industries such as
automotive and aerospace and is a critical enabler for rapid product and technology development and maturation. We believe
that the combination of laboratory and ocean test regimens coupled with carefully planned PowerBuoy™ ocean tests will help
us to improve our effectiveness in commercializing our products.
It is our intent to fund the majority of our future research and development expenses with sources of external funding,
including cost sharing obligations under customer contracts. However, we cannot assure you that we will be successful in our
efforts to secure additional contracts. If we are unable to obtain external funding, we may curtail our research and development
expenses or reduce the scope of our operations as necessary to lower our operating costs.
Deployments
We continue to receive important feedback from in-ocean trial deployments of our PowerBuoys™, as is customary in
the marine industry for new vessels and products prior to final acceptance by their customers. If we are able to increase
PowerBuoy™ production, we anticipate that the need for in-ocean trials of our mature products will diminish. Deployment
sites are selected based on minimum ocean depth, appropriate wave activity for power generation requirements of associated
deployment payloads, and proximity to end-user operations. The PB3 can be transported over land to the deployment port using
conventional transportation methods. Once at port, the PB3 can be lifted into the water or onboard a vessel using a readily
available crane of appropriate capacity. The PB3 may then be towed to site using a standard vessel (if the location is within an
appropriate distance from the port), or the PB3 may be carried aboard a vessel to its offshore location, and craned into the water
at site. The PB3 is then attached to the mooring system, which is installed during a separate operation, after which a brief
commissioning process places the PB3 into operation. Recent deployments include the PB3-A1 in August and October of 2015,
and again in June and July of 2016 which was the final validation of the PB3 prior to the MES deployment in Japan.
7
Product Insurance. We currently have a property loss and liability insurance policy underwritten by Lloyd’s
Underwriters that covers the deployment and storage of our PowerBuoys™.
Site Approval. In the U.S., federal agencies regulate the siting of long-term renewable energy projects and related-
uses located on the outer continental shelf (“OCS”), which is generally more than three miles offshore. OCS projects longer
than one-year in duration are regulated by the U.S. Bureau of Ocean Energy Management (“BOEM”). For projects located
within three miles of the U.S. shore regardless of duration, 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. Generally, the same process applies to foreign sites where
site approval is contingent on meeting both national and local regulatory and environmental requirements. In connection with
issuing permits or leases enabling project use, the respective government agency often requires site restoration or other activities
at the conclusion of the permit or lease period.
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 U.S., the construction and operation of PowerBuoys™ offshore would
require permits and approvals from the U.S. Coast Guard, the U.S. Army Corps of Engineers and other governmental
authorities. These required permits and approvals evaluate, among other things, whether a 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 provide you with additional information under “Regulation” below.
Customers
Commercial Activities
We continue to seek new strategic relationships, and further develop our existing partnerships, with other companies
that have developed or are developing in-ocean applications requiring a persistent source of power that is also capable of real
time data collection, processing and communication, to address potential customer needs.
●
●
●
In June 2018, we entered into a contract with PMO for the lease of a PB3 PowerBuoy™ to be deployed in
one of PMO’s offshore fields in the North Sea. Under the agreement, the PowerBuoy™ will provide
communications and remote monitoring services for PMO assets and will demonstrate its ability to monitor
and alert vessels in the area after the Floating Production, Storage and Offloading vessel is removed. The
initial trial phase shall last for three months, and if successful, PMO may elect to extend for a second six-
month trial phase and a third three-month trial phase. We will be paid a flat fee specified in the contract for
each phase of the lease. At the end of the twelve months, PMO will have the option to extend the lease on a
month-to-month basis as well as to purchase the PowerBuoy™. If PMO elects to purchase the unit, the parties
will negotiate mutually agreeable terms. We have agreed to assist PMO in deployment and commissioning
of the unit, as well as related data collection and assessment of performance. PMO is responsible for all costs
associated with deployment and installation.
In March 2018, we entered into an agreement with Eni that provides for a minimum 24-month contract that
includes an 18-month PB3 PowerBuoy™ lease and associated project management. The PB3 PowerBuoy™
will be deployed in the Adriatic Sea to advance Eni’s Clean Sea technology for marine environmental
monitoring and offshore asset inspection using AUV’s. The PB3 PowerBuoy™ will be used to demonstrate
subsea battery charging, and eventually may be used to provide a stand-alone charging station and
communications platform that would enable the long-term remote operation of AUVs. At the end of June
2018, the buoy build is 90% complete and system level factory acceptance test is completed. OPT plans to
ship the PB3 to Eni in August 2018.
In January 2018, we entered into a 3-month agreement totaling approximately $0.1 million with PMO to
study the feasibility of using the PB3 PowerBuoy™ for decommissioning operations in the North Sea. The
contract outlines work that will determine the viability of using the PB3 for monitoring and guarding
remaining wells and subsea equipment after removal of a floating production, storage and offloading vessel
and prior to subsea decommissioning and/or well plugging and abandonment operations. During the study,
we are working closely with PMO’s other subsea equipment suppliers to produce a design to integrate their
equipment into the PB3. The feasibility study was completed and submitted to PMO for review and final
approval. In June 2018, we entered into a contract with PMO for the lease of a PB3 PowerBuoy™ to be
deployed in one of PMO’s offshore fields in the North Sea.
8
●
●
●
In February 2017, we entered into a Joint Application Development and Marketing Agreement with HAI
Technologies to pursue mutual opportunities. The initial focus of the agreement is on offshore oil and gas
subsea chemical injection systems where persistent power and real-time data communications are critical.
In December 2016, we entered into a Joint Marketing Agreement with Sonalysts, Inc. to explore and pursue
mutual opportunities in defense and oil and gas applications. The agreement includes the exploration and
assessment of the use of the PB3 as a platform to provide power and communications for these markets.
In September 2016, we entered into a contract with ONR totaling approximately $0.2 million to carry out the
first phase of a project which focuses on the initial concept design and development of a mass-on-spring
PTO-based PowerBuoy™ leveraging a number of OPT patents covering such a technology. If successful,
this device is expected to be able to respond to the unique set of requirements expected in various military
marine applications. We completed the Phase 2 BASE Effort work under the contract which focused on the
initial concept design and development of a mass-on-spring PTO-based PowerBuoy™. The Company is
waiting for ONR funding of Phase 2, Option 1 to be approved.
●
● We have worked with MES (from 2010 to current) to develop several PowerBuoy™ projects in Japan.
Historically, our agreements with MES have provided for MES to reimburse us for specific costs associated
with research, development and deployment of our PowerBuoy™ product. In March 2016, we entered into a
letter of intent with MES to conduct funded pre-work tasks and to negotiate a definitive agreement that would
allow for the lease of the PB3 PowerBuoy™ for a project off the coast of Kozushima Island, Japan following
a planned stage gate review. Stage-gate reviews are used in product development to gather key information
needed to advance the project to the next gate or decision point. This process is a generally accepted industry
practice and has been utilized by other customers such as the DOE. A final contract totaling nearly $1.0
million was negotiated and finalized with MES in May 2016 that included engineering and logistics support,
and the lease of our PB3 PowerBuoy™ for a 7-month period, its ocean deployment, associated data collection
and monitoring of its performance. Upon the completion of the engineering pre-work and a successful stage
gate review, the PB3 was shipped to Japan and was deployed off Kozushima Island from April to September
2017. The MES lease concluded in September 2017 and the PB3 was shipped back to New Jersey.
In May 2016, we entered into a Memorandum of Agreement (“MOA”) with WCS to explore the use of our
PowerBuoys™ in conjunction with ocean life monitoring sensors to collect ocean mammal migration data.
The MOA includes the exploration and assessment of the use of the PB3 as an integration platform to provide
power and communications to sensors that monitor marine life migrations. An initial effort consisting of a
battery powered sensor mounted to the PB3-A1 was deployed off of the coast of New Jersey which sought
to establish a baseline acoustic survey. The deployment proceeded for approximately three months and met
all project objectives. The deployment proceeded for approximately three months and met all project
objectives.
In 2016, we entered into a cooperative research and development agreement (“CRADA”) with the NDBC to
conduct ocean demonstrations of its innovative Self-Contained Ocean Observing Payload (“SCOOP”)
monitoring system integrated into our PB3-A1 PowerBuoy™ . NDBC operates a large network of buoys and
stations which provide critical meteorological and oceanic observations that are utilized by government,
industry, and academia throughout the world. Under the CRADA, an initial ocean demonstration was to be
conducted off the coast of New Jersey. We integrated the SCOOP onto our PB3 PowerBuoy™ and in June
2016 we deployed the system off of the coast of New Jersey. Site-specific measurements of meteorological
and ocean conditions, as well as system performance and maintenance data collection, were carried out. The
SCOOP was powered by the PB3, and provided metocean data to OPT and to NDBC. The deployment
proceeded for approximately three months and met all project objectives.
●
Current Customers
The table below shows the percentage of our revenue we derived from significant customers for the periods indicated:
Twelve months ended April 30,
2018
2017
Eni S.p.A. ...........................................................................................
Mitsui Engineering & Shipbuilding ...................................................
Premier Oil UK Limited ....................................................................
U.S. Department of Defense Office of Naval Research .....................
33 %
43 %
10 %
14 %
100 %
0 %
80 %
0 %
20 %
100 %
9
In order to achieve success in commercializing our products, we must expand our customer base and obtain
commercial contracts to lease or sell our PowerBuoy™ and related services to customers. Our potential customer base for our
PowerBuoys™ includes various public and private entities, and agencies that require remote offshore power. To date,
substantially all of our revenue producing contracts have been with a small number of customers under contracts to fund a
portion of the costs of our operational efforts to develop and improve our technology, validate our product through ocean and
laboratory testing, and business development activities with potential commercial customers. Our goal in the future is that an
increased portion of our revenues will be from the lease or sale of our products and related maintenance and other services.
Historic Projects
Our relationships and projects during recent years include, but are not limited to, the following:
● The U.S. Navy and Department of Homeland Security.
o From 2009 to 2011, we ocean-tested our utility-scale PowerBuoy™ at the U.S. Marine Corps Base,
Hawaii at Kaneohe Bay. The PowerBuoy™ was launched under our program with the U.S. Navy for
ocean testing and demonstration of a prior iteration of our PowerBuoy™, including connection to the
Oahu power grid.
o
o From 2007 to 2013, we worked on two separate contracts to fabricate and deploy two autonomous
PowerBuoys™, which were subsequently deemed obsolete, as an alternate power source for the U.S.
Navy’s Deep Water Active Detection System (“DWADS”).
In 2009 and 2010, we were awarded $2.4 million and $2.75 million, respectively, from the U.S. Navy to
develop a Littoral Expeditionary Autonomous PowerBuoy™ (“LEAP”) prototype. The LEAP contract
was developed to enhance the U.S. Navy’s territorial protection capability by providing potential
persistent power at sea for port maritime surveillance in the near coast, harbor, piers and offshore areas.
During the LEAP contract, we designed, built and deployed in 2011 a PowerBuoy™ structure
incorporating a new PTO system. The system was deployed by a U.S. Coast Guard vessel and was ocean-
tested approximately 20 miles off of the coast of New Jersey. It was integrated with a Rutgers University-
operated land-based radar network that provided ocean current mapping data for the National
Oceanographic and Atmospheric Administration (“NOAA”) and U.S. Coast Guard Search and Rescue
(“SAR”) 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 potential persistent power source
for systems requiring remote power at sea. During the ocean testing under these contracts, our
PowerBuoy™ withstood the high storm waves of Hurricane Irene which occurred in August 2011.
In 2012, we executed a CRADA with the U.S. Department of Homeland Security to collaborate and
demonstrate persistent maritime vessel detection. The vessel detection ocean demonstration in 2013
utilized the same PowerBuoy™ under the LEAP contract with additional sensors. This additional
deployment provided critical data which informed our next design iteration, and which incorporated
major modifications to address critical operations and reliability improvements. This project concluded
in 2013.
o
● Lockheed Martin. From 2004 to 2014, we had several project teaming agreements and license agreements
with Lockheed Martin.
10
● Australia. In 2008, we announced a Joint Development Agreement with Leighton Contractors Pty. Ltd.
(“Leighton”) for the development of wave power projects off the coast of Australia. In 2009, Leighton formed
Victorian Wave Partners Pty Ltd (“VWP”), a special purpose company for the development of a wave power
project off the coast of Victoria, Australia. In 2010, VWP and the Commonwealth of Australia entered into
an Energy Demonstration Program Funding Deed (“Funding Deed”), wherein VWP was awarded an A$66.5
million (approximately US$62 million) grant for the wave power project. However, receipt of funds under
the grant was subject to certain terms, including achievement of future significant external funding
milestones. The grant was expected to be used towards the A$232 million proposed cost of building and
deploying a wave power station off the coast of Australia (the “Project”). In March 2012, our Australian
subsidiary Ocean Power Technologies (Australasia) Pty. Ltd acquired 100% ownership of VWP from
Leighton. In January 2014, VWP signed a Deed of Variation with the Australian Renewable Energy Agency
(“ARENA”) that amended the Funding Deed, and, in March 2014, received the initial portion of the grant
from ARENA in the amount of approximately A$5.6 million (approximately US$5.2 million) (the “Initial
Funding”). The Initial Funding was subject to claw-back provisions if certain contractual requirements,
including performance criteria, were not satisfied. In light of the claw-back provisions, we determined to
classify the Initial Funding as an advance payment, hold the funds as restricted cash and defer recognition of
the funds as revenue. In July 2014, the VWP Board of Directors determined that the project contemplated by
the Funding Deed was no longer commercially viable and terminated the Funding Deed. The Initial Funding
was returned to ARENA. We do not currently have any projects in Australia.
Japan. In fiscal years 2014-2016, we worked with MES under several contracts to enhance our PowerBuoy™
technology for Japanese sea conditions for both utility scale and autonomous applications. Under these
contracts and leveraging prior work with MES, we analyzed methods to maximize buoy power capture,
performed modeling and wave tank testing, evaluated novel mooring strategies and conducted design
reviews. Currently, the utility scale effort with MES has been suspended and our current efforts with MES
are focused on autonomous applications. We billed and were paid for all eligible costs incurred under the
previous utility scale project with MES in fiscal 2015. Our revenue recorded in fiscal 2016 and 2017 reflect
the total amount paid on these MES contracts. See above under “Current Customers” for a description of our
current contract with MES.
●
● Reedsport, Oregon Project. We obtained a permit in 2007 from the Federal Regulatory Commission
(“FERC”) for a multi-stage wave power project off the coast of Reedsport, Oregon. In addition, we received
two cost-sharing contracts with the DOE for approximately $4.4 million to construct and deploy a single
PowerBuoy™ off the coast of Reedsport. We subsequently obtained a license from FERC in August 2012
that authorized installation and operation of a 10-buoy grid connected wave energy array (the “License”).
Due to the complexity of the FERC regulations for the single buoy, higher than anticipated project costs,
unanticipated technical risks, and uncertainty surrounding permitting, we made the decision not to proceed
with the project. Accordingly, we announced in March 2014 our surrender of the permit for one phase of the
project and announced in April 2014 that we were taking the steps necessary to close out this project with
the DOE. In May 2014, we filed an application to surrender the FERC permit for the remaining phases. In
August 2014, in cooperation with the State of Oregon Department of State Lands, we removed anchoring
and mooring equipment from the seabed off of the coast of Oregon. In fiscal 2016, we dispositioned the
PowerBuoy™. In late fiscal 2016 and early fiscal 2017, we disposed of the remaining anchoring and mooring
equipment through a local entity and by June 2017 the project was closed out.
● The EU WavePort Project. In 2010, we were awarded €2.2 million under the European Commission’s
Seventh Framework Programme (“FP7”) by the European Commission’s Directorate (“EC”) responsible for
new and renewable sources of energy, energy efficiency and innovation. This grant was part of a total award
of €4.5 million to a consortium of companies, including us, to deliver a PowerBuoy™ wave energy device,
referred to as the PB40 (a legacy utility scale buoy), under a project entitled WavePort. We commenced work
under this grant in fiscal 2012, and this cost-sharing contract expired on July 31, 2014. Due to a variety of
factors, in October 2014, we shipped the PB40 back to New Jersey in order to undertake to deploy it off of
the coast of New Jersey using our own funding. The legacy utility scale buoy was deployed in July 2015 and
retrieved in August 2015, due to failure of a component part. We do not intend to redeploy the PB40.
Following a project audit, final payment under the WavePort Project was received and recognized as revenue
in fiscal 2016. Subsequently, the Company proceeded with the deployment site remediation to meet the terms
of its deployment permit requirements. The site remediation was completed on May 18, 2017.
11
● PowerBuoy™ Development Projects. In April 2010, we received a $1.5 million award from the DOE for a
feasibility study of a PowerBuoy™ with the ability to produce up to 500kW of power (referred to as the
“PB500”). In fiscal 2011, we received additional awards totaling $4.7 million for the PB500 structure and
PTO optimization study, $2.3 million from the U.K. Government’s Technology Strategy Board and $2.4
million from the DOE. In fiscal 2014, upon completion of the concept design and associated trade studies
that included detailed mechanical analyses, manufacturability and overall projected performance, the study
concluded that a PB500 would not be technically feasible or economically viable. In March 2015, we
successfully completed a stage gate review and a review of project deliverables with the DOE where
advancements related to PTO design aspects such as reliability, cost take out, manufacturability and
scalability were reviewed. Following a stage gate review, the project was successfully completed in fiscal
2016.
Manufacturing
We engage in two types of manufacturing activities: 1) the manufacturing of the high value-added PTO components
for systems control, power generation and conversion, and energy storage for each PowerBuoy™; and 2) contracting with
outside companies for the fabrication of the buoy structure, mooring system, and cabling.
Our core in-house manufacturing activity is the assembly, final systems integration and testing of the PTO and its
components, which is conducted at our New Jersey facility. The power generation system consists of electro-mechanical
components, and the control modules include the critical electrical and electronic systems that convert the mechanical energy
into usable electricity. The sensors and control systems use sophisticated technology to optimize the performance of the
PowerBuoy™ in response to changing operating conditions and payload power demand. We maintain a portfolio of patents,
including those that cover our power generation, power conversion and control technologies.
We purchase the remaining components and materials for each PowerBuoy™ from various vendors. 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 and test procedure results. After the vendor completes the testing of the buoy
structure, it is transported to our facility for final integration of the PTO. After each vendor completes testing of the remaining
components, they are transported ready-to-install to the project site. We do not believe that we are dependent on any single
vendor for manufacturing the components of and materials for our PowerBuoy™, and we believe that there are many available
manufacturers for our component parts if a particular manufacturing partner should become unavailable or expensive. However,
we have only manufactured our PowerBuoys™ in limited quantities for use in development and testing and have limited
commercial manufacturing experience, and our work with our vendors has not included work on multiple orders on time-critical
deadlines. Moreover, we do not have long-term contracts with our third-party manufacturers or vendors. In order to be
successful in our efforts to commercialize our PowerBuoys™, we will need to secure stable relationships with a variety of
manufacturers and vendors that can supply component parts and materials for our PowerBuoy™ products.
In December 2017, we relocated our corporate headquarters and manufacturing operations from Pennington, New
Jersey to Monroe, New Jersey. Our new facility offers approximately 56,000 square feet of manufacturing and office space,
which is more than double the size of our prior facility. This larger space supports our increased operational needs, and also
allows for our anticipated growth over the next several years. We believe this new facility will enable us to implement world
class assembly and testing processes, emphasizing product quality and employee safety, while significantly improving our
ability to increase product throughput. We believe that our decision to relocate our operations is integral to our overall business
growth strategy.
Marketing and Sales
We continue to enhance our marketing capabilities across our target markets and we have begun actively marketing
our PowerBuoys™. We currently use a direct sales force consisting of employees and industry expert consultants. Because our
PowerBuoys™ use technology which is not yet considered mature by our target markets, we expect that the customer decision
process could require us to spend substantial time educating end-users and stakeholders, which may result in a lengthy sales
cycle.
We attend and display our products at tradeshows and conferences that represent our pursued markets. In 2018, we
highlighted our Anchorless PowerBuoy™ at the Navy Forum for SBIR/STTR Transition in National Harbor, Maryland. In
May 2018, we displayed our full-size PowerBuoy™ PB3 at the Offshore Technology Conference in Houston, Texas.
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We market our PowerBuoys™ to companies and entities requiring remote offshore power and communications; for
example, oil and gas companies for potential applications such as remote sensing, trace heating, or autonomous site monitoring,
power and communications for remotely operated vehicles or autonomous underwater vehicle charging stations. We also see
opportunities for security and defense applications using active sensors such as high frequency radar and acoustic systems with
significant processing and communications requirements.
Additionally, we continue to seek to enter into strategic relationships to develop application solutions with commercial
and military sensor and equipment manufacturers, where we might grant licenses to manufacture, market or operate
PowerBuoys™ or PowerBuoy™ subsystems.
Backlog
As of April 30, 2018, our backlog was $0.7 million. This backlog includes amounts remaining to be paid under the
Eni and Premier contracts. 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 (U.S. Congress, in the case of U.S.
Government agencies), and unfunded amounts, which are unfilled firm orders 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
contract.
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 portion
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.
Competition
We expect to compete with other providers of in-ocean autonomous power sources, primarily consisting of subsea
batteries, solar and fossil-fuel power sources, where many of the providers are substantially larger than OPT and may have
access to greater financial resources. Incumbent sources of in-ocean power may also represent established and reliable power
sources and may have already gained customer acceptance. Our ability to compete successfully for business from applications
seeking in-ocean power will depend on our ability to produce and store energy reliably and at a total cost that is competitive
with or lower than that of other sources, and on the on-going reliability of our product and customer perception of our company.
Our ability to compete effectively may be adversely affected by our current need for additional financing and our future
customers’ concerns about our long-term viability.
We also may eventually compete against other renewable wave generated power providers. As of June 2018, there
were more than nearly 260 companies, some with institutional funding, listed in the DOE’s Marine and Hydrokinetic (“MHK”)
Technology Database. This DOE database provides up-to-date information on marine and hydrokinetic renewable energy
technologies and companies, both in the U.S. and around the world. Many of these companies are located in the U.K.,
continental Europe, Japan, Israel, the U.S. and Australia, and many of those companies are pursuing the utility, grid-connected
energy market. The MHK industry is both highly competitive and continually evolving as participants strive to differentiate
themselves by promoting their specific technology focusing on cost and efficiency. The companies are subdivided by
implementation: wave power, current power, tidal and ocean thermal energy conversion. Within wave power, the technologies
are classified as point absorber, oscillating wave column, overtopping device, attenuator and oscillating wave surge converter.
Our PowerBuoy™ wave energy converter is classified as a point absorber.
The vast majority of the companies in the DOE’s database are small, start-up type companies with a small number of
employees and in early stage development that do not have our in-ocean validation experience. Only a few of these companies
have conducted testing similar to us, such as accelerated life testing and extensive wave tank testing on reduced scale models
of their devices. We believe our in-ocean experience is critical in proving the reliability, survivability and performance of any
wave energy system, which we believe our future customers will require before adopting any wave generated energy solution.
We believe our experience gained through full scale in-ocean deployments, coupled with other types of factory and laboratory
testing, and our resulting understanding of risks and failure modes provides us with an advantage compared to potential wave
energy competitors.
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Our analysis of the DOE database indicates that approximately 20 wave energy technologies were selected for further
evaluation by the DOE, primarily based on company financial capability, type of system and potential to compete in
autonomous (non-grid connected) markets. Of these, there are three companies that we believe may have the technical
capability and financial viability to compete in the offshore autonomous power market; however, their technologies are still in
early stage development with limited ocean testing. We believe that none of these technologies are at the maturity level of our
current PB3 PowerBuoy™, and because of this we believe that we continue to maintain a first mover advantage.
Intellectual Property
We believe that our technology differentiates us from other providers of wave energy conversion 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 upon the proprietary rights of others and to prevent others from infringing upon our
proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. 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 June 2018, we have been issued 65 U.S. patents, of which 50 are active and 15 have expired. Outside of the U.S.
we have been issued 200 patents across 13 countries with 33 of the active U.S. patents having at least one corresponding issued
foreign patent. We have filed for 3 additional U.S. patents and 1 of the U.S. patents applications have corresponding foreign
patent applications. Our patent portfolio includes patents and patent applications with claims directed to:
system design;
control systems;
power conversion;
anchoring and mooring; and
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● wave farm architecture.
The expiration dates for our issued U.S. patents range from 2018 to 2032. 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 U.S. 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 PB-Vue®, OPTMicrobuoy®, CellBuoy®, PowerTower®, Making Waves in
Power®, Talk on Water® and
duration when marks are properly maintained in commercial use.
® marks in the United States. Trademark ownership is generally of indefinite
Regulation
Our PowerBuoys™ are subject to regulation in the U.S. and in foreign jurisdictions concerning, among other areas,
site approval and environmental approval and compliance. In order to encourage the adoption of offshore power solutions,
many governments offer subsidies and other financial incentives and have mandated renewable energy targets which some of
our customers may be able to leverage. However, these subsidies, incentives and targets may not be applicable to our technology
and therefore may not be available to our customers.
The renewable energy industry has also been subject to increasing regulation. As the renewable energy industry
continues to evolve and as the wave energy industry continues to evolve, we anticipate that wave energy technology and our
PowerBuoys™ and their deployment will be subject to increased oversight and regulation in accordance with international,
national and local regulations relating to safety, sites, and environmental protection.
Site Approval, Environmental Approval and Compliance
We present additional information regarding the regulatory requirements relating to our in-ocean deployments above,
under “Product and Technologies – Deployments.”
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Subsidies and Incentives
Renewable energy subsidies and incentives are generally applicable only to electric generation and supply to the utility
grid. However, our autonomous applications may permit a customer to reduce its carbon emissions, which our potential
customers may be able to publicize in their environmental stewardship reports.
Employees
As of April 30, 2018, we had 35 full-time employees. Of these employees, 34 are located in the United States and one
is located in the United Kingdom. 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 are represented by a labor union, and we believe our employee relations
are good.
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. 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 Related to Our Financial Condition
Our auditors have raised substantial doubts as to our ability to continue as a going concern.
Our financial statements have been prepared assuming we will continue as a going concern. We have experienced
substantial and recurring losses from operations, which losses have caused an accumulated deficit of $197.5 million at April
30, 2018. We generated revenues of only $0.5 million in fiscal 2018, and $0.8 million in fiscal 2017. At April 30, 2018, we
had approximately $11.5 million in cash on hand. Based on the Company’s cash and cash equivalents and marketable securities
balances as of April 30, 2018, the Company believes that it will be able to finance its capital requirements and operations into
the quarter ending April 30, 2019, including $0.6 million of payments due by August 30, 2018 as a return of an option fee due
to ineligibility for certain emission credits.
We continue to experience operating losses and currently have two revenue producing contracts. During fiscal 2018,
our net burn rate (cash used in operations less cash generated by operations) including product development spending was
approximately $0.9 million per month. Even if wave energy technology achieves broad commercial acceptance, our
PowerBuoys™ may not prove to be a commercially viable technology for generating electricity from ocean waves.
We have been funding our business principally through sales of our securities, and we expect to continue to fund our
business with sales of our securities and, to a limited extent, with our revenues until, if ever, we generate sufficient cash flow
to internally fund our business. These factors, among others, raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty. We anticipate that our operating expenses will be approximately $14.5 million in fiscal 2019 including product
development spending of more than $6.3 million. However, we may choose to reduce our operating expenses through personnel
reductions, and reductions in our research and development and other operating costs during fiscal year 2019, if we are not
successful in our efforts to raise additional capital. We cannot assure our stockholders that we will be able to increase our
revenues and cash flow to a level which would support our operations and provide sufficient funds to pay our obligations for
the foreseeable future. Further, we cannot assure our stockholders that we will be able to secure additional financing or raise
additional capital or, if we are successful in our efforts to raise additional capital, of the terms and conditions upon which any
such financing would be extended. If we are unable to meet our obligations, we would be forced to cease operations, in which
event investors would lose their entire investment in our company.
We may not be able to raise sufficient capital to continue to operate our business.
Historically, we have funded our business operations through sales of equity securities. We do not know whether we
will be able to secure additional funding or, if secured, whether the terms will be favorable to us or our investors. Our ability
to obtain additional funding will be subject to a number of factors, including market conditions, our operating performance,
pending litigation and investor sentiment. These factors may make additional funding unavailability, or the timing, dollar
amount, and terms and conditions of additional funding unattractive.
15
If we issue additional securities to raise capital, our existing stockholders could experience dilution or may be
subordinated to any rights, preferences or privileges granted to the new security holders. In particular, any new securities issued
could have rights senior to those associated with our common stock and could contain covenants that would restrict our
operations. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive
when we require it, our business, operating results, financial condition and prospects could be materially and adversely affected
and we may be unable to continue our operations.
We have a history of operating losses and may not achieve or maintain profitability and positive cash flow.
We have incurred net losses since we began operations in 1994, including net losses of $10.2 million and $9.5 million
in fiscal 2018 and 2017, respectively. As of April 30, 2018, we had an accumulated deficit of $197.5 million. To date, our
activities have consisted primarily of activities related to the development and testing of our technologies and our
PowerBuoy™. Thus, our losses to date 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
continue to have a net use of cash from operating activities unless or until we achieve positive cash flow from the
commercialization of our products and services.
We do not know whether we will be able to successfully commercialize our PowerBuoys™, or whether we can achieve
profitability. There is significant uncertainty about our ability to successfully commercialize our PowerBuoys™ in our targeted
markets. Even if we do achieve commercialization of our PowerBuoy™ and become profitable, we may not be able to achieve
or, if achieved, sustain profitability on a quarterly or annual basis.
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:
●
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●
●
●
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●
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, or the failure to meet, specified contractual milestones or other performance criteria under
project contracts or in completing project contracts that could delay or prevent the recognition of revenue
that would otherwise be earned;
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
inherent uncertainties in our manufacturing processes.
Currency translation and transaction risk may adversely affect our business, financial condition and results of operations.
Our reporting currency is the U.S. 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 U.S. 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 sale
transaction using a different currency from our reporting currency. We cannot accurately predict the impact of future exchange
rate fluctuations on our results of operations. Currently, we do not engage in any exchange rate hedging activities and, as a
result, any volatility in currency exchange rates may have an immediate adverse effect on our business, results of operations
and financial condition.
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Risks Related To Growth Of Our Business
We 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.
Historically, a small number of customers have provided substantially all of our revenues and we expect that such
concentration will continue for the foreseeable future. In fiscal 2018 commercial contracts accounted for 86% of our revenues
and governmental contracts accounted for 14%. In fiscal 2017, revenues from commercial contacts accounted for 80% of our
revenues and governmental contracts accounted for 20%.
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 would adversely affect our business, financial condition
and results of operations.
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, would adversely affect our business,
financial condition and results of operations. We cannot assure you that we will be successful in our efforts to secure additional
commercial customers, or additional revenue-generating contracts.
Wave energy technology may not gain broad commercial acceptance and, therefore, our revenues may not increase and we
may be unable to achieve and, even if achieved, 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 sources
●
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and products;
fluctuations in economic and market conditions, such as increases or decreases in the prices of oil and other
fossil fuels;
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, it is unlikely that we will be able to
commercialize our PowerBuoy™ and our business will be materially harmed, in which case, we may curtail or cease operations.
If sufficient demand for our PowerBuoy™ does not develop or takes longer to develop than we anticipate, our revenue
generation will be limited, and it is unlikely that we will be able to achieve and, if achieved, then sustain profitability.
Even if wave energy technology achieves broad commercial acceptance, our PowerBuoys™ 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 PowerBuoys™, but have not yet achieved successful
commercialization of our PowerBuoys™. As we seek to manufacture, market, sell and deploy our PowerBuoys™ in greater
quantities, we may encounter unforeseen hurdles that would limit the commercial viability of our PowerBuoys™, including
unanticipated manufacturing, deployment, operating, maintenance and other costs. Our target customers and we may also
encounter technical obstacles to deploying, operating and maintaining PowerBuoys™.
If demand for our PowerBuoys™ fails to develop sufficiently, it is unlikely that we will be able to grow our business
or generate sufficient revenues to achieve and then sustain profitability. In addition, demand for PowerBuoys™ in our presently
targeted markets, including coastal North America, Europe, Australia and Japan, may not develop or may develop to a lesser
extent than we anticipate.
If we are not successful in commercializing our PowerBuoy™, or are significantly delayed in doing so, our business,
financial condition and results of operations will be adversely affected.
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If we are unable to attract and retain management and other qualified personnel, we may not be able to achieve our business
objectives.
Our success depends on the skills, experience and efforts of our senior management and other key product
development, manufacturing, and sales and marketing employees. We have limited financial resources and 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. Implementation of our business plans will be highly dependent upon our ability to hire and retain senior executives
as well as talented staff in various fields of expertise.
Changes in senior management are inherently disruptive, and efforts to implement any new strategic or operating
goals may not succeed in the absence of a long-term management team. Changes to strategic or operating goals with the
appointment of new executives may themselves prove to be disruptive. Periods of transition in senior management leadership
are often difficult as the new executives gain detailed knowledge of our operations and due to cultural differences that may
result from changes in strategy and style. Without consistent and experienced leadership, customers, employees, creditors,
stockholders and others may lose confidence in us.
To be successful, we need to retain key personnel. Qualified individuals, including engineers and project managers,
are in high demand, and we may incur significant costs to attract and retain them. With the exception of our President and Chief
Executive Officer, all of our officers and other employees are at-will employees, which means they can terminate their
employment relationship with us at any time, and their knowledge of our business and industry would be difficult to replace.
If we lose the services of key personnel, or do not hire or retain other personnel for key positions, our business, results of
operations and stock price could be adversely affected.
If we are unable to effectively manage our growth, this 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 may be necessary to achieve profitable operations. Our current personnel, facilities, systems and internal procedures
and controls may not be adequate to support future growth. This factor, when combined with the technical complexity of some
of our development efforts, may result in our inability to meet certain customer expectations or deadlines and could result in
the amendment to, or termination of, customer contracts or relationships. To realize our desired growth, we may need to add
sales, marketing and engineering offices in our existing and/or additional locations, which may include areas such as Australia,
Japan, and continental Europe, and which may result in additional organizational complexity.
To manage the expansion of our operations, we may 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 may need to increase significantly if we are to be able to fulfill our current manufacturing and growth plans. Our
management may 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.
If we are unable to successfully negotiate and enter into service 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 enter into service contracts with our customers under which we
would be paid fees for services related to the maintenance and operation of the PowerBuoys™ purchased from us. In addition,
we may offer to lease PowerBuoys™, sell power generated by PowerBuoys™ or sell data gathered by sensors on our
PowerBuoys™. Even if customers purchase or lease our PowerBuoys™, they may not enter into service contracts with us. We
may not be able to negotiate service, power sale or other contracts that provide us with any additional profit opportunities. Even
if we successfully negotiate and enter into such service 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, if we were unable
to perform adequately under such service contracts our efforts to successfully market the PowerBuoys™ could be impaired.
Any one of these outcomes could have a material adverse effect on our business, financial condition and results of operations.
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Since our PowerBuoys™ can only be deployed in certain geographic locations, our ability to grow our business could be
adversely affected.
Our PowerBuoys™ are designed for use offshore, but not all offshore areas worldwide have appropriate natural
resources for our PowerBuoys™ 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 PowerBuoys™ in certain coastal areas.
If we are unable to identify and deploy PowerBuoys™ at sufficient sites with appropriate natural resources to permit our
PowerBuoys™ to capture wave energy, our ability to grow our business could be adversely affected.
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 have been and expect to continue to be highly dependent on third parties to supply or manufacture components of
our PowerBuoys™. 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 PowerBuoys™. We
have utilized several different deployment methods, including towing the PowerBuoy™ to the deployment location and
transporting the PowerBuoy™ to the deployment location by barge or ocean workboat. If these third parties do not properly
deploy our systems, cannot effectively deploy the PowerBuoy™ 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.
Our investments in joint ventures could be adversely affected by our lack of sole decision-making authority, our reliance on
a co-venture’s financial condition and disputes between us and our co-venture partners.
It is part of our strategy that we may co-invest with third parties through joint ventures or by acquiring non-controlling
interests in special purpose entities. In these situations, we may not be in a position to exercise sole decision-making authority
regarding the joint venture. Our co-ventures may have economic or other business interests or goals that may not be consistent
with our own and may be in a position to take actions that are contrary to our policies or objectives. Additionally, investments
in joint ventures involve risks that would not be present were a third party not involved, including the possibility that our co-
ventures might become bankrupt or fail to fund their share of required capital contributions. Disputes between us and our co-
venture partners 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. In addition, we may not be able to identify appropriate strategic partners,
or successfully negotiate, finance or operate any joint ventures or other collaborative projects to advance this aspect of our
strategy. Consequently, both the entrance into a joint venture itself, or the failure to identify appropriate potential opportunities,
could materially and adversely affect our business, financial condition and results of operations.
Our targeted markets are highly competitive. We compete against incumbent solutions already being utilized by our
customers and potential customers. If we are unable to compete effectively, we may be unable to increase our revenues and
achieve or maintain profitability.
In our targeted markets, which are highly competitive, we compete against incumbent power solutions already being
utilized by our customers and potential customers. If we are unable to demonstrate to our customers and our potential customers
that our PowerBuoy™ is cost competitive to their existing alternative power solutions, or if it takes us longer to do so than we
anticipate, we may be unable to expand our business, maintain our competitive position, satisfy our contractual obligations,
continue to commercialize our PowerBuoy™, or become profitable. In addition, if the cost associated with these development
efforts exceeds our projections, our results of operations could be materially and adversely affected.
In addition, 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 power, we may not be able to respond effectively to competitive
pressures from other renewable energy technologies or improvements to existing technologies.
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If we are unable to respond effectively to such competitive forces, our business, financial condition and results of
operations could be adversely affected. Our targeted markets are subject to their own inherent risks, and if those risks should
materialize then our business, financial condition and results of operations could be adversely affected.
We market and plan to market our products in multiple 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 multiple global regions, including Europe, Australia, North America
and parts of Asia, and we are therefore subject to risks associated with having international operations. Revenues from
customers who are based outside of the U.S. accounted for 86% of our revenues in fiscal 2018 and 80% of our revenues in
fiscal 2017. 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;
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● unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to
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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 PowerBuoys™ and make us less competitive in some countries;
fluctuations in exchange rates may affect demand for our PowerBuoys™ and may adversely affect our
profitability in U.S. dollars to the extent the price of our PowerBuoys™ and cost of raw materials and labor
are denominated in a foreign currency;
● difficulty with staffing and managing widespread operations;
●
complexity of, and costs relating to compliance with, the different commercial and legal requirements of the
overseas markets in which we offer and sell our PowerBuoys™;
inability to obtain, maintain or enforce intellectual property rights; and
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● difficulty in enforcing agreements in foreign legal systems.
Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our
overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory, economic, social
and political conditions. We may not be able to develop and implement policies and strategies that will be effective in each
location where we do business, which in turn could adversely affect our business, financial condition and results of operations.
The current economic environment, particularly the macroeconomic pressures in certain European countries, may increase
these risks.
We anticipate that our contracts with our customers will generally include cancellation for convenience clauses that permit
our customers to terminate the contract for their convenience; if a customer were to terminate its contract with us for
convenience, this could materially adversely affect our business.
We anticipate that our contracts with our customers will be structured as capital equipment contracts or capital
equipment leases, and could include a cancellation for convenience clause, which we believe is relatively standard in these
types of contracts. Cancellation for convenience clauses allow the customer to cancel the contract or lease at their option without
cause prior to defined points in time, generally subject to a reasonable notice period. If any of our current or future customers
were to cancel their contracts with us for convenience, such cancellation could adversely affect our business.
Risks Related to Product Development and Commercialization
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
viability of our PowerBuoy™. Our product development costs were $4.3 million and $5.0 million in fiscal 2018 and 2017,
respectively. It is our goal to fund the majority of our product development expenses, including cost sharing obligations under
some of our customer contracts, over the next several years with sources of external funding, but we do not currently have any
such committed sources of funding, and we may not be able to secure any such funding in the future. If we are unable to obtain
external funding, our operations may be materially and adversely affected, and we may be required to curtail our product
development expenses, among other consequences.
20
We have only manufactured a limited number of PowerBuoys™ and to date we have not produced PowerBuoys™ in any
significant quantity or for commercial production. Our PowerBuoys™ have been used for testing and development and may
not have a sufficient operating history to confirm how they will perform over their estimated useful life.
We began developing and testing wave energy technology over 15 years ago. However, to date, we have only
manufactured a limited number of PowerBuoys™ for use in ocean testing and development. The longest continuous in-ocean
deployment of our PowerBuoy™ was from December 2009 to January 2012 and was an earlier iteration of our PowerBuoy™.
As a result, our PowerBuoys™ may not have a sufficient operating history to confirm how they will perform over their
estimated useful life. Our technology may not yet have demonstrated that our engineering and test results can be duplicated in
volume or in commercial production. We have conducted and plan to continue to conduct practical testing of our PowerBuoy™.
If our PowerBuoy™ is ultimately proven 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
PowerBuoys™ perform below expectations, we could lose customers and face substantial repair and replacement expenses
which could in turn adversely affect our business, financial condition and results of operations.
We face numerous accident and safety risks and hazards, including extreme environmental hazards, which are inherent in
offshore operations.
Portions of our operations are subject to hazards and risks inherent in the building, testing, deploying and maintenance
of our PowerBuoys™. These hazards and risks could result in personal injuries, loss of life, liberation of a PowerBuoy™ from
its mooring due to extreme environmental conditions and damage caused by its drifting, and other damages which may include
damage to our properties, including our PowerBuoy™, 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 that
we will be able to maintain adequate insurance in the future at reasonable rates.
Our relationships with our strategic 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 application development agreements and strategic
alliances with companies committed to providing products and services which require in-ocean energy sources. Generally,
these types of relationships obligate us to provide certain services or perform certain tasks in connection with the relationship
with the alliance partner, and we are generally responsible for paying the costs we incur relating to such services or tasks. These
relationships generally are not expected to provide us with any revenues or sources of financing. We currently have strategic
arrangements with WCS and NDBC. If we are unable to reach agreements with additional suitable alliance partners, we may
fail to meet our business objectives for the commercialization of our PowerBuoys™. 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. 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 PowerBuoys™
to these companies, 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.
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 PowerBuoys™, including the PTO advanced control and generation
systems, while outsourcing the manufacturing for other components of our PowerBuoys™, including the structure itself.
However, we have only manufactured our PowerBuoys™ in limited quantities for use in development and testing and have
limited commercial manufacturing experience, and our work with our vendors has not included work on multiple orders on
time-critical deadlines. Our future success depends on our ability to significantly increase both our manufacturing capacity and
production throughput in a cost-effective and efficient manner, and to manage multiple vendors with several orders on specific
deadlines. In order to meet our growth objectives, we will need to increase our engineering, contract management, and
manufacturing staff. There is intense competition for hiring qualified technical and engineering personnel, and we have limited
funding available to retain such additional staff. Therefore, we may not be able to hire a sufficient number of qualified personnel
to allow us to meet our growth objectives.
21
We may be unable to develop efficient, low-cost manufacturing capabilities and processes that enable us to meet the
quality, price, engineering, design and production standards or production volumes necessary to successfully commercialize
our PowerBuoys™. 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.
Problems with the quality or performance of our PowerBuoys™ would 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
PowerBuoys™. Because of the limited operating history of our PowerBuoys™, we have been required to make analytical
assumptions regarding the durability, reliability and performance of the systems, and we may not be able to 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 PowerBuoys™, 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
PowerBuoys™ and recognized revenue. Moreover, any widespread product failures could adversely affect our business,
financial condition and results of operations.
We have not yet deployed a wave power array of two or more PowerBuoys™ in a single geographic location. If we are
unable to successfully deploy a multiple-system wave power array, our capability to generate revenues may be limited, and
we may be unable to achieve and then maintain profitability.
We have not yet deployed a wave power array of two or more PowerBuoys™. Whether we are able to do so is
contingent upon, among other things, our ability to manufacture and produce multiple PowerBuoys™ in a short period of time,
receipt of required governmental permits, obtaining adequate financing, successful array design and implementation and,
finally, successful deployment and connection of the PowerBuoys™.
We have not yet conducted ocean testing or otherwise installed in the ocean a multiple-system wave power array. In
particular, unlike single-system wave power arrays, multiple-system wave power arrays may require the use of an underwater
substation to connect the power transmission cables from, and collect the electricity generated by, each PowerBuoy™ in the
array. We have not yet deployed an underwater substation connected to multiple PowerBuoys™. In addition, unanticipated
issues may arise with the logistics and mechanics of deploying and maintaining multiple PowerBuoys™ at a single site and the
additional equipment associated with these multiple system wave power arrays.
The development and deployment of an array of PowerBuoys™ could require us to incur significant expenses for
preliminary engineering, permitting 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.
Our future success in our selected markets depends in part on our ability to achieve cost savings over existing and incumbent
solutions. If we are unable to achieve cost savings relating to our PowerBuoy™, the commercial prospects for our
PowerBuoy™ may be adversely affected.
Our goal is to commercialize our PowerBuoy™. Our success in meeting this objective depends, in part, on our ability
to provide energy to our prospective customers at a cost savings over existing and incumbent power solutions already being
utilized by our customers and potential customers. We have experienced problems and delays in the development and
deployment of our PowerBuoy™ in the past, and could experience similar delays or other difficulties in the future. If we are
unable to demonstrate to our prospective customers that our PowerBuoy™ is cost competitive with existing alternative power
sources, or if it takes us longer to do so than we anticipate, we may be unable to continue our business, achieve
commercialization of our PowerBuoy™, achieve a competitive position, satisfy our contractual obligations, or become
profitable. In addition, if the costs associated with these development efforts exceed our projections, our results of operations
will be materially and adversely affected.
22
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 U.S. 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 U.S. 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 and
we do not know what the cost to do so would be. 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 U.S.
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.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology
and products could be adversely affected, which could in turn adversely affect our business, financial condition and results
of operations.
In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how,
particularly with respect to our PowerBuoy™ control and electricity generating systems. We generally seek to protect this
information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be
breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become
known or be independently developed by competitors.
Foreign laws may not afford us sufficient protections for our intellectual property, and we may not be able to obtain patent
protection outside of the United States.
Intellectual property rights protection continues to present significant challenges to foreign businesses in many
countries around the world. The body of law is often relatively undeveloped compared to the commercial law in the United
States and only limited protection of intellectual property may be available in those jurisdictions. Although we have taken
precautions to protect our intellectual property, any local design or manufacture of products that we undertake in a foreign
jurisdiction could subject us to an increased risk that unauthorized parties will be able to copy or otherwise obtain or use our
intellectual property, which could harm our business. We may also have limited legal recourse in the event we encounter patent
or trademark infringement. If we are unable to manage our intellectual property rights, our business and operating results may
be seriously harmed.
If we infringe or are alleged to have infringed upon intellectual property rights of third parties, our business, financial
condition and results of operations could be adversely affected.
Our products or use of our trademarks may infringe, or be claimed to infringe, upon patents, patent applications or
trademarks under which we do not hold licenses or other rights. Third parties may own or control these patents, patent
applications or trademarks 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 or trademark 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 or trademark 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 non-exclusive, 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 or trademark 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.
23
In addition to infringement claims against us, we may become a party to other types of patent or trademark litigation
and other proceedings, including proceedings declared by the U.S. Patent and Trademark Office and proceedings in the
European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of
any patent or trademark 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.
Our contracts with governmental entities could negatively affect our intellectual property rights, and our ability to
commercialize our products could be impaired.
Our agreements with government agencies in large part fund the research and development of our PowerBuoy™.
When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting
patents, technical data and software, generally including, at a minimum, a non-exclusive 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 U.S.
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. U.S. government-funded inventions must be reported to the government and U.S. government funding
must be disclosed in any resulting patent applications; 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 U.S. 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. Foreign governments with which we contract to provide funding for our research and development may
seek similar rights.
Risks Related to Regulatory and Compliance Matters
If we are unable to obtain all necessary regulatory permits and approvals, it could be possible we will not be able to
implement our planned projects or business plan.
Offshore deployment of our PowerBuoy™ is heavily regulated. Each of our deployments 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 in-ocean power generation and the associated potential for environmental hazards
of PowerBuoy™ deployment, we 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 deployments could result in increased costs, 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.
24
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. Pursuant to the Sarbanes-Oxley Act of 2002, we are required to furnish a report by management
on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Internal
control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the
possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can
provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition,
projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the
risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate. If we fail to maintain the adequacy of our internal controls, including any failure to implement
new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be
harmed, we could fail to meet our reporting obligations, and there could also be a material adverse effect on our stock price.
Our business could suffer as a result of the United Kingdom’s decision to end its membership in the European Union
The decision of the United Kingdom (U.K.) to exit from the European Union (E.U.) (generally referred to as
“BREXIT”) could cause disruptions to and create uncertainty surrounding our business, including affecting our relationships
with existing and potential customers, suppliers and employees. The effects of BREXIT will depend on any agreements the
U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. The measures could
potentially disrupt some of our target markets and jurisdictions in which we operate, and adversely change tax benefits or
liabilities in these or other jurisdictions. In addition, BREXIT could lead to legal uncertainty and potentially divergent national
laws and regulations as the U.K. determines which E.U. laws to replace or replicate. BREXIT also may create global economic
uncertainty, which may cause our customers and potential customers to monitor their costs and reduce their budgets for our
products and services. Any of these effects of BREXIT, among others, could materially adversely affect our business, business
opportunities, results of operations, financial condition and cash flows.
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, particularly 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.
25
Risks Related to Litigation
We are the subject of pending litigation, which is costly and time-consuming to defend, and if decided against us, could
require us to pay substantial judgments or settlements. We may be the subject of future securities or other litigation, which
could adversely affect our company, our business and our liquidity.
We are the subject of certain pending litigation. Any litigation is costly and time consuming to defend and may distract
our management from the daily operations of our business. We may be the subject of additional future litigation, which could
adversely affect our company, our business and our liquidity. Although we maintain directors’ and officers’ insurance coverage,
we cannot assure you that this insurance coverage will be sufficient to cover the substantial fees of lawyers and other
professionals advisors relating to these pending lawsuits or any future litigation, our obligations to indemnify our officers and
directors who may become parties to such pending and future actions, or the amount of any judgments or settlements that we
may be obligated to pay in connection with these lawsuits. In addition, these actions have caused our insurance premiums and
retention amounts to increase, and we may be subject to additional increases in the future or be subjected to other changes in
our insurance coverages. Further, given the volatility of the market price of our Common Stock, we may be subject to future
class action securities and other litigation. Accordingly, we have incurred and may continue to incur substantial legal expenses,
judgments and/or settlements relating to pending and future litigation and our management’s time and attention may be diverted
from the operation of our business, which could materially and adversely affect the Company.
We may become the target of additional 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. Our stock price has been volatile, and class action securities litigation and
derivative lawsuits have been filed against us and it is possible that additional lawsuits could be brought against us in the future.
The results of complex legal proceedings are difficult to predict. These lawsuits assert types of claims that, if resolved against
us, could give rise to substantial damages, and an unfavorable outcome or settlement of these lawsuits, or any future lawsuits,
could have a material adverse effect on our business, financial condition, results of operations and/or stock price. Even if any
future lawsuits, are not resolved against us, the costs of defending such lawsuits may be material to our business and our
operations. Moreover, these lawsuits may divert our management’s attention from the operation of our business. For more
information on our legal proceedings, see Item 3 “Legal Proceedings” of this Annual Report and Note 14 “Commitments and
Contingencies – Litigation” in the accompanying consolidated financial statements for the fiscal year ended April 30, 2018.
Risks Related to Our Common Stock
If we issue additional shares of our equity securities in the future, our stockholders may experience substantial dilution in
the value of their investment or their ownership interest.
Our certificate of incorporation currently authorizes us to issue up to 50,000,000 shares of our Common Stock and to
issue and designate the rights of, without stockholder approval, up to 5,000,000 shares of preferred stock. In the future, in order
to raise additional capital, we may offer additional shares of our Common Stock or other securities convertible into or
exchangeable for our Common Stock at prices that may not be the same as the price per share paid by other investors, and
dilution to our stockholders in the value of their investment and their ownership and voting interest in the Company could
result. We may sell shares or other securities in any other offering at a price per share that is less than the price per share paid
by existing investors, and investors purchasing shares or other securities in the future could have rights superior to existing
stockholders.
In addition, we have a significant number of stock options and warrants outstanding. To the extent that outstanding
stock options or warrants have been or may be exercised or other shares issued, current stockholders and future investors who
have purchased our Common Stock will experience further dilution. In addition, we may choose to raise additional capital due
to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating
plans. To the extent that we issue new securities, or raise additional capital through the sale of equity or convertible debt
securities, the issuance of these securities could result in further dilution to our stockholders or result in downward pressure on
the price of our Common Stock.
26
Historically, our stock price has been volatile and this is likely to continue; purchasers of our Common Stock could incur
substantial losses as a result.
Historically, the market price of our Common Stock has fluctuated significantly, and we expect that this will continue.
Purchasers of our Common Stock could incur substantial losses relating to their investment in our stock as a result. For the
fiscal year ended April 30, 2018, the 52-week high and low prices for our Common Stock was $1.02 and $2.54, respectively.
Also, 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:
● developments in our business or with respect to our projects;
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;
●
● quarterly or annual variations in our financial results or those of companies that are perceived to be similar
the recruitment or departure of key personnel;
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 our targeted markets; and
●
●
●
● general economic, political and market conditions.
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 the approval of our Board of Directors,
our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital
stock entitled to vote.
In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested stockholder, which is generally a person 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.
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 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.
27
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters are currently located in Monroe Township, New Jersey, where we occupy approximately
56,000 square feet under a lease expiring on October 31, 2024. We use this facility for administration, research and
development, as well as assembly and testing of the generators and control models for our PowerBuoy™ systems.
ITEM 3. LEGAL PROCEEDINGS
Shareholder Litigation and Demands
The Company and certain of its current and former directors and officers were defendants in a derivative lawsuit filed
on March 18, 2015 in the United States District Court for the District of New Jersey captioned Labare v. Dunleavy, et. al., Case
No. 3:15-cv-01980-FLW-LHG. The derivative complaint alleged claims for breach of fiduciary duty, abuse of control, gross
mismanagement and unjust enrichment relating to the now terminated agreement between Victorian Wave Partners Pty. Ltd.
(VWP) and the Australian Renewable Energy Agency (ARENA) for the development of a wave power station. The derivative
complaint sought unspecified monetary damages and other relief.
On July 10, 2015, a second derivative lawsuit, captioned Rywolt v. Dunleavy, et al., Case No. 3:15-cv-05469, was
filed by another shareholder against the same defendants in the United States District Court for the District of New Jersey
alleging similar claims for breach of fiduciary duty, gross mismanagement, abuse of control, and unjust enrichment relating to
the now terminated agreement between VWP and ARENA. The Rywolt complaint also sought unspecified monetary damages
and other relief. On February 8, 2016, the Court issued an order consolidating the Labare and Rywolt actions, appointing co-
lead plaintiffs and lead counsel, and ordering a consolidated amended complaint to be filed within 30 days of the order. On
March 9, 2016, the co-lead plaintiffs filed an amended complaint consolidating their claims and seeking unspecified monetary
damages and other relief.
On April 21, 2016, a third derivative lawsuit, captioned LaCalamito v. Dunleavy, et al., Case No. 3:16-cv-02249, was
filed by another shareholder against certain current and former directors and officers of the Company in the United States
District Court for the District of New Jersey alleging similar claims for breach of fiduciary duty relating to the now terminated
agreement between VWP and ARENA. The LaCalamito complaint sought unspecified monetary damages and other relief. The
Company was not formally served and did not respond to the complaint.
On June 9, 2016, a fourth derivative lawsuit, captioned Pucillo v. Dunleavy, et al., was filed by another shareholder
against certain current and former directors and officers of the Company in the United States District Court for the District of
New Jersey alleging similar claims for breach of fiduciary duty, unjust enrichment, and abuse of control relating to the now
terminated agreement between VWP and ARENA. The Pucillo complaint sought unspecified monetary damages and other
relief. On August 2, 2016, the parties in the Pucillo lawsuit filed a Stipulation and Proposed Order pursuant to which: (i) the
defendants agreed to accept service of the Pucillo complaint; (ii) the parties agreed to stay the Pucillo action pending the filing
and resolution of a motion to consolidate the Pucillo action with the Labare and Rywolt actions; and (iii) the parties agreed that
the defendants shall not be required to respond to the Pucillo complaint during the pendency of the stay. The Court approved
the Stipulation on August 3, 2016.
On October 25, 2016, the Court approved and entered a Stipulation and Order that, among other things, (i) consolidated
the four derivative actions; (ii) identified plaintiff Pucillo as the lead plaintiff in the consolidated actions; and (iii) stayed the
consolidated actions pending the November 14, 2016 settlement hearing in the now-settled securities class action and further
order of the Court.
28
On October 23, 2017, the parties entered into a Stipulation and Agreement of Settlement to resolve the four
consolidated derivative lawsuits. The settlement provided for, among other things, the Company to implement certain corporate
governance changes, a $350,000 payment to the plaintiffs’ attorneys for attorneys’ fees and costs that will be made by the
Company’s insurance carrier, dismissal of the derivative lawsuits, and certain releases. On November 21, 2017, the plaintiffs
filed an unopposed motion seeking preliminary approval of the settlement, which the Court granted on March 9, 2018. On May
14, 2018, the Court held a final settlement approval hearing at which the Court stated that it was approving the settlement. On
June 13, 2018, the Court issued a Final Order and Judgement, approving the Stipulation and Agreement of Settlement. As of
April 30, 2018, the Company has accrued $350,000 related to this matter as a probable and reasonably estimable loss
contingency with the offset to Statement of Operations. The Company also recorded a receivable of $350,000 from its insurance
carrier with the offset to the Statement of Operations.
On May 26, 2017, an attorney claiming to represent two stockholders sent the Company’s Board of Directors a
Stockholder Litigation Demand letter (“Stockholder Demand”). The Stockholder Demand alleges that the voting of shares for
the 1-for-10 reverse stock split at the 2015 annual meeting of stockholders held on October 22, 2015 was not properly counted,
and further alleges that, although the Company reported the reverse stock split as having been passed, if the vote was properly
counted the reverse stock split would not have been approved. The Stockholder Demand requests the Board of Directors either
to deem the reverse stock split as ineffective and disclose the same or to seek a proper and effective stockholder ratification of
the reverse stock split. In addition, the Stockholder Demand requests the Board of Directors to adopt and implement adequate
internal controls and systems to prevent the alleged improper voting from recurring. On June 23, 2017, the Company responded
to the Stockholder Demand, explained the procedures that were followed for the 2015 annual meeting of stockholders and
provided the Oath of the Inspector of Elections and the Certificate of the Inspector of Elections that certified as accurate the
results of the voting at the meeting including voting on the reverse stock split proposal. On June 26, 2017, the attorney
representing the alleged stockholders replied to the Company’s response, further alleged that the proxy statement underlying
the 2015 annual meeting provided voting instructions that misled the stockholders regarding whether their brokers could vote
on the reverse stock split proposal and renewed their requests of the Board. On July 24,2017, the Company provided an
additional response to the Stockholder Demand, denied the allegations, and declined to take any of the actions requested.
On June 13, 2018, Tiderunner Marine, Inc. filed a lawsuit in the United States District Court for the District of New
Jersey captioned Tiderunner Marine, Inc. v. Ocean Power Technologies, Inc., Case No. 1:18-cv-10496. The complaint names
Ocean Power Technologies, Inc. as defendant and alleges claims for breach of contract, unjust enrichment, conversion, and
fraud, negligent and/or reckless misrepresentation all as associated with the removal of an OPT mooring system off the coast
of New Jersey that was completed in May 2017. The complaint seeks damages in the amount of $2,825,130 together with
interest, costs, attorney’s fees, punitive damages and such other relief as may be appropriate under the circumstances. OPT has
retained counsel, is investigating the claims, and has not yet responded to the lawsuit.
Employment Litigation
On June 10, 2014, the Company announced that it had terminated Charles Dunleavy as its Chief Executive Officer
and as an employee of the Company for cause, effective June 9, 2014, and that Mr. Dunleavy had also been removed from his
position as Chairman of the Board of Directors. On June 17, 2014, Mr. Dunleavy wrote to the Company stating that he had
retained counsel to represent him in connection with an alleged wrongful termination of his employment. On July 28, 2014,
Mr. Dunleavy resigned from the Board and the boards of directors of the Company's subsidiaries. In 2014, the Company and
Mr. Dunleavy have agreed to suspend his alleged employment claims pending resolution of a class action shareholder litigation
(resolved in May 2017) and then agreed to continue to the suspension pending resolution of the derivative litigation described
(resolved in June 2018. As of the filing of this report, the claims are still suspended.
Except for the Stipulation agreement noted previously, we have not established any provision for losses relating to
these claims and pending litigation. Due to the stages of these proceedings, and considering the inherent uncertainty of these
claims and litigation, at this time we are not able to predict or reasonably estimate whether we have any possible loss exposure
or the ultimate outcome of these claims.
Regulatory Matters
SEC Investigation
On April 30, 2018, the Company received a letter from the SEC staff in the Philadelphia regional office announcing
that the SEC had concluded its investigation of the Company. The investigation began on February 4, 2015, when the Company
received a subpoena from the SEC requesting information related to the discontinued VWP Project in Australia. On July 12,
2016, the SEC issued second subpoena requesting information related to the Company’s April 4, 2014 public offering. The
Company provided information to the SEC in response to both subpoenas and cooperated with the SEC throughout its
investigation. In its letter of April 30, 2018, the SEC stated that it does not intend to recommend an enforcement action by the
SEC against the Company.
29
Spain IVA (sales tax)
In June 2012, 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 $0.3 million of input tax. The Company
believed that the tax credit was properly claimed and, therefore, no liability was recorded. The Company issued two letters of
credit totaling €0.3 million ($0.3 million) at the request of the Spanish tax authorities. On January 31, 2017 the Company
received $0.2 million from the Spanish tax authorities as a result of the conclusion of the inquiry. In addition, during February
2017, the Spanish tax authorities approved release of the two outstanding letters of credit.
Spain Income Tax Audit
We are currently undergoing an income tax audit in Spain for the period from 2008 to 2014, when our Spanish branch
was closed. The branch reported net operating losses for each of the years reported that the Spanish tax inspector claims should
have been capitalized on the balance sheet instead of charged as an expense in the Statement of Operations. As of April 30,
2017, we had recorded a penalty of $132,000 to Selling, general and administrative costs in the Statement of Operations. The
Spanish tax inspector has recently closed its discussion relating to the capitalization of expenses and as of April 30, 2018 the
Company reversed the penalty. However, the Spanish tax inspector has now raised questions with respect to the Company’s
recognition of funds received in 2011 to 2014 from a governmental grant from the European Commission in connection with
the Waveport project. It is anticipated that we will be assessed a penalty relating to these tax years. We have estimated this
penalty to be $177,000 as of April 30, 2018. We have recorded the penalty to Selling, general and administrative costs in the
Statement of Operations.
Item 4. MINE SAFETY DISCLOSURES
None.
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 is listed on the NASDAQ Capital Market, under the symbol “OPTT.” As of June 29, 2018, there
were 161 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 Stock
Market for the period indicated.
NASDAQ Stock Market
Low
High
Fiscal Year Ended April 30, 2018
First quarter ended July 31, 2017 ........................................................ $
Second quarter ended October 31, 2017 .............................................
Third quarter ended January 31, 2018 ................................................
Fourth quarter ended April 30, 2018 ...................................................
Fiscal Year Ended April 30, 2017
First quarter ended July 31, 2016 ........................................................ $
Second quarter ended October 31, 2016 .............................................
Third quarter ended January 31, 2017 ................................................
Fourth quarter ended April 30, 2017 ...................................................
1.62 $
2.54
1.32
1.52
15.65 $
10.48
5.89
3.67
1.20
1.14
1.02
1.05
1.37
2.29
2.00
1.33
30
Dividend Policy
We have never declared or paid any cash dividends on our common stock, and we do not currently anticipate declaring
or paying cash dividends on our common stock in the foreseeable future. We currently intend to retain all of our future earnings,
if any, to finance the growth and development of our business. Any future determination relating to our dividend policy will
be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital
requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of
directors may deem relevant.
Transfer Agent Information
Our transfer agent is Computershare Trust Company, N.A. Computershare is located at 250 Royall Street, Canton,
MA 02021-1011. Its contact information is: United States and Canada: (800) 662 – 7232, International (781) 575 – 4238 and
its website is located at www.computershare.com.
Purchases of Equity Securities by the Issuer
The following table details our share repurchases for the three months ended April 30, 2018:
Period
Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plan
February 1 - February 28 ....................... - $ -
-
March 1 - March 31 ...............................
-
April 1 - April 30 ...................................
- $
- $
-
-
-
-
-
-
Equity Compensation Plan Information
See “Part III, Item 12- Security Ownership of Certain Beneficial Owners, Management and Related Stockholder
Matters- Equity Compensation Plan Information.”
Unregistered Sales of Equity Securities and Use of Proceeds
There have been no unregistered sales of equity securities or purchases of equity securities 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 on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this
Annual Report on Form 10-K, 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, and elsewhere in this 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 2018 are to the fiscal year ended April 30, 2018.
31
Overview
We are commercializing proprietary systems that generate electricity by harnessing the renewable energy of ocean
waves. Our PowerBuoy™ systems use proprietary technologies to convert the mechanical energy created by the rising and
falling of ocean waves into electricity. We currently have developed our PB3 PowerBuoy™ product. Since fiscal 2002,
government agencies have accounted for a significant portion of our revenues, which were largely for the support of our product
development efforts. Our goal is that an increased portion of our revenues will be from the sale of products and services, as
compared to revenue from grants to support our product development efforts. As we continue to advance our proprietary
technologies, we expect to have a net use of cash in operating activities unless or until we achieve positive cash flow from the
commercialization of our products and services.
We are marketing our PowerBuoy™, 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
PowerBuoy™, within markets such as oil and gas, ocean observing, security and defense and as well as other markets, which
we refer to collectively as autonomous application markets.
We were incorporated in New Jersey in 1984, began business operations in 1994, and were re-incorporated in
Delaware in 2007. We currently have five wholly-owned subsidiaries: Ocean Power Technologies Ltd., organized under the
laws of the United Kingdom, Reedsport OPT Wave Park LLC, organized under the laws of Oregon, and Oregon Wave Energy
Partners I, LLC, organized under the laws of Delaware, Ocean Power Technologies (Australasia) Pty Ltd (“OPTA”), organized
under the laws of Australia. OPTA owns 100% of Victorian Wave Partners Pty. Ltd. (“VWP”), which is also organized under
the laws of Australia.
Product Development
The development of our technology has been funded by revenue generating projects, capital we raised and by
development engineering contracts we received starting in fiscal 1995, including projects with the DOE, the U.S. Navy, the
Department of Homeland Security and MES. Please see Item 1 of this Annual Report– “Business – Customers” and “Historic
Projects” for more information.
Through these historic projects, we also continued development of our PowerBuoy™ technologies. We are continuing
to focus on marketing and developing our PowerBuoy™ products and services for use in autonomous power applications.
During fiscal 2018, we continued to focus on the commercialization of our PowerBuoy™ technology, while expanding
the application of our PB3 product in autonomous application markets. During fiscal 2018, we gained additional field
experience with our PB3 by completing the demonstration of the PowerBuoy™ in an ocean observing application with MES.
In January 2018, we were awarded a contract from Premier Oil to study the feasibility of using the PB3 PowerBuoy™ for
decommissioning operations in the North Sea. The work under this contract was completed in May 2018. In March 2018, we
entered into an agreement with Eni S.p.A. (“Eni”) that provides for a minimum 24-month contract that includes an 18-month
PB3 PowerBuoy™ lease and associated project management. The PB3 PowerBuoy™ will be deployed in the Adriatic Sea to
advance Eni’s Clean Sea technology for marine environmental monitoring and offshore asset inspection using AUVs.
Additionally, we completed the Phase I work under the contract with the U.S. Department of Defense Office of Naval Research
(“ONR”), which focused on the initial concept design and development of a mass-on-spring PTO-based PowerBuoy™. We are
waiting for ONR funding of Phase II to be approved. Working closely with potential customers, we also continued to analyze
and further develop new applications for the PowerBuoy™ including subsea well monitoring for oil and gas, AUV charging,
and independent telecommunications platforms.
In fiscal 2017, we completed our work under our DOE contract that focused on further optimization of our modular
PTO technology and delivered the project final report to the DOE in the prior year. In the prior year, we successfully completed
the final stage and associated review with the DOE of the contract deliverables during which the DOE reviewed advancements
related to PTO design aspects such as reliability, cost take out, manufacturability and scalability. As we continued to focus on
the development and validation of our PB3 PowerBuoy™ commercial product, our activities concentrated mainly on
implementing all of our lessons learned during our efforts in the prior fiscal year from our ocean deployments and accelerated
life testing (“ALT”). The resulting improved PB3 PowerBuoy™ was deployed off the coast of New Jersey in July of 2016 and
was retrieved early December 2016 upon completing all intended testing and validation. Inspection and refurbishment of the
PB3 PowerBuoy™ were completed and this PB3 was shipped for delivery to MES in Japan where it was deployed off
Kozushima Island in the Pacific Ocean from April 2017 and was retrieved in mid-September 2017 after successfully fulfilling
the requirements of our lease with MES.
32
ALT of the PB3 commercial PTO is ongoing with no failures to date. In addition to the deployment of the PB3
PowerBuoy™, the prior generation pre-commercial PB3 (“PB3-A1”), was fitted with a sensor that collects tagged marine
mammal migration information as well as with a Self-Contained Ocean Observing Payload (“SCOOP”). The marine mammal
migration detection sensor was attached to the PB3-A1 PowerBuoy™ as part of an agreed scope of work with the Wildlife
Conservation Society (“WCS”) through a memorandum of agreement between WCS and OPT. The SCOOP payload was
integrated into PB3-A1 to complete the Phase 1 work scope of a Cooperative Research and Development Agreement
(“CRADA”) between the National Data Buoy Center (“NDBC”) and OPT. The PB3-A1, deployed off the coast of New Jersey
in May 2016, was retrieved in October 2016. From July 2016 through October 2016, both PB3-A1 and PB3 were concurrently
deployed generating valuable performance validation data. Both the NDBC SCOOP as well as the WCS tagged mammal
migration detection sensor met all of their performance requirements. This pre-commercial PowerBuoy™, referred to as “PB3-
A1” has now undergone a full upgrade and has achieved full commercial status by retrofitting it with the final commercial PTO
including our modular energy storage system, and to make it available to support our on-going commercialization efforts. In
addition to the PB3 commercial product validation activities, a concerted effort has been underway which focuses on
proactively implementing additional features driven by extensive and direct discussions with potential users and customers in
our target markets. Such features include:
● The design, development and implementation of a versatile mooring interface that allows the PB3 to
accommodate various types of mooring configurations depending on the specifics and the needs of the
customer, eliminating the need for a redesign to the device.
● The design, development and implementation of a flexible power transmission system intended to support
delivery of power and communication capabilities to customer payloads which are external to the
PowerBuoy™, and which may reside in the water column or on the seabed.
Additionally, and building upon our initial success in implementing an auto-ballast system in our commercial PB3,
we further enhanced this feature in order to achieve faster and more cost effective PB3 deployments and retrievals.
As we are focusing all resources on enhancing and commercializing our PB3, we have curtailed the development of
our PB15, the next scale-up of our autonomous PowerBuoy™, which will provide higher peak power than our PB3. To date
we completed the preliminary design of our PB15 and are continuing to obtain market feedback on the value proposition of
this design. While this scale-up leverages every aspect of the product development and validation of the PB3, it may also
strategically position the product to allow OPT to respond to higher power needs as expressed by potential end-users and
customers in our target markets.
As previously stated, the PB3 has achieved commercial status through a series of design iterations which focused on
improving its reliability and survivability in the ocean environment. Though the PB3 will continue to undergo further
enhancements through customary product life cycle management, we believe the PB3 has achieved a maturity level for
immediate commercial use. We believe that the PB3 will generate and store sufficient power to address various application
requirements in our target markets. Our product development and engineering efforts are focused, in part, on increasing the
energy output and efficiency of our PowerBuoys™ and, if we are able to do so, we believe the PowerBuoy™ would be useful
for additional applications where cost savings and additional power are required by our potential customers. We continue to
explore opportunities in these target markets. We believe that by demonstrating the capability of our PowerBuoy™ in oil &
gas and telecommunications applications, we can advance our technology and gain further adoption from our target markets.
We continue to improve design and manufacturing of the PB3 to enhance our ability to improve customer value, displace
additional incumbent solutions, and become the preferred power source for new and existing applications in our target markets.
We are utilizing our experience with multiple commercial PB3 deployments globally to continually improve our
product so that we have higher energy efficiency, additional mooring capability, platform flexibility and higher reliability. For
example, the redesigned PB3 leverages our knowledge base from past designs to incorporate new design features which we
believe will improve its reliability and efficiency, including a redesigned PTO and a higher efficiency and higher voltage ESS.
In July 2016, we deployed our first commercial PB3 PowerBuoy™, off of the coast of New Jersey. This deployment was the
final validation of the PB3 prior to the March 2017 seven-month lease of the PB3 PowerBuoy™ under a previously announced
customer agreement. In April 2017, our commercial PB3 was deployed off the coast of Kozushima Island in Japan as part of
this lease, operated meeting all project requirements. The MES lease concluded in September 2017 and the PB3 was shipped
back to New Jersey.
33
Capital Raises
On June 2, 2016, we entered into a securities purchase agreement, which was amended on June 7, 2016 (as amended,
the “Purchase Agreement”) with certain institutional purchasers (the “Purchasers”). Pursuant to the terms of the Purchase
Agreement, we sold an aggregate of 417,000 shares of common stock together with warrants to purchase up to an aggregate of
145,952 shares of common stock. Each share of common stock was sold together with a warrant to purchase 0.35 of a share of
common stock at a combined purchase price of $4.60. The net proceeds from the offering to us were approximately $1.7
million, after deducting placement agent fees and estimated offering expenses payable by us, but excluding the proceeds, if
any, from the exercise of the warrants issued in the offering. The warrants have an exercise price of $6.08 per share, will be
exercisable on December 8, 2016, and will expire five years following the date of issuance.
On July 22, 2016, the Company entered into the Second Amendment to the Purchase Agreement (the “Second
Amended Purchase Agreement”) with certain purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended
Purchase Agreement, the Company sold an aggregate of 595,000 shares of Common Stock together with warrants to purchase
up to an aggregate of 178,500 shares of Common Stock. Each share of Common Stock was sold together with a warrant to
purchase 0.30 of a share of Common Stock at a combined purchase price of $6.75. The net proceeds to the Company from the
offering were approximately $3.6 million, after deducting placement agent fees and estimated offering expenses payable by
the Company, but excluding the proceeds, if any, from the exercise of the warrants issued in the offering. The Warrants were
exercisable immediately at an exercise price of $9.36 per share. The Warrants will expire on the fifth (5th) anniversary of the
initial date of issuance.
On October 19, 2016, the Company sold 2,760,000 shares of common stock at a price of $2.75 per share, which
includes the sale of 360,000 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of
the over-allotment option by the underwriters in a public offering. The net proceeds to the Company from the offering were
approximately $6.9 million, after deducting placement agent fees and offering expenses payable by the Company.
On May 2, 2017, the Company sold 6,192,750 shares of common stock at a price of $1.30 per share, which includes
the sale of 807,750 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-
allotment option by the underwriters in a public offering. The net proceeds to the Company from the offering were
approximately $7.2 million, after deducting placement agent fees and offering expenses payable by the Company.
On October 23, 2017, the Company sold 5,739,437 shares of common stock at a price of $1.42 per share in a best
efforts public offering. The net proceeds to the Company from the offering were approximately $7.4 million, after deducting
placement fees and offering expenses payable by the Company.
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 or preferred stock, these securities could have rights senior to those associated
with our common stock and could contain covenants that would restrict our operations. We do not have any committed sources
of debt or equity financing and we cannot assure you that financing will be available in amounts or on terms acceptable to us
when needed, or at all. If we are unable to obtain required financing when needed, we may be required to reduce the scope of
our operations, including our planned product development and marketing efforts, which could materially and adversely affect
our financial condition and operating results. If we are unable to secure additional financing, we may be forced to cease our
operations.
Backlog
As of April 30, 2018, our negotiated backlog was $0.7 million. As of April 30, 2017, our negotiated backlog was $0.3
million. 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 (U.S. Congress, in the case of U.S. Government agencies),
and unfunded amounts, which are unfilled firm orders 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 contract.
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 portion of our revenue has been for the support of our product development efforts. These revenues are 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.
34
Going Concern
Our financial statements have been prepared assuming we will continue as a going concern. We have experienced
substantial and recurring losses from operations, which losses have caused an accumulated deficit of $197.5 million at April
30, 2018. Based on the Company’s cash and cash equivalents and marketable securities balances as of April 30, 2018, the
Company believes that it will be able to finance its capital requirements and operations into the quarter ending April 30, 2019,
including $0.6 million of payments due by August 30, 2018 as a return of an option fee due to ineligibility for certain emission
credits. The report of our independent registered public accounting firm on our consolidated financial statements for the year
ended April 30, 2018, contains an explanatory paragraph regarding our ability to continue as a going concern, based on, among
other factors, that our ability to continue as a going concern is dependent upon our ability to raise additional external capital
and increase revenues. These factors, among others, raise substantial doubt about our ability to continue as a going concern.
Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We cannot assure you that we will be successful in our efforts to generate revenues, become profitable, raise additional outside
capital or to continue as a going concern. If we are not successful in our efforts to raise additional capital sufficient to support
our operations, we would be forced to cease operations, in which event investors would lose their entire investment in our
company.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations set forth below are based on our
consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles
(U.S. 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.
Legal contingencies
As discussed in Part I, Item 3 of this Annual Report under the heading “Legal Proceedings” and in Note 14,
“Commitments and Contingencies,” in Notes to the Consolidated Financial Statements, the Company is currently subject to
various legal proceedings and claims. The Company records a contingent liability when it is probable that a loss has been
incurred and the amount is reasonably estimable in accordance with SFAS No. 5, “Accounting for Contingencies”. There is a
significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated
since the outcome of legal proceedings and claims brought against the Company are subject to significant uncertainty. In
management’s opinion, any reasonable possible losses in addition to the amounts accrued for litigation would not, individually
or in the aggregate, have a material adverse effect on its financial condition or operating results. Should the Company fail to
prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same
reporting period, the operating results of a particular reporting period could be materially adversely affected.
Revenue recognition and unearned revenues
The Company’s contracts are either cost plus or fixed price contracts and may include a lease component. Under cost
plus contracts, customers are billed for actual expenses incurred plus an agreed-upon fee. Under cost plus contracts, a profit or
loss on a project is recognized depending on whether actual costs are more or less than the agreed upon amount.
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, a profit
or loss is recognized depending on whether actual costs are more or less than the agreed upon amount. Under cost-sharing
contracts, the fixed amount agreed upon with the customer is only intended to fund a portion of the costs on a specific project.
Under cost sharing contracts, an amount corresponding to the revenue is recorded in cost of revenues, resulting in gross profit
on these contracts of zero. The Company’s share of the costs is recorded as product development expense.
35
Generally, revenue under fixed price or cost-plus contracts is recognized using the cost to cost percentage-of-
completion method, measured by 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. If an arrangement involves multiple deliverables, the delivered items are
considered separate units of accounting if the items have value on a stand-alone basis. Amounts allocated to each element are
based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately or
competitor prices for similar products or services.
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. These contracts
are subject to interpretation and management may make a judgment as to the amount of revenue earned and recorded. Because
the Company has a small number of contracts, revisions to the percentage-of-completion determination, management
interpretation or delays in meeting performance and contractual 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.
The Company classifies leases as either operating or capital lease arrangements in accordance with the authoritative
accounting guidance contained within Accounting Standards Codification (“ASC”) Topic 840, “Leases”. At inception of the
contract, the Company evaluates the lease against the four lease classification criteria within ASC Topic 840. In general, if one
of the four criteria is met, then the lease is accounted for as a capital lease. All others are treated as an operating lease. For
operating leases, lessee payments are recorded to revenue on a straight-line basis over the term of the lease.
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.
Warrant liabilities
The Company accounts for warrants issued in connection with its public offerings in June and July 2017 in accordance
with the guidance on “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which
provides that we classify the warrant instruments as a liability at its fair value. The warrant liabilities are subject to re-
measurement at each balance sheet date using the Black-Scholes option pricing model. The Company recognizes any change
in fair value in its consolidated statements of operations within “Gain due to the change in fair value of warrant liabilities”. The
Company will continue to adjust the carrying value of the warrants for changes in the estimated fair value until such time as
these instruments are exercised or expire. At that time, the liabilities will be reclassified to “Additional paid-in capital”, a
component of “Stockholders' equity” on the consolidated balance sheets.
Financial Operations Overview
Over the next several years, it is our goal to fund the majority of our product development efforts with sources from
commercial relationships, including cost-sharing agreements. If we are unable to obtain commercial relationships or cost-
sharing arrangements, we may be forced to curtail our development expenses and scope to reduce our overall expenses. We
recently narrowed our development focus to the PB3 to drive toward commercialization of that product and to reduce our
overall expenses. In the future, we also may continue to develop the PB15 if we determine that future relationships warrant
incurring the costs associated with such product development.
The following table provides information regarding the breakdown of our revenues by customer for fiscal years 2018
and 2017:
Twelve months ended April 30,
2018
2017
(in thousands)
Eni S.p.A. ............................................................................................ $
Mitsui Engineering & Shipbuilding ....................................................
Premier Oil UK Limited .....................................................................
U.S. Department of Defense Office of Naval Research ......................
U.S. Department of Energy .................................................................
$
171 $
218
51
71
-
511 $
-
693
-
178
(28 )
843
36
We currently focus our sales and marketing efforts on North America, Europe, Australia, Asia and South America.
The following table shows the percentage of our revenues by geographical location of our customers for fiscal 2018 and 2017:
Customer Location
Twelve months ended April 30,
2018
2017
Asia and Australia ..............................................................................
Europe ................................................................................................
United States ......................................................................................
43 %
43 %
14 %
100 %
80 %
0 %
20 %
100 %
Foreign exchange loss
We transact business in various countries and have exposure to fluctuations in foreign currency exchange rates.
Foreign exchange gains and losses arise in the translation of foreign-denominated assets and liabilities, which may result in
realized and unrealized gains or losses from exchange rate fluctuations. Since we conduct our business in US dollars and our
functional currency is the US dollar, our main foreign exchange exposure, if any, results from changes in the exchange rate
between the US dollar and the British pounds sterling, the Euro and the Australian dollar. Due to the macroeconomic pressures
in certain European countries, foreign exchange rates may become more volatile in the future.
We maintain cash accounts that are denominated in British pounds sterling, Euros and Australian dollars. These
foreign denominated accounts had a balance of $1.0 million as of April 30, 2018 and $1.2 million as of April 30, 2017,
compared to our total cash, cash equivalents, restricted cash, and marketable securities balances of $12.3 million as of April
30, 2018 and $8.9 million as of April 30, 2017. These foreign currency balances are translated at each month end to our
functional currency, the US dollar, and any resulting gain or loss is recognized in our results of operations.
In addition, a portion of our operations is conducted through our subsidiaries in countries other than the United States,
specifically Ocean Power Technologies Ltd. in the United Kingdom, the functional currency of which is the British pound
sterling, and Ocean Power Technologies (Australasia) Pty Ltd. in Australia, the functional currency of which is the Australian
dollar. Both of these subsidiaries have foreign exchange exposure that results from changes in the exchange rate between their
functional currency and other foreign currencies in which they conduct business.
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.
Results of Operations
This section should be read in conjunction with the discussion below under “Liquidity and Capital Resources.”
37
Fiscal Years Ended April 30, 2018 and 2017
The following table contains selected statement of operations information, which serves as the basis of the discussion
of our results of operations for the years ended April 30, 2018 and 2017:
Twelve months ended April 30,
2018
2017
(in thousands)
% change
2018 period to
2017 period
511 $
763
(252 )
4,320
6,988
11,308
(11,560 )
122
83
4
75
(11,276 )
1,119
(10,157 ) $
843
938
(95 )
5,029
6,563
11,592
(11,687 )
1,491
28
-
(16 )
(10,184 )
698
(9,486 )
-39 %
-19 %
-14 %
6 %
-92 %
196 %
100 %
-569 %
11 %
60 %
7 %
Revenues ............................................................................ $
Cost of revenues ................................................................
Gross loss ...................................................................
Operating expenses:
Product development costs ............................................
Selling, general and administrative costs .......................
Total operating expenses ...........................................
Operating loss ....................................................................
Change in fair value of warrant liabilities ..........................
Interest income, net ............................................................
Other income .....................................................................
Foreign exchange gain/(loss) .............................................
Loss before income taxes ...................................................
Income tax benefit .....................................................
Net loss .............................................................................. $
Revenues
Revenues for the fiscal years ended April 30, 2018 and 2017 were approximately $0.5 million and $0.8 million,
respectively. The decrease of approximately $0.3 million or 39% over 2017 was attributable to the MES and ONR contracts
being completed in the second quarter of fiscal 2018 partly offset by the new Eni and Premier contracts.
Cost of revenues
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 certain contracts.
Cost of revenues for the fiscal years ended April 30, 2018 and 2017 were approximately $0.8 million and $0.9 million,
respectively. The decrease of approximately $0.1 million, or 19%, over 2017 was due to lower revenue in the current year as
compared to the prior year, partially offset by a higher reserve for future contract losses.
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 relate
primarily to our efforts to increase the power output and reliability of our PowerBuoy™ system, and to development of new
products, product applications and complementary technologies. We expense all of our product development costs as incurred.
Product development costs during the fiscal year ended April 30, 2018 were $4.3 million as compared to $5.0 million
for fiscal year 2017. The decrease of $0.7 million, or 14%, is primarily attributable to lower costs mainly related to redesigned
commercial PB3 and preliminary design of PB15 in fiscal 2017.
38
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.
Selling, general and administrative costs during the fiscal year months ended April 30, 2018 were $7.0 million as
compared to $6.6 for fiscal year 2017. The increase of $0.4 million, or 6%, is primarily attributable to higher employee costs
of $0.7 million partly offset by lower stock compensation expense of $0.4 million.
Gain due to the change in fair value of warrant liabilities
The change in fair value of warrant liabilities during the fiscal year ended April 30, 2018 was an unrealized gain of
$122,000 versus an unrealized gain of $1,491,000 for the fiscal months ended April 30, 2017. The change between periods is
mainly due to a lower stock price for the nine months ended April 30, 2018.
Interest income, net
Interest income consists of interest received on cash and cash equivalents, investments in commercial bank-issued
certificates of deposit and U.S. Treasury bills and notes and interest expense paid on certain obligations to third parties. Total
cash, cash equivalents, restricted cash, and marketable securities were $12.3 million as of April 30, 2018, compared to $8.9
million as of April 30, 2017.
Interest income, net during the fiscal year 2018 was approximately $83,000 compared to $28,000 for fiscal 2017. The
increase in interest income year over year is due to higher cash balances from several capital raises completed in fiscal year
2018.
Foreign exchange gain/(loss)
Foreign exchange gain was approximately $75,000 for fiscal year 2018 as compared to a foreign exchange loss of
$16,000 for fiscal year 2017. The difference was attributable primarily to the relative change in value of the British pound
sterling, Euro and Australian dollar compared to the U.S. dollar during the two periods.
Income tax benefit
During the fiscal years ended April 30, 2018 and 2017, the Company sold New Jersey State net operating losses and
research and development credits in the amount of $11.5 million and $7.8 million, respectively, resulting in the recognition of
income tax benefits of $1.1 million and $0.7 million, respectively. The Company has a full valuation allowance against its
deferred tax assets.
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 our business. For the two years ended April 30, 2018, our aggregate revenues were $1.4 million, our
aggregate net losses were $19.6 million and our aggregate net cash used in operating activities was $20.7 million.
Net cash used in operating activities
Net cash flows used in operating activities during the fiscal year ended April 30, 2018 were $10.7 million, an increase
of $0.7 million, when compared to $10.0 million during the fiscal year ended April 30, 2017. The change was the result of an
increase in net loss of $0.7 million reduced by non-cash items of $0.4 million and an increase in cash used by the net change
in operating assets and liabilities of $0.8 million. Fiscal 2017 included a $0.5 million litigation settlement payment.
The decrease in noncash operating items in fiscal year 2018 compared to fiscal year 2017 reflects a decrease in the
change in fair value of warrant liabilities and lower stock compensation expense.
The increase in operating assets and liabilities in fiscal year 2018 compared to fiscal year 2017 is due to lower balances
in accounts payable and accrued expenses of $1.7 million offset by unbilled receivables of $0.5 million and other net changes
in operating assets and liabilities of $0.4 million.
39
Net cash provided by (used in) investing activities
Net cash used in investing activities was approximately $0.7 million for fiscal year 2018 versus net cash provided by
investing activities of approximately zero for fiscal 2017. The change was primarily the result of the Company’s spending on
equipment and leasehold improvements relating to its new facility in Monroe, New Jersey.
Net cash provided by (used in) financing activities
Net cash provided by financing activities was approximately $14.6 million in fiscal year 2018, and net cash provided by
financing activities was approximately $11.9 million for fiscal 2017. The net cash provided in fiscal 2018 and fiscal 2017 were
primarily from the sale of our common stock, net of issuance costs.
Effect of exchange rates on cash and cash equivalents
The effect of exchange rates on cash and cash equivalents was approximately $88,000 in fiscal year 2018, an increase
of $130,000 from fiscal 2017, respectively. The effect of exchange rates on cash and cash equivalents results primarily from
gains or losses on consolidation of foreign subsidiaries and foreign denominated cash and cash equivalents.
Liquidity Outlook
Our financial statements have been prepared assuming we will continue as a going concern. We have experienced
substantial and recurring losses from operations, which losses have caused an accumulated deficit of $197.5 million at April
30, 2018. We generated revenues of only $0.5 million in fiscal year 2018, and $0.8 million in fiscal year 2017. Based on the
Company’s cash and cash equivalents and marketable securities balances as of April 30, 2018, the Company believes that it
will be able to finance its capital requirements and operations into the quarter ending April 30, 2019, including $0.6 million of
payments due by August 30, 2018 as a return of an option due to ineligibility for certain emission credits. These conditions
raise substantial doubt about our ability to continue as a going concern.
We expect to devote substantial resources to continue our development efforts for our PowerBuoys™ and to expand
our sales, marketing and manufacturing programs associated with the planned commercialization of the PowerBuoys™. Our
future capital requirements will depend on a number of factors, including but not limited to:
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our ability to commercialize our PowerBuoys™, and achieve and sustain profitability;
our continued development of our proprietary technologies, and expected continued use of cash from
operating activities unless or until we achieve positive cash flow from the commercialization of our products
and services;
our ability to obtain additional funding, as and if needed which will be subject to a number of factors,
including market conditions, and our operating performance;
our estimates regarding expenses, future revenues and capital requirements;
the adequacy of our cash balances and our need for additional financings;
our ability to develop and manufacture a commercially viable PowerBuoy™ product;
that we will be successful in our efforts to commercialize our PowerBuoy™ or the timetable upon which
commercialization can be achieved, if at all;
our ability to identify and penetrate markets for our PowerBuoys™ and our wave energy technology;
our ability to implement our commercialization strategy as planned, or at all;
our ability to maintain the listing of our common stock on the NASDAQ Capital Market;
the reliability of our technology and our PowerBuoys™;
our ability to improve the power output, survivability and reliability of our PowerBuoys™;
the impact of pending and threatened litigation on our business, financial condition and liquidity;
changes in current legislation, regulations and economic conditions that affect the demand for renewable
energy;
our ability to compete effectively in our target markets;
our limited operating history and history of operating losses;
our sales and marketing capabilities and strategy in the United States and internationally; and
our ability to protect our intellectual property portfolio.
40
Our business is capital intensive and, to date, we have been funding our business principally through sales of our
securities, and we expect to continue to fund our business with sales of our securities and, to a limited extent, with our revenues
until, if ever, we generate sufficient cash flow to internally fund our business. This is largely a result of the high product
development costs associated with our product development. We may choose to reduce our operating expenses through
personnel reductions, and reductions in our research and development and other operating costs during the fiscal year 2019, if
we are not successful in our efforts to raise additional capital. We cannot assure you that we will be able to increase our revenues
and cash flow to a level which would support our operations and provide sufficient funds to pay our obligations for the
foreseeable future. Further, we cannot assure you that we will be able to secure additional financing or raise additional capital
or, if we are successful in our efforts to raise additional capital, of the terms and conditions upon which any such financing
would be extended. If we are unable to raise additional capital when needed or generate positive cash flow, it is unlikely that
we will be able to continue as a going concern. The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet financing activities.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No.
2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 outlines a new, single comprehensive model
for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis
in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange
for those goods or services. The FASB subsequently issued additional clarifying standards to address issues arising from
implementation of the new revenue standard, including a one-year deferral of the effective date for the new revenue standard.
Public companies should now apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15,
2017 and interim periods within those annual periods. Earlier application is permitted only as of annual reporting periods
beginning after December 15, 2016, including interim periods within that annual period. As such, the Company is required to
adopt this standard effective in fiscal 2019, which begins May 1, 2018. The Company will use the modified retrospective
approach to adopt ASU 2014-09. The Company is completing its final review and therefore has not yet determined the final
impact on its consolidated financial statements and disclosures. However, the preliminary view is that the impact will not be
material to the consolidated financial statements disclosures. The impact to the Company could be affected by the nature and
terms of potential future contracts with customers, as those contracts may have terms that differ from the company’s current
contracts.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern”, which describes how an entity should assess its ability to meet obligations and sets rules for how this
information should be disclosed in the financial statements. The standard provides accounting guidance that will be used along
with existing auditing standards. The new standard applies to all entities for the first annual period ending after December 15,
2016, and interim periods thereafter. Early application is permitted. The Company adopted ASU 2014-15 for the fiscal year
2017. The Company’s addition of the standard did not have a material impact on disclosures. See Note (1) “Background, Basis
of Presentation and Liquidity” for discussion on the Company’s ability to continue as a going concern.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard establishes a right-
of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with
terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is
evaluating the effect ASU 2016-02 will have on its consolidated financial statements and disclosures and has not yet determined
the effect of the standard on its ongoing financial reporting at this time.
41
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718).” The
amendments of ASU No. 2016-09 were issued as part of the FASB’s Simplification initiative focused on improving areas of
GAAP for which cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed
within the financial statements. The amendments focused on simplification specifically with regard to share-based payment
transactions, including income tax consequences, classification of awards as equity or liabilities and classification on the
statement of cash flows. The guidance in ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016,
and interim periods within those annual periods. The Company adopted ASU 2016-09 on May 1, 2017. Certain of the
amendments are applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity
as of May 1, 2017, while other amendments are applied retrospectively, prospectively or using either a prospective or a
retrospective transition method. Upon adoption, the Company is beginning to account for forfeitures as they occur rather than
estimate a forfeiture rate and has recorded a cumulative-effect adjustment in equity of approximately $11,000 on the date of
initial adoption. In periods subsequent to adoption, a higher expense will be recognized earlier during the respective vesting
periods of stock-based awards that are not forfeited. As a result of the valuation allowance against our deferred tax assets, there
was no net adjustment to retained earnings for the change in accounting for unrecognized windfall tax benefits.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments”, providing additional guidance on eight specific cash flow classification issues. The goal
of the ASU is to reduce diversity in practice of classifying certain items. The amendments in the ASU are effective for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The
Company evaluated the effect ASU 2016-13 will have on its consolidated financial statements and disclosures and has
determined the standard will have no impact on its ongoing financial reporting at this time.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which
amends guidance and presentation related to restricted cash in the statement of cash flows, including stating that amounts
generally described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. An entity is required
to provide a disclosure indicating the reconciliation of all cash accounts. The amendments in the ASU are effective for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The
Company has early adopted ASU 2016-18 effective May 1, 2017. In connection with the adoption of the standard the Company
has used a retrospective transition method for each period presented in the statement of cash flows. The Company reclassified
$300,000 of restricted cash to cash, cash equivalents and restricted cash, beginning of period for the period April 30, 2017 and
$488,000 of restricted cash to cash, cash equivalents and restricted cash, ending of period for the period April 30, 2017 in the
statement of cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are listed in Item 15 — “Exhibits and Financial
Statement Schedules” of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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.
42
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, 2018, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective.
Internal Control over Financial Reporting
The annual report of management on the Company’s internal control over financial reporting is provided under
“Reports of Management” on page F-2, which is incorporated herein by reference as if fully set forth herein. As described
therein, management concluded that the Company’s internal control over financial reporting was effective as of April 30, 2018.
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, 2018 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
PART III
All of the directors bring to our Board of Directors executive leadership experience from their service as executives
and/or directors of our Company and/or other entities. The biography of each director contains information regarding the
person’s service as a director, business experience, director positions held currently or at any time during the last five years,
and the experiences, qualifications, attributes and skills that caused the Nominating and Corporate Governance Committee and
our Board of Directors to determine that the person should serve as a director, given our business and structure.
Name
Terence J. Cryan
Dean J. Glover
George H. Kirby III
Steven M. Fludder
Robert K. Winters
Age
56
52
48
58
50
Position(s) with the Company
Chairman of the Board
Vice Chairman of the Board and Independent Director
Chief Executive Officer and Director
Independent Director
Independent Director
Served as
Director
From
2012
2014
2015
2016
2016
43
Terence J. Cryan has been a member of our Board of Directors since October 2012 and Chairman of the board since
June 2014. Prior to joining our Board, Mr. Cryan was a member of our Board of Advisors. Mr. Cryan was our lead independent
director from October 2013 to June 2014 when he became Chairman of the Board. Since August 2016, Mr. Cryan has served
as the Chairman of the Board of Westwater Resources, Inc. Mr. Cryan has served on the boards of directors of a number of
other publicly traded companies including Uranium Resources, Inc. from 2006 to 2016; Global Power Equipment Group Inc.
from 2008 to 2017; Superior Drilling Products from May 2014 to 2016; Gryphon Gold Corporation from 2009 to 2012; and
The Providence Service Corporation from 2009 to 2011. Mr. Cryan previously served as President and Chief Executive Officer
of Medical Acoustics, LLC from 2007 through 2010. From September 2012 until April 2013, Mr. Cryan also served as interim
President and CEO of Uranium Resources, Inc., and was elected as Chairman of the Board of Directors of Uranium Resources,
Inc. in June 2014 and served until March 2016. Mr. Cryan served as President and CEO of Global Power Equipment Group
Inc., from March 2015 until July 2017. Mr. Cryan co-founded in 2001 Concert Energy Partners, LLC, an investment and private
equity firm based in New York with a focus on the traditional and alternative energy, power and natural resources industries,
and served as Managing Director until 2015. Between 1990 and 2001, Mr. Cryan was a Senior Managing Director in the
investment banking department at Bear Stearns & Co. Inc. in New York City and a Managing Director at Paine Webber/Kidder
Peabody in both New York City and London. Mr. Cryan earned his Bachelor of Arts degree from Tufts University in 1983 and
a Master of Science degree in Economics from The London School of Economics in 1984. In December 2014, Terence Cryan
was named a Board Leadership Fellow by the National Association of Corporate Directors. We believe Mr. Cryan's
qualifications to sit on our Board of Directors include his significant experience in financial matters, his prior board and
executive experience at other companies, his broad energy industry background and his extensive expertise in financings,
mergers and acquisitions.
Dean J. Glover became a member of our Board of Directors in October 2014, replacing a director who retired, and
was elected Vice Chairman of our Board of Directors in July 2016. Since March 2018, Mr. Glover has served as a member of
the Board of Directors of ConXtech. Mr. Glover is currently the CEO of Techniks Tool Group. Prior to Techniks Tool Group
from October 2014 until 2017, Mr. Glover served as MIRATECH President & CEO. Prior to this, he was Senior Vice President
and President of the Products Division of Global Power Equipment Group Inc. Mr. Glover joined Global Power in December
2005 as Chief Operating Officer of Braden Manufacturing. Prior to joining Global Power, Mr. Glover led the global supply
chain and manufacturing for Diebold Inc. Prior to this Mr. Glover spent 13 years with General Electric (NYSE: GE) in various
managerial and technical roles and is a certified Six Sigma Master Black belt. Mr. Glover currently serves as a director of
Oklahoma Scholastic Organization, a non-profit organization. Mr. Glover holds a Bachelor’s degree in Mechanical Engineering
from the University of Nebraska and an M.B.A. from the Kellogg Graduate School of Management, Northwestern University.
Mr. Glover has extensive international experience having lived in various international locations for most of his career. Mr.
Glover has over 25 years of commercial and technical experience in industry. We believe Mr. Glover’s qualifications to sit on
our Board of Directors include his significant managerial, commercial and technical experience in the energy technology
industry.
George H. Kirby III has served as our President, Chief Executive Office and a member of our Board of Directors
since January 20, 2015, replacing Interim Chief Executive Officer David L. Keller. Prior to this, he joined AECOM Technology
Corporation (NYSE: ACM) a leading provider of engineering, procurement and construction (“EPC”) services in September
2013 as Senior Vice President. In this role, he led their Energy Business Line for the north U.S. region providing services for
utilities, power transmission and generation developers, and large industrial energy efficiency end-users. Prior to AECOM, he
joined SAIC Energy, Environment, & Infrastructure (NYSE: SAIC) in January 2012 a global leader in solutions for national
security, healthcare and engineering, as Managing Director for their Asset Transactions group providing power generation
investors and developers with technical and market consulting and advisory services, and was promoted to Vice President in
2013 providing EPC services to Investor Owned Utilities. In 2009, he joined American Superconductor (NASDAQ: AMSC)
as Director of Global Sales and was promoted to Managing Director of the Americas and Australia in 2011. From 2000 to
2009, Mr. Kirby held significant leadership roles at General Electric in both GE Energy and GE Capital (NYSE: GE) in product
development, global sales, quality and project finance. In June 2016, Mr. Kirby was elected to the Board of Trustees of the Sea
Research Foundation, a non-profit organization in Mystic, Connecticut. Mr. Kirby previously served as a director of Blade
Dynamics, LLC from April to December 2011, and Schooner, Inc. from June to October 2012. Mr. Kirby earned a Bachelor of
Science degree in Aerospace Engineering from Syracuse University in 1992 and an M.B.A. from Smeal College of Business
at Pennsylvania State University in 2008. We believe Mr. Kirby’s significant leadership experience in energy industries
qualifies him to serve on our Board of Directors.
44
Steven M. Fludder became a member of the Board of Directors on May 5, 2016. Mr. Fludder brings more than 30
years of global executive leadership in energy and infrastructure markets. Since November 2017, Mr. Fludder has served as the
Chief Executive Officer for NEC Energy Solutions. Prior to joining NEC Energy Solutions, Mr. Fludder was the Chief
Executive Officer with alpha-En, a publicly traded innovative clean technology company focused on enabling next generation
battery technologies by developing high purity lithium products. Prior to alpha-En, Mr. Fludder was Chief Executive of
AECOM’s global Energy and Water practice. Prior to AECOM, he was Senior Executive Vice President, Division General
Manager and Samsung group officer where he was head of worldwide sales and marketing for Samsung Engineering, a global
engineering, procurement and construction (EPC) firm serving a broad range of energy industries including power, oil & gas,
petrochemicals, and metallurgy. He was subsequently President of Samsung Techwin Power Systems Division. Prior to
Samsung, Mr. Fludder served as a Vice President and General Electric corporate officer where he led GE’s companywide
environmental business initiative “ecomagination”. Earlier in his career at GE, Mr. Fludder held executive leadership roles in
the Water, Energy Services, Energy China, and Aircraft Engines divisions. He has significant experience scaling and growing
energy related technology businesses through start-ups, acquisitions and turnarounds. Mr. Fludder holds a Master’s degree in
Mechanical Engineering from the Massachusetts Institute of Technology, a bachelor’s degree in Mechanical Engineering from
Columbia University, and a second Bachelor of Science degree from Providence College. We believe Mr. Fludder’s
qualifications to serve on our Board of Directors include his wide experience in both the energy and infrastructure markets, as
well a variety of other industry segments related to our business.
Robert K. Winters became a member of the Board of Directors on May 5, 2016. Robert Winters has been an
Executive Vice President and G.M. of Alpha IR Group since September 2015. He established and is running the NYC office
for Chicago-based firm, which specializes in providing strategic counsel to small- and mid-cap U.S. companies across a broad
range of industries. Prior to this, he was a partner and portfolio manager at Zesiger Capital Group, LLC for 14 years; Zesiger
Capital Group, LLC is an investment advisor based in NYC, catering to both large institutional clients and high net-worth
individuals. Zesiger’s investment strategy during Mr. Winters’ tenure was to take concentrated, long-term investment positions
in small-and mid-cap stocks in the U.S., as well as in select emerging and frontier markets. Additionally, Mr. Winters managed
fixed income investments on behalf of clients at Zesiger, as well as private investments; Mr. Winters sat on the boards of several
private portfolio companies during his time at Zesiger. Prior to his work at Zesiger Capital Group, LLC, Mr. Winters worked
as a Managing Director and Senior Natural Resource analyst for almost 10 years at Bear, Stearns & Co., Inc., where he focused
on energy, metals and mining. Mr. Winters began his finance career at CS First Boston following his work as an international
trade analyst with Kilpatrick & Cody in Washington, D.C. Mr. Winters served as a director of LRM Industries International
from 2009 until 2014 Mr. Winters graduated from Georgetown University in 1990 with a dual major in International Relations
and History. We believe Mr. Winter’s qualifications to serve on our Board of Directors include his extensive finance experience,
as well his experience with small-cap and mid-cap public companies.
Executive Officers
We have two executive officers who are not also a director:
Name
Age Position with Ocean Power Technologies, Inc.
Matthew T. Shafer
47
Vice President, Chief Financial Officer and Treasurer
Christopher Phebus
47
Vice President, Engineering
Matthew T. Shafer joined the Company in September 2016 as Chief Financial Officer and Treasurer of the Company.
Mr. Shafer previously served as a Vice President of Finance and Corporate Controller for CMF Associates from May 2015 to
September 2016, where he led teams in providing finance solutions for small and middle-market high-growth organizations.
Prior to that, beginning in 2013 he served as a Business Unit Chief Financial Officer at Valeant Pharmaceuticals International
(NYSE: VRX), a large global publicly traded company that develops, manufactures, markets and sells specialty
pharmaceuticals and medical devices. He held this Finance Leadership role for the Valeant Dentistry, Generics and Neurology
business units, and had worked closely with commercial operations and corporate level teams on numerous product launches,
sales force expansions, mergers and acquisitions, financial systems integrations, and internal controls. Mr. Shafer has a
foundation in Public Accounting working at Arthur Andersen LLP at the beginning of his career, holds a Bachelor of Science
in Accounting from The Stillman School of Business at Seton Hall University, an MBA in Finance from Rutgers Business
School in New Brunswick, N.J. and is a Certified Public Accountant.
45
Christopher Phebus joined the Company in January 2018 as Vice President, Engineering. Mr. Phebus was previously
employed by General Electric Company for 16 years in positions including the GM and Executive Engineering Director for
GE Subsea Products and Projects in Norway and the U.K., and the GM and Lean-Six Sigma Quality Leader for Global
Engineering at GE Energy. Most recently he was the Head of Global Engineering and Technology for the Flow and Process
Technology and Reciprocating Compression division at GE Oil & Gas. He began his career at Pratt & Whitney, where he
worked as a systems engineer directly with the U.S. Air Force on the F100 aircraft engine. Mr. Phebus holds a Bachelor of
Science in Mechanical Engineering from Clemson University and a Master of Science in Management from Embry-Riddle
Aeronautical University.
Corporate Governance
Our Board of Directors believes that good corporate governance is important to ensure that the Company is managed
for the long-term benefit of our stockholders. This section describes key corporate governance guidelines and practices that our
Board has adopted. Complete copies of our corporate governance guidelines, committee charters and code of business conduct
and ethics are available on the corporate governance section of our website, www.oceanpowertechnologies.com. Alternatively,
you can request a copy of any of these documents by writing to our Secretary at 28 Engelhard Drive, Monroe Township, NJ
08831.
Corporate Governance Guidelines
Our Board has adopted corporate governance guidelines to assist in the exercise of its duties and responsibilities and
to serve the best interests of the Company and our stockholders. These guidelines, which provide a framework for the conduct
of the Board’s business, provide that:
●
●
●
●
●
the Board’s principal responsibility is to oversee the management of the Company;
a majority of the members of the Board shall be independent directors;
the non-employee directors shall meet regularly in executive session;
directors have full and free access to management and, as necessary and appropriate, independent advisors;
and
at least annually, the Board and its committees will conduct a self-evaluation to determine whether they are
functioning effectively.
Audit Committee
The members of our Audit Committee are Dean J. Glover, Steven M. Fludder and Robert K. Winters. Effective
September 8, 2016, Messrs. Cryan and Burger rotated off the Audit Committee and Messrs. Fludder and Winters joined the
Audit Committee. Mr. Glover is the chair of the Audit Committee. The Board of Directors has determined that Mr. Glover is
an “audit committee financial expert” within the meaning of the regulations of the Securities and Exchange Commission (the
“SEC”). The Audit Committee met 4 times in fiscal 2018. Our Board has also determined that all Audit Committee members
meet the independence requirements contemplated by Rule 5605(c) of the NASDAQ Stock Market and Rule 10A-3 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Our Audit Committee assists our Board of Directors in its oversight of the integrity of our consolidated financial
statements, our independent registered public accounting firm’s qualifications, independence and performance.
Our Audit Committee’s responsibilities include: appointing, approving the compensation of, and assessing the
independence of, our independent registered public accounting firm; overseeing the work of our independent registered public
accounting firm, including through the receipt and consideration of reports from our independent registered public accounting
firm; reviewing and discussing with management and our independent registered public accounting firm our annual and
quarterly consolidated financial statements and related disclosures; monitoring our internal control over financial reporting,
disclosure controls and procedures and code of business conduct and ethics; establishing procedures for the receipt and retention
of accounting related complaints and concerns; meeting independently with our independent registered public accounting firm
and management; and preparing the Audit Committee report required by SEC regulations.
Material Changes in Director Nominations Process
There have not been any material changes to the procedures by which shareholders may recommend nominees to our
Board.
46
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our employees, officers (including our
principal executive officer and principal financial officer) and directors. The Code of Business Conduct and Ethics is posted
on our website at www.oceanpowertechnologies.com and can also be obtained free of charge by sending a request to our
Secretary at 28 Engelhard Drive, Monroe Township, NJ 08831. Any changes to or waivers under the Code of Business Conduct
and Ethics as it relates to our chief executive officer, chief financial officer, controller or persons performing similar functions
must be approved by our Board of Directors and will be disclosed in a Current Report on Form 8-K within four business days
of the change or waiver.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Exchange Act and the rules issued thereunder, our executive officers and directors
are required to file with the SEC reports of ownership and changes in ownership of Common Stock. Copies of such reports are
required to be furnished to us. Based solely on a review of the copies of such reports furnished to us, or written representations
that no other reports were required, we believe that all required reports were filed in fiscal 2018 in a timely manner.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
For Board service year 2018, the Board of Directors approved, for each non-employee director, an annual payment of
$45,000 and a choice of either (a) an option worth $50,000, based on the Black-Scholes formula, to purchase shares of Common
Stock or (b) Common Stock worth $50,000, with such option award or stock award to vest, if at all, at the next annual meeting
of stockholders. Directors serving a portion of a year receive a pro-rata grant. Each non-employee director also receives a per
annum supplement ranging from $2,000 to $9,600 for each committee that they chair. In addition, the Chairman of the Board
annually receives an additional $38,000.
We reimburse each non-employee director for out-of-pocket expenses incurred in connection with attending our Board
and Board committee meetings. Compensation for our directors, including cash and equity compensation, is determined, and
remains subject to adjustment, by our Board of Directors.
The following table summarizes compensation paid to each of our non-employee directors who served during fiscal
year 2018.
Name (1)
Fees Earned or
Paid in Cash
($) (2)
Stock
Awards
($)
Option
Awards
($) (3)
Total
($)
Terence J. Cryan ......................
85,000
Robert J. Burger (4) ...................
30,500
Dean J. Glover .........................
54,600
Steven M. Fludder ...................
49,000
Robert K. Winters ....................
45,000
-
-
-
-
-
50,000
135,000
-
30,500
50,000
104,600
50,000
50,000
95,000
95,000
(1) George H. Kirby III, the Company’s President and Chief Executive Officer is not included in this table as he is an
employee of the Company and thus receives no compensation for his services as a Director. The compensation
received by Mr. Kirby as an employee of the Company is shown in the Summary Compensation Table on page 49.
(2) Fees earned or paid in cash reflect annual retainer and committee meeting fees.
(3) Stock options granted to directors vest fully on the date of the first annual shareholders meeting following the grant
date. The amounts in the “Option Awards” column reflect the aggregate grant date fair value of stock options granted
during the year computed in accordance with the provisions of Accounting Standards Codification (ASC) No. 718,
“Compensation- Stock Compensation.” The assumptions used in calculating these amounts are incorporated by
reference to Note 2 to the financial statements in this Annual Report.
(4) Robert J. Burger term ended on October 20, 2017 and Mr. Burger did not seek re-election at the 2017 Annual
Meeting of Stockholders.
47
The following table summarizes grants during fiscal year 2018.
Name
Terence J. Cryan (1) ...................................................
Robert J. Burger (1), (2) ...............................................
Dean J. Glover (1) ......................................................
Steven M. Fludder (1) ................................................
Robert K. Winters (1) .................................................
Stock
Awards
Option
Awards
Total
-
-
-
-
-
42,666
-
42,666
42,666
42,666
42,666
-
42,666
42,666
42,666
(1) During fiscal year 2018 each board member was granted stock options exercisable for 42,666 shares of common
stock for Board service during the year ending October 31, 2018.
(2) Robert J. Burger term ended on October 20, 2017 and Mr. Burger did not seek re-election at the 2017 Annual
Meeting of Stockholders.
EXECUTIVE COMPENSATION
Overview of Executive Compensation
Our Compensation Committee is responsible for overseeing the compensation of all of our executive officers. In this
capacity, the Compensation Committee designs, implements, reviews and approves all compensation for our named executive
officers. The goal of the Compensation Committee is to ensure that our compensation programs are aligned with our business
goals and objectives and that the total compensation paid to each of our named executive officers is fair, reasonable and
competitive.
Compensation Objectives and Philosophy
Our compensation programs are designed to attract and retain qualified and talented executives, motivating them to
achieve our business goals and rewarding them for superior short- and long-term performance. In particular, our compensation
programs are intended to reward the achievement of specified predetermined quantitative and qualitative goals and to align our
executives’ interests with those of our stockholders in order to attain the ultimate objective of increasing stockholder value.
Elements of Total Compensation and Relationship to Performance
Key elements of these programs include:
● base salary compensation designed to reward annual achievements, with consideration given to the
executive’s qualifications, scope of responsibility, leadership abilities and management experience and
effectiveness;
cash bonus awards designed to align executive compensation with business objectives and performance; and
equity-based incentive compensation, primarily in the form of stock options and restricted stock, the value
of which is dependent upon the performance of our Common Stock, and which is subject to multi-year vesting
that requires continued service and/or the attainment of certain performance goals.
●
●
Determining and Setting Executive Compensation
Our management develops our compensation plans by utilizing publicly available compensation and on-line survey
data for a broad selection of national and regional companies, which we believe are generally comparable to the Company in
terms of public ownership, organizational structure, size and stage of development, and against which we believe we may
compete for executive talent. The results of these analyses are reviewed with and approved by the Compensation Committee
annually. We believe that these compensation practices provide us with appropriate compensation guidelines. The
Compensation Committee generally targets compensation for our executives near the median range of compensation paid to
similarly situated executives in comparable companies covered by the on-line survey data. Other considerations, including
market factors, the unique nature of our business and the experience level of an executive, may dictate variations to this general
target.
Our business is characterized by a long product development cycle, including a lengthy engineering and product-
testing period and regulatory approval and licensing. Because of this, many of the traditional benchmarking metrics, such as
product sales, revenues and profits are inappropriate for our Company. Instead, the specific factors the Compensation
Committee considers when determining our named executive officers’ compensation include:
48
● key product development initiatives;
●
●
●
●
●
technology advancements;
achievement of regulatory and other commercial milestones;
establishment and maintenance of key strategic relationships;
implementation of appropriate financing strategies; and
financial and operating performance.
Summary Compensation Table
The following table sets forth the compensation paid or accrued during the fiscal years ended April 30, 2018 and April
30, 2017 to our named executive officers.
Name and
Principal Position
Year
Salary ($)
(1)
Bonus ($)
(2)
Stock
Awards
($)(3)
Option
Awards
($)
All Other
Compensation
($)
Total ($)
George H. Kirby III ........... 2018
President and
2017
Chief Executive Officer
Matthew T. Shafer (5) ......... 2018
Vice President
2017
Chief Financial Officer
and Treasurer
Christopher Phebus (6) ........ 2018
2017
Vice President,
Engineering
Dr. Mike M. Mekhiche (8) .. 2018
Former Executive Vice
President,
Engineering and
Operations
2017
381,600
381,600
276,565
235,829
70,000
86,350
236,042
143,400
118,750
53,900
20,418
49,788
79,784
-
37,406
-
108,000
-
91,814
-
336,328 123,600
-
53,380
-
-
-
-
-
-
-
-
51,710 (4) 779,875
37,468 (4) 741,247
-
-
375,210
247,088
17,815 (7) 243,005
-
-
33,712 (9) 125,526
20,086 (9) 533,394
(1) Salary represents actual salary earned during each fiscal year. The amounts in this column may be different from the
amounts listed below under description of employment agreements, due to increases in salary levels and payments for
unused vacation during each fiscal year.
(2) This amount represent bonuses earned by the named executive officers in fiscal year 2018 and 2017.
(3) The amounts in the “Stock Awards” column reflect the aggregate grant date fair value of stock options granted during the
year computed in accordance with the provisions of Accounting Standards Codification (ASC) No. 718, “Compensation-
Stock Compensation.” The assumptions used in calculating these amounts are incorporated by reference to Note 2 to the
financial statements in this Annual Report.
(4) For fiscal year 2018 the amount of $51,710 includes $42,710 for relocation expenses and $9,000 relates to the Company’s
matching contributions to the 401(K) plan. For fiscal year 2017 the amount of $37,468 includes $34,468 for relocation
expenses and $3,000 relates to the Company’s matching contributions to the 401(K) plan. In accordance with his
employment agreement Mr. Kirby is eligible for reimbursement of relocation expenses.
(5) Mr. Shafer joined the Company on September 7, 2016 to serve as the Company’s Chief Financial Officer and Treasurer.
(6) Mr. Phebus joined the Company on January 15, 2018 to serve as the Company’s Vice President of Engineering.
(7) For fiscal year 2018 the amount of $17,815 is relocation expenses in accordance with Mr. Phebus’ employment agreement.
(8) Dr. Mekhiche resigned from his position as Executive Vice President, Engineering and Operations effective August 8,
2017.
(9) For fiscal year 2018 the amount of $33,712 includes $31,612 payout for unused vacation and $2,100 relates to the
Company’s matching contributions to the 401(K) plan. For fiscal year 2017 the amount of $20,086 includes $12,886
payout for unused vacation and $7,200 relates to the Company’s matching contributions to the 401(K) plan.
49
Employment Agreements
George H. Kirby III — President, Chief Executive Officer and Director
Under an agreement entered into on December 29, 2014, Mr. Kirby was entitled to an initial annual base salary of
$360,000 subject to adjustment upon annual review by our Board of Directors, was subsequently increased to $381,600 on
May 1, 2016 and to $391,140 on May 1, 2018. Mr. Kirby is also eligible to earn discretionary incentive bonuses and incentive
compensation. The Company also reimbursed Mr. Kirby for his eligible relocation costs.
Upon the termination of his employment other than for cause, or if he terminates his employment for good reason (as
such terms are defined in his employment agreement), Mr. Kirby has the right to receive severance payments. If such
termination occurs, Mr. Kirby will receive twelve months of his base salary then in effect. Pursuant to this agreement, Mr.
Kirby is prohibited from competing with us and soliciting our customers, prospective customers or employees during the term
of his employment and for a period of one year after the termination or expiration of his employment.
Matthew T. Shafer – Vice President, Chief Financial Officer and Treasurer
On August 23, 2016, and in connection with his hiring by the Company, Mr. Shafer entered into an employment
agreement with the Company, to be effective on September 7, 2016 (the “Shafer Employment Agreement”). Under the Shafer
Employment Agreement, Mr. Shafer was entitled to an initial annual base salary of $220,000 subject to adjustment upon annual
review by the Company’s Board of Directors, was subsequently increased to $250,000 on October 18, 2017 and to $253,125
on May 1, 2018. Mr. Shafer is also eligible to earn discretionary incentive bonuses and incentive compensation. He is also
entitled to participate in all Company employee benefit plans.
Upon the termination of his employment other than for cause, or if he terminates his employment for good reason (as
such terms are defined in the Shafer Employment Agreement), Mr. Shafer has the right to receive severance payments. If such
termination occurs before the end of six months of service, he receives no severance. If such termination occurs after completing
six months of service, Mr. Shafer will receive six months of his base salary. Pursuant to this agreement, Mr. Shafer is also
subject to covenants regarding confidentiality, non-competition and non-solicitation during and after the term of his
employment.
Christopher Phebus- Vice President, Engineering
On November 28, 2017, and in connection with his hiring by the Company, Mr. Phebus entered into an employment
agreement with the Company, to be effective on January 15, 2018 (the “Phebus Employment Agreement”). Under the Phebus
Employment Agreement, Mr. Phebus was entitled to an initial annual base salary of $270,000 subject to adjustment upon annual
review by the Board of Directors, which was subsequently increased to $271,969 on May 1, 2018. Mr. Phebus is also eligible
to earn discretionary incentive bonuses and incentive compensation. He is also entitled to participate in all Company employee
benefit plans.
Upon the termination of his employment other than for cause, or if he terminates his employment for good reason (as
such terms are defined in the Phebus Employment Agreement), Mr. Phebus has the right to receive severance payments. If such
termination occurs before the end of six months of service, he receives no severance. If such termination occurs after completing
six months of service, Mr. Phebus will receive six months of his base salary. Pursuant to this agreement, Mr. Phebus is also
subject to covenants regarding confidentiality, non-competition and non-solicitation during and after the term of his
employment.
Stock Option and Other Compensation Plans
2006 Stock Incentive Plan
Our 2006 Stock Incentive Plan was adopted by our Board of Directors on December 7, 2006, was approved by our
stockholders on January 12, 2007 and became effective on April 24, 2007. The 2006 Stock Incentive Plan provides for the
grant of incentive stock options, non-statutory stock options, restricted stock awards and other stock-unit awards. 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 shares. In 2010, our Board of Directors approved amending and restating the 2006
Stock Incentive Plan to make certain adjustments, including imposing minimum performance periods for performance awards
and minimum vesting periods for time-based awards, a requirement that we obtain stockholder approval prior to certain option
and stock appreciation right repricing actions, and limiting the situations in which vesting periods may be waived or accelerated.
This amendment and restatement did not require the approval of our stockholders. On October 2, 2013, a further amendment
to the 2006 Stock Incentive Plan was approved by our stockholders, increasing the aggregate number of shares authorized for
issuance by an additional 800,000 shares to 2,453,215.
50
Our employees, officers, directors, consultants and advisors are eligible to receive awards under our 2006 Stock
Incentive Plan; however, incentive stock options may only be granted to our employees. The maximum number of shares of
Common Stock with respect to which awards may be granted to any participant under our 2006 Stock Incentive Plan is 200,000
per calendar year.
Our 2006 Stock Incentive Plan was administered by our Board of Directors. Pursuant to the terms of our 2006 Stock
Incentive Plan, and to the extent permitted by law, our Board of Directors could delegate authority to one or more committees
or subcommittees of the Board of Directors or to our officers. Our Board of Directors or any committee to whom the Board of
Directors delegates authority selected the recipients of awards and determined:
●
●
●
●
the number of shares of Common Stock covered by options and the dates upon which the options become
exercisable;
the exercise price of options; provided, however, that the exercise price shall not be less than 100% of the
fair market value of the underlying Common Stock on the date the option is granted;
the duration of the options; and
the number of shares of Common Stock subject to any restricted stock or other stock-unit awards and the
terms and conditions of such awards, including conditions for repurchase, issue price and repurchase price.
If our Board of Directors delegated authority to an officer, the officer had the power to make awards to all of our
employees, except to executive officers. Our Board of Directors fixed the terms of the awards to be granted by such officer,
including the exercise price of such awards, and the maximum number of shares subject to awards that such officer could make.
If a merger or other reorganization event occurred, our Board of Directors could provide that all of our outstanding
options are to be assumed or substituted by the successor corporation. Our Board of Directors could also provide that, in the
event the succeeding corporation did not agree to assume, or substitute for, outstanding options, then all unexercised options
would become exercisable in full prior to the completion of the event and that these options would terminate immediately prior
to the completion of the merger or other reorganization event if not previously exercised. Our Board of Directors could also
provide for cashing out the value of any outstanding options.
No awards could be granted under our 2006 Stock Incentive Plan after December 6, 2016, but the vesting and
effectiveness of awards granted before that date could extend beyond that date. Our Board of Directors could amend, suspend
or terminate our 2006 Stock Incentive Plan at any time, except that stockholder approval would be required for any revision
that would materially increase the number of shares reserved for issuance, expand the types of awards available under the plan,
materially modify plan eligibility requirements, extend the term of the plan or materially modify the method of determining the
exercise price of options granted under the plan, or otherwise as required to comply with applicable law or stock market
requirements.
As of April 30, 2018, options to purchase 46,116 shares of our Common Stock at a weighted average exercise price
of $38.96 were outstanding under our 2006 Stock Incentive Plan.
As of April 30, 2018, we had granted 114,019 shares of restricted Common Stock under our 2006 Stock Incentive
Plan, of which zero remain outstanding as of April 30, 2018.
Once the 2015 Omnibus Incentive Plan (discussed below) was approved by the stockholders on October 22, 2015, no
further stock options or other awards were awarded under the 2006 Stock Incentive Plan and it was terminated.
2015 Omnibus Incentive Plan
On August 17, 2015, the Board of Directors approved, subject to the receipt of stockholder approval, the Ocean Power
Technologies, Inc. 2015 Omnibus Incentive Plan (the “2015 Plan”). On October 22, 2015, the stockholders approved the 2015
Plan and the 2006 Stock Incentive Plan was terminated. Effective August 17, 2016, our Board approved and adopted an
amendment to the 2015 Plan, subject to stockholder approval, to increase the number of shares available for grant under the
2015 Plan from 240,703 to 640,703 in order to assure that adequate shares will be available for future grants. On October 21,
2016, the stockholders approved the amendment to the 2015 Plan.
51
Description of 2015 Plan
The following is a summary of the material provisions of the 2015 Plan, as amended, and is qualified in its entirety
by reference to the complete text of the 2015 Plan, a copy of which is filed as Annex A to our Proxy Statement on Schedule
14A filed with the SEC on September 3, 2015.
Administration
The 2015 Plan is administered by a committee of the Board, which consists of not fewer than two directors of the
Company designated by the Board, each of whom is a “non-employee director” within the meaning of Rule 16b-3 promulgated
under the Exchange Act, an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code as amended
(as now in effect or later amended and any successor thereto, the “Code”) and, for so long as our Common Stock is listed on
the NASDAQ, an “independent director” within the meaning of the NASDAQ rules. Among other things, the committee
administering the 2015 Plan has full power and authority to take all actions and to make all determinations required or provided
for under the 2015 Plan, any award under the 2015 Plan or any award agreement under the 2015 Plan, not inconsistent with the
specific terms and conditions of the 2015 Plan, which the committee deems to be necessary or appropriate to the administration
of the 2015 Plan. The committee administering the 2015 Plan, may amend, modify or supplement the terms of any outstanding
award, provided that no amendment, modification or supplement of the terms of any outstanding award shall impair a grantee’s
rights under an award without the consent of the grantee. The committee administering the 2015 Plan is also authorized to
construe the award agreements, and may prescribe rules relating to the 2015 Plan. Notwithstanding the foregoing, our full
Board will conduct the general administration of the 2015 Plan with respect to all awards granted to our non-employee directors.
In addition, in its sole discretion, our Board may at any time and from time to time exercise any and all rights and duties of the
committee under the 2015 Plan except with respect to matters which are required to be determined in the sole discretion of the
committee under Rule 16b-3 of the Exchange Act or Section 162(m) of the Code, or any regulations or rules issued thereunder.
Grant of Awards; Shares Available for Awards; Award Limits; Eligible Grantees
The 2015 Plan provides for the grant of stock options, SARs, restricted stock awards, stock unit awards and
unrestricted stock awards, dividend equivalent rights, performance share awards or other performance-based awards, other
equity-based awards or cash to eligible employees, officers and non-employee directors of the Company or any affiliate of the
Company, or any consultant or adviser to the Company or an affiliate who is currently providing services to the Company or
an affiliate, or to any other individual whose participation in the 2015 Plan is determined to be in the best interests of the
Company by the committee administering the 2015 Plan. We have reserved a total of 200,000 shares of Common Stock for
issuance as or under awards to be made under the 2015 Plan, plus (y) 40,703, which was the number of shares of Common
Stock available for issuance under our 2006 Stock Incentive Plan as of the effective date of the 2015 Plan, plus (z) the number
of shares of our Common Stock related to awards under the 2006 Stock Incentive Plan as of the effective date of the 2015 Plan
which thereafter terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such shares. With the
amendment to the Plan approved by the stockholders on October 21, 2016, the number of shares of Common Stock increased
from 240,703 to 640,703. If any award expires, is cancelled, or terminates unexercised or is forfeited, the number of shares
subject thereto is again available for grant under the 2015 Plan. The maximum number of shares of stock that can be granted
under the 2015 Plan pursuant to incentive stock option awards is currently two hundred thousand (200,000). The maximum
number of shares of stock subject to awards that can be granted under the 2015 Plan in any one calendar year to any person,
other than a non-employee director, is seventy-five thousand (75,000). The maximum fair market value of shares of stock that
may be granted under the 2015 Plan in any one calendar year to any non-employee director is two-hundred thousand dollars
($200,000). The limitation on the amount of shares of stock issuable under the 2015 Plan is subject to adjustment in the event
of certain changes in our capital stock, such as recapitalizations, reclassifications, stock splits, reverse stock splits, spin-offs,
combinations of our stock, exchanges of our stock and other increases or decreases in our stock without receipt of consideration.
As of April 30, 2018, options to purchase 342,413 shares of our Common Stock at a weighted average exercise price
of $1.73 were outstanding under our 2015 Omnibus Incentive Plan.
As of April 30, 2018, we had granted 346,996 shares of Restricted Common Stock under our 2015 Omnibus Incentive
Plan. 194,304 shares vested and 52,925 shares were cancelled, with 99,767 shares remaining outstanding.
The 2015 Plan will terminate automatically on October 22, 2025, which is ten years after the date on which
stockholders approve the 2015 Plan. As of April 30, 2018, there are 89,531 shares available for grant under the 2015 Omnibus
Incentive Plan.
52
2018 Employment Inducement Incentive Award Plan
On January 18, 2018, the Board adopted the Ocean Power Technologies, Inc. Employment Inducement Incentive
Award Plan (the “Inducement Plan”) and, subject to the adjustment provisions of the Inducement Plan, reserved 500,000 shares
of the Company’s common stock for issuance pursuant to equity awards granted under the Inducement Plan.
The Inducement Plan was adopted without stockholder approval pursuant to Rule 5635(c)(4) and Rule 5635(c)(3) of
the Nasdaq Listing Rules. The Inducement Plan provides for the grant of equity-based awards, including restricted stock units,
restricted stock, performance shares and performance units, and its terms are substantially similar to the Company’s 2015
Omnibus Incentive Plan, including with respect to treatment of equity awards in the event of a “change in control” as defined
under the Inducement Plan, but with such other terms and conditions intended to comply with the NASDAQ inducement award
exception.
In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement
Plan may only be made to individuals not previously employees or non-employee directors of the Company (or following such
individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into
employment with the Company. An award is any right to receive the Company’s common stock pursuant to the 2018
Inducement Plan, consisting of a performance share award, restricted stock award, a restricted stock unit award or a stock
payment award. No Awards may be granted or awarded during any period of suspension or after termination of the Plan, and
in no event may any Award be granted under the Plan after the tenth (10th) anniversary of the date of its adoption. Any Awards
that are outstanding on the Expiration Date, or the date of termination of the Plan (if earlier), shall remain in force according
to the terms of the Plan and the applicable Award Agreement. As of April 30, 2018, there were 97,297 shares outstanding and
402,703 shares available for grant under the 2018 Inducement Plan.
2018 Outstanding Equity Awards at Fiscal Year End Table
The following table contains certain information regarding equity awards held by the named executive officers as of
April 30, 2018:
Name and
Principal Position
Option Awards
Stock Awards
Numbers of Numbers of
Shares
Shares
Underlying Underlying
Unexercised Unexercised Option
Options (#) Options (#) Exercise
Exercisable Unexercisable Price ($)
Number of
Shares or
Units of
Option
Stock That
Expiration Have Not
Vested (#)
Date
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
George H. Kirby III .........................
Matthew T. Shafer ...........................
Christopher Phebus ..........................
-
-
-
-
-
-
-
-
-
-
-
-
50,000(1)
10,308(2)
14,584(3)
55,000
11,339
16,042
97,297(4)
107,027
(1) Represent shares of restricted stock granted on May 19, 2017 relating to an aggregate of 50,000 shares which vest after a
two- year period based on service requirements.
(2) Represent shares of restricted stock granted on October 21, 2016 relating to an aggregate of 15,462 shares which vest over
a three- year period based on service requirements; 5,154 shares vested on Sept 17, 2017.
(3) Represent shares of restricted stock granted on May 19, 2017 relating to an aggregate of 14,584 shares which vest after a
two- year period based on service requirements.
(4) Represent shares of restricted stock granted on January 18, 2018 relating to an aggregate of 97,297 shares which vest over
a three- year period based on service requirements.
Potential Payments upon Termination of Employment or Change in Control
The following information sets forth the terms of potential payments to each of our named executive officers in the
event of a termination of employment. We do not include information for Mr. Mekhiche since he is no longer employed by the
Company.
53
Termination by Company without Cause; Termination by Executive for Good Reason. Our employment agreement
with Mr. Kirby provides for severance pay within 30 days in the event that employment is terminated by the Company, other
than for cause, upon Mr. Kirby’s disability or by the executive with good reason, in the amount of twelve months of base salary.
Mr. Kirby would also be entitled to receive any other payments owed such as a short-term bonus, long-term compensation,
benefits and expenses reimbursements to the degree such payments are owed for service provided up to the date of termination.
Finally, the expiration date of any other options held by Mr. Kirby would be extended to a date 90 days after the date of
termination of employment (but not longer than the original term of such options).
Our employment agreement with Mr. Shafer provides, upon the termination of his employment other than for cause,
or if Mr. Shafer terminates his employment for good reason, that Mr. Shafer has the right to receive severance payments. If
such termination occurs before the end of six months of service, Mr. Shafer will receive no severance. If such termination
occurs after completing six months of service, Mr. Shafer will receive six months of his base salary.
Our employment agreement with Mr. Phebus provides, upon the termination of his employment other than for cause,
or if Mr. Phebus terminates his employment for good reason, that Mr. Phebus has the right to receive severance payments. If
such termination occurs before the end of six months of service, Mr. Phebus will receive no severance. If such termination
occurs after completing six months of service, Mr. Phebus will receive six months of his base salary.
Termination by Company for Cause; Termination by Executive without Good Reason. Under our employment
contracts with Mr. Kirby upon termination for cause or at the executive’s election without good reason, the executive is entitled
to the base salary and benefits due and owing to the executive as of the date of termination. The employment agreements with
Mr. Shafer and Mr. Phebus do not contain provisions regarding severance in the event of a termination by the Company with
or without cause or termination by the executive without good reason.
Change in Control. Our employment agreement with Mr. Kirby provides for severance pay equal to one (1) year of
base salary if a change of control occurs and Mr. Kirby is terminated by the Company or Mr. Kirby terminates the agreement,
each occurring within 90 days of the change of control. Mr. Kirby would also be entitled to receive any other payments owed
such as a short-term bonus, long-term compensation, benefits and expenses reimbursements to the degree such payments are
owed for service provided up to the date of termination. Finally, the expiration date of any other options held by Mr. Kirby
would be extended to a date 90 days after the date of termination (but not longer than the original term of such options). In
addition, to the extent that Mr. Kirby has not previously vested in rights and interests held by Mr. Kirby under the Company’s
stock and other equity plans (including stock options, restricted stock, RSU’s, performance units or performance shares), such
rights and interest would become fully vested.
The employment agreements for Mr. Shafer and Mr. Phebus do not contain change of control provisions; therefore,
payments for cash severance and continued healthcare benefits are the same as for termination without cause. The restricted
stock agreement provides for accelerated stock vesting upon a change in control.
Termination upon Failure to Renew by the Company. In the event that our employment agreement with Mr. Kirby
terminates the end of the term and is not renewed as a result of a decision by the Company not to renew, prior to a decision by
Mr. Kirby not to renew, the Company will pay Mr. Kirby a severance payment in the amount of one (1) year base salary in a
lump sum within 30 days after the termination date.
The employment agreements for Mr. Shafer and Mr. Phebus do not contain similar provisions.
Qualifying retirement. Under our restricted stock agreements with the named executive officers, upon a Qualifying
Retirement 50% of unvested restricted shares will vest immediately. A “Qualifying Retirement” means retirement by the
recipient after satisfaction of the conditions in either clause (A) or clause (B): (A) the recipient has both (1) attained the age of
55 and (2) completed at least ten years of employment with the Company; or (B) the sum of the recipient’s age plus the number
of years he or she has been employed by the Company equals or exceeds 75 years.
54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of Common Stock as of July 5,
2018 by (a) each person known by us to be the beneficial owner of more than 5% of the outstanding shares of Common Stock,
(b) each executive officer (c) each director, and (d) all executive officers and directors as a group.
The Percentage of Common Stock outstanding is based on 18,368,286 shares of our Common Stock outstanding as of
July 5, 2018. For purposes of the table below, and in accordance with the rules of the SEC, we deem shares of Common Stock
subject to options that are currently exercisable or exercisable within sixty days of July 5, 2018 to be outstanding and to be
beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person,
but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. Except as
otherwise noted, each of the persons or entities in this table has sole voting and investing power with respect to all of the shares
of Common Stock beneficially owned by such person, subject to community property laws, where applicable. The street address
of each beneficial owner shown in the table below is c/o Ocean Power Technologies, Inc., 28 Engelhard Drive, Monroe
Township, NJ 08831.
Name of Beneficial Owner
Number of Shares
Beneficially
Owned
Percentage of
Shares
Beneficially
Owned
Terence J. Cryan (1) ............................................................................
George H. Kirby III (2) .......................................................................
Matthew T. Shafer (3) .........................................................................
Steven Fludder (4) ...............................................................................
Dean J. Glover (5) ...............................................................................
Christopher Phebus (6) ........................................................................
Robert Winters (7) ...............................................................................
All directors and executive officers as a group (7 individuals) ..........
49,476
58,831
3,471
28,759
43,027
-
28,759
212,323
*
*
*
*
*
*
*
1.1 %
* Represents a beneficial ownership of less the one percent of our outstanding common stock
(1) Beneficial ownership includes 5,050 shares of our common stock and 44,426 shares issuable upon the exercise of
options that are currently exercisable or exercisable within sixty days of July 5, 2018.
(2) Beneficial ownership includes 58,831 shares of our common stock.
(3) Beneficial ownership includes 3,471 shares of our common stock.
(4) Beneficial ownership includes 28,759 shares issuable upon the exercise of options that are currently exercisable or
exercisable within sixty days of July 5, 2018.
(5) Beneficial ownership includes 4,950 shares of our common stock and 38,077 shares issuable upon the exercise of
options that are currently exercisable or exercisable within sixty days of July 5, 2018.
(6) Mr. Phebus joined the company on January 15, 2018 and does have any ownership of our common stock or options
that are currently exercisable or exercisable within sixty days of July 5, 2018.
(7) Beneficial ownership includes 28,759 shares issuable upon the exercise of options that are currently exercisable or
exercisable within sixty days of July 5, 2018.
55
Equity Compensation Plan Information
The following table sets forth the indicated information as of April 30, 2018 with respect to our equity compensation
plans:
Number of Shares
to be Issued Upon
Exercise of
Outstanding
Options and
Restricted
Stock
Weighted-
Average
Exercise Price of
Outstanding
Options
Number of Shares
Remaining
Available for
Future Issuance
Under
Equity
Compensation
Plans (Excluding
Shares
Reflected in First
Column
Plan category
Equity compensation plans approved by shareholders
Stock Options...............................................................
Restricted Stock ...........................................................
388,529 $
197,064
Equity compensation plans not approved by
shareholders
Stock Options...............................................................
Restricted Stock ...........................................................
Total .................................................................................
-
97,297
682,890
6.15
N/A
-
N/A
-
89,531(1)
-
-
402,703(2)
492,234
(1) Consists of shares of our common stock available for issuance under the 2015 Omnibus Incentive Plan.
(2) Consists of shares of our common stock available for issuance under the 2018 Employee Inducement Incentive Award
Plan.
Our equity compensation plans consist of 2006 Stock Incentive Plan and 2015 Omnibus Incentive Plan which were
approved by our stockholders. Once the 2015 Omnibus Incentive Plan was approved by the stockholders on October 22, 2015,
no further stock options or other awards were awarded under the 2006 Stock Incentive Plan and it was terminated. Shares that
are forfeited under the 2006 Stock Incentive Plan on or after October 22, 2015 will become available for issuance under the
2015 Omnibus Incentive Plan.
The equity compensation plan that has not been approved by our shareholders is our 2018 Employee Inducement
Incentive Award Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Board Determination of Independence
Under applicable NASDAQ rules, a director will only qualify as an “independent director” if they are not an executive
officer or employee of the Company, and, in the opinion of our Board of Directors, that person does not have a relationship
which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Our Board has determined that all of our current directors are “independent directors” within the meaning of the
applicable listing standards of the NASDAQ, except for George H. Kirby III who is our President and Chief Executive Officer.
Certain Relationship and Related Person Transaction
Review and Approval of Related Person Transactions
The Audit Committee is charged with the responsibility of reviewing and approving all related person transactions (as
defined in SEC regulations), and periodically reassessing any related person transaction entered into by the Company to ensure
continued appropriateness. This responsibility is set forth in our Audit Committee charter. A related party transaction will only
be approved if the members of the Audit Committee determine that the transaction is in the best interests of the Company. If a
director is involved in the transaction, he or she will recuse himself or herself from all decisions regarding the transaction.
56
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees of Independent Registered Public Accounting Firm
The following table summarizes the fees of KPMG LLP, our independent registered public accounting firm, billed to
us for each of the last two fiscal years.
Fiscal Year 2018 Fiscal Year 2017
Audit Fees (1) ................................................................................ $
Audit- Related Fees .....................................................................
Tax Fees (2) ...................................................................................
All Other Fees (3) ..........................................................................
Total Fees .................................................................................... $
322,000 $
-
19,000
1,780
342,780 $
432,500
-
6,000
150,339
588,839
(1) Audit Fees consist of fees for the audit and quarterly reviews of our consolidated financial statements and other
professional services provided in connection with the statutory and regulatory filings or engagements. Fiscal year
2018 and 2017 audit fees include fees for comfort letters and consents of $72,500 and $182,500, respectively,
related to several equity offerings. Fiscal 2018 includes $4,500 for out of pocket fees.
(2) Tax Fees include fees for the tax return preparation assistance and review.
(3) All Other Fees for fiscal 2018 includes subscription fee for KPMG’s accounting research tool. Fiscal year 2017
include reimbursement of costs related to response to SEC inquiry.
Pre-Approval Policies and Procedures
The Audit Committee’s policy is that all audit services and all non-audit services to be provided to us by our
independent registered public accounting firm must be approved in advance by our Audit Committee. The Audit Committee’s
approval procedures include the review and approval of a description of the services that documents the fees for all audit
services and non-audit services, primarily tax advice and tax return preparation and review.
All audit services and all non-audit services in fiscal years 2018 and 2017 were pre-approved by the Audit Committee.
The Audit Committee has determined that the provision of the non-audit services for which these fees were rendered is
compatible with maintaining the independent auditor’s independence.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) (1) Financial Statements: See Index to Consolidated Financial Statements on page F-1.
(3) Exhibits: See Exhibit Index on pages 59 to 60.
ITEM 16. FORM 10-K SUMMARY
None.
57
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: July 17, 2018
OCEAN POWER TECHNOLOGIES, INC.
/s/ George H. Kirby III
By: George H. Kirby III
President and 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/ George H. Kirby III
George H. Kirby III
/s/ Matthew T. Shafer
Matthew T. Shafer
/s/ Terence J. Cryan
Terence J. Cryan
/s/ Dean J. Glover
Dean J. Glover
/s/ Steven M. Fludder
Steven M. Fludder
/s/ Robert K. Winters
Robert K. Winters
President and Chief Executive Officer
(Principal Executive Officer)
Director
Chief Financial Officer
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
DATE
July 17, 2018
July 17, 2018
Chairman of the Board
Director
July 17, 2018
Director
Director
Director
July 17, 2018
July 17, 2018
July 17, 2018
58
Exhibit
Number
3.1
3.2
3.3
3.4
4.1
4.2
10.1
10.2
10.3
10.4
10.5
Exhibits Index
Description
Restated Certificate of Incorporation of the registrant (incorporated by reference from Exhibit 3.1 to our
Quarterly Report on Form 10-Q filed September 14, 2007).
Certificate of Amendment of Certificate of Incorporation of Ocean Power Technologies, Inc. dated October 27,
2015 (incorporated by reference from Exhibit 3.1 to Current Report on Form 8-K filed on October 28, 2015).
Amended and Restated Bylaws of the registrant (incorporated by reference from Exhibit 3.2 to the Current Report
on Form 8-K filed June 23, 2016).
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of
the State of Delaware on October 21, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s Current
Report on Form 8-K filed on October 21, 2016).
Specimen certificate of Common Stock (incorporated by reference from Exhibit 4.1 to Form S-1/A filed March
19, 2007).
Form of Warrant to Purchase Common Stock (incorporated by reference from Exhibit 4.1 to Current Report on
Form 8-K/A filed on June 7, 2016).
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).
Amended and Restated 2006 Stock Incentive Plan (incorporated by reference from Exhibit A to Proxy Statement
filed August 28, 2013).*
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).
Form of Restricted Stock Agreement (incorporated by reference from Exhibit 10.1 to Form 10-Q filed March
14, 2011).*
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) (incorporated by reference from Exhibit 10.23 to Form 10-K filed July 12, 2013).
10.6
Employment Agreement, dated December 29, 2014, between George H. Kirby and Ocean Power Technologies,
10.7
10.8
10.9
Inc. (incorporated by reference from Exhibit 10.1 to Form 10-Q filed March 11, 2015).*
Placement Agency Agreement dated June 2, 2016, by and among Ocean Power Technologies, Inc., Roth Capital
Partners, LLC and Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC (incorporated by reference to
Exhibit 99.2 to Current Report on Form 8-K filed on June 2, 2016).
Form of Securities Purchase Agreement dated June 2, 2016 (incorporated by reference to Exhibit 99.3 to Current
Report on Form 8-K filed on June 2, 2016).
Form of Amendment No. 1 to Securities Purchase Agreement, dated June 7, 2016 (incorporated by reference to
Exhibit 99.4 to the Current Report on Form 8-K/A filed on June 7, 2016).
10.10
2015 Omnibus Incentive Plan* (incorporated by reference to Annex A to Proxy Statement filed on September 3,
2015).
10.11
Stipulation and Agreement of Class Settlement dated as of May 5, 2016 (incorporated by reference to Exhibit
10.1 to Current Report on Form 8-K filed on May 11, 2016).
10.12
Agreement by and between Ocean Power Technologies, Inc. and Mitsui Engineering & Shipbuilding Co., Ltd
dated May 31, 2016 (incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K/A filed on
June 6, 2016).
10.13
Form of Amendment No. 1 to the Securities Purchase Agreement, dated June 7, 2016 (incorporated by reference
to Exhibit 99.4 to the Current Report on Form 8-K filed on June 7, 2016).
10.14
Form of Amendment No. 2, dated as of July 21, 2016, to the Securities Purchase Agreement, dated as of June 2,
2016, by and among Ocean Power Technologies, Inc. and the investor’s signatory thereto, and (incorporated by
reference from Exhibit 99.2 to the Current Report on Form 8-K filed July 21, 2016).
10.15
Form of Placement Agency Agreement, dated July 22, 2016, between the Company and the Placement Agent
(incorporated by reference from Exhibit 1.1 to the Current Report on Form 8-K filed July 22, 2016).
10.16
Form of Subscription Agreement, dated July 22, 2016 between the Company and the Purchasers thereto
(incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed July 22, 2016).
10.17
Employment Letter between the Company and Matthew Shafer dated August 23, 2016, (incorporated by
reference from Exhibit 10.1 to the Current Report on Form 8-K filed August 29, 2016).
59
10.18
Letter Agreement between the Company and Mark A. Featherstone dated August 25, 2016, (incorporated by
reference from Exhibit 10.3 to the Current Report on Form 8-K filed August 29, 2016).
10.19
Employment Letter between the Company and Mike Mekhiche dated September 12, 2016, (incorporated by
reference from Exhibit 10.4 to the Current Report on Form 8-K filed August 29, 2016).
10.20
Letter Agreement between the Company and Mike Mekhiche dated June 19, 2014, (incorporated by reference
10.21
10.22
10.23
from Exhibit 10.5 to the Current Report on Form 8-K filed August 29, 2016).
Agreement by and between the Company and the U.S. Office of Naval Research dated September 13, 2016
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September
14, 2016).
Agreement by and between the Company and the U.S. Office of Naval Research dated September 13, 2016
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September
14, 2016).
Lease Agreement, dated March 31, 2017 between Ocean Power Technologies, Inc. and PPH Industrial 28
Engelhard, LLC (incorporated by reference from Exhibit 99.2 to the Current Report on Form 8-K filed April 6,
2017).
10.24
Ocean Power Technologies, Inc. Employment Inducement Incentive Award Plan (incorporated by reference to
Exhibit 10.1 to Form 8-K filed with the SEC on January 19, 2018).*
10.25
Form of Restricted Stock Agreement for Employment Inducement Incentive Award Plan (incorporated by
reference to Exhibit 10.2 to Form 8-K filed with the SEC on January 19, 2018).*
10.26
Contract between eni SpA and the Company dated March 14, 2018 (incorporated by reference to Exhibit 10.1 to
10.27
21.1
23.1
31.1
31.2
32.1
32.2
101
Form 8-K filed with the SEC on March 19, 2018). +
Contract between Premier Oil UK Limited and the Company dated June 27, 2018.+
Subsidiaries of the registrant
Consent of KPMG LLP
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002**
Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002**
The following financial information from Ocean Power Technologies, Inc.’s Annual Report on Form 10-K for
the annual period ended April 30, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i)
Consolidated Balance Sheets – as of April 30, 2018 and 2017, (ii) Consolidated Statements of Operations – for
the years ended April 30, 2018 and 2017, (iii) Consolidated Statements of Comprehensive Loss – for the years
ended April 30, 2018 and 2017, (iv) Consolidated Statements of Stockholders’ Equity – for the years ended April
30, 2018 and 2017 (v) Consolidated Statements of Cash Flows – for the years ended April 30, 2018 and 2017,
(vi) Notes to Consolidated Financial Statements.***
Indicates that confidential treatment has been requested for this exhibit.
+
* Management contract or compensatory plan or arrangement.
** As provided in Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed to be “filed” or 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.
*** 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.
60
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Reports of Management ..................................................................................................................................................... F-2
Reports of Independent Registered Public Accounting Firm............................................................................................. F-3
Consolidated Balance Sheets, April 30, 2018 and 2017 .................................................................................................... F-4
Consolidated Statements of Operations, Years ended April 30, 2018 and 2017 ............................................................... F-5
Consolidated Statements of Comprehensive Loss, Years ended April 30, 2018 and 2017 ............................................... F-6
Consolidated Statements of Stockholders’ Equity, Years ended April 30, 2018 and 2017 ............................................... F-7
Consolidated Statements of Cash Flows, Years ended April 30, 2018 and 2017 .............................................................. F-8
Notes to Consolidated Financial Statements ...................................................................................................................... F-9
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, 2018. 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 (2013). Based on this
assessment using those criteria, management concluded that the Company’s internal control over financial reporting was
effective as of April 30, 2018.
/s/ George H. Kirby III
George H. Kirby III
President and Chief Executive Officer
/s/ Matthew T. Shafer
Matthew T. Shafer
Chief Financial Officer and Treasurer
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors Ocean Power Technologies, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Ocean Power Technologies, Inc. and subsidiaries
(the Company) as of April 30, 2018 and 2017, 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, 2018, and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Ocean Power Technologies, Inc. and subsidiaries as of April 30, 2018 and 2017, and
the results of their operations and their cash flows for each of the years in the two-year period ended April 30, 2018, in
conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in note 1 (b) to the consolidated financial statements, as of April 30, 2018 the Company has cash
and cash equivalents of $11.5 million, and the Company has suffered recurring losses from operations and has an accumulated
deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to
these matters are described in note 1 (b). The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Basis for Opinion
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 are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2004.
Philadelphia, Pennsylvania
July 17, 2018
F-3
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
April 30, 2018
April 30, 2017
Current assets:
ASSETS
Cash and cash equivalents ......................................................................... $
Marketable securities .................................................................................
Restricted cash- short-term ........................................................................
Accounts receivable ...................................................................................
Unbilled receivables ..................................................................................
Litigation receivable ..................................................................................
Other current assets ....................................................................................
Total current assets ................................................................................
Property and equipment, net ..........................................................................
Restricted cash- long-term .............................................................................
Other noncurrent assets ..................................................................................
Total assets ............................................................................................. $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ....................................................................................... $
Accrued expenses ......................................................................................
Litigation payable ......................................................................................
Warrant liabilities ......................................................................................
Current portion of capital lease obligations ...............................................
Unearned revenue ......................................................................................
Deferred credits payable current ................................................................
Total current liabilities ...........................................................................
Long-term portion of capital lease obligations ..............................................
Deferred rent ..................................................................................................
Total liabilities .......................................................................................
Commitments and contingencies
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 50,000,000 shares,
issued 18,424,939 and 6,313,996 shares, respectively ...............................
Treasury stock, at cost; 74,012 and 48,065 shares, respectively ................
Additional paid-in capital ..........................................................................
Accumulated deficit ...................................................................................
Accumulated other comprehensive loss .....................................................
Total stockholders’ equity......................................................................
Total liabilities and stockholders’ equity ............................................... $
11,499 $
25
572
171
71
350
567
13,255
712
154
-
14,121 $
290 $
2,261
350
201
23
18
600
3,743
-
142
3,885
8,421
25
334
48
296
-
622
9,746
170
154
3
10,073
586
3,059
-
323
35
-
600
4,603
23
-
4,626
-
-
18
(300 )
208,216
(197,538 )
(160 )
10,236
14,121 $
6
(263 )
193,234
(187,370 )
(160 )
5,447
10,073
See accompanying notes to consolidated financial statements.
F-4
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
Twelve months ended April 30,
2018
2017
Revenues ................................................................................................................ $
Cost of revenues ....................................................................................................
Gross loss .......................................................................................................
511 $
763
(252 )
Operating expenses:
Product development costs ................................................................................
Selling, general and administrative costs ...........................................................
Total operating expenses ...............................................................................
Operating loss ........................................................................................................
Gain due to the change in fair value of warrant liabilities .....................................
Interest income, net ................................................................................................
Other income .........................................................................................................
Foreign exchange gain/(loss) .................................................................................
Loss before income taxes .......................................................................................
Income tax benefit .............................................................................................
Net loss .................................................................................................................. $
Basic and diluted net loss per share ....................................................................... $
Weighted average shares used to compute
basic and diluted net loss per share ....................................................................
4,320
6,988
11,308
(11,560 )
122
83
4
75
(11,276 )
1,119
(10,157 ) $
(0.66 ) $
843
938
(95 )
5,029
6,563
11,592
(11,687 )
1,491
28
-
(16 )
(10,184 )
698
(9,486 )
(2.23 )
15,346,602
4,259,172
See accompanying notes to consolidated financial statements.
F-5
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(in thousands)
Twelve months ended April 30,
2018
2017
Net loss .......................................................................................................... $
Foreign currency translation adjustment ........................................................
Total comprehensive loss ............................................................................... $
(10,157 ) $
-
(10,157 ) $
(9,486 )
(38 )
(9,524 )
See accompanying notes to consolidated financial statements.
F-6
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
Additional
Accumulated
Other
Total
Treasury Shares Paid-In Accumulated Comprehensive Stockholders’
Amount Shares Amount Capital Deficit
Loss
Equity
Common Shares
Shares
Balances, April 30,
2016 ....................... 2,352,100 $
Net loss ..................
Stock based
compensation .........
Issuance of
restricted stock, net 189,896
Sale of stock ........... 3,772,000
Acquisition of
treasury stock .........
Other
comprehensive loss
Balances, April 30,
2017 ....................... 6,313,996 $
Net loss ..................
Stock based
compensation .........
Issuance of
restricted stock, net 178,756
Sale of stock, net of
financing costs ....... 11,932,187
Acquisition of
treasury stock .........
Adoption of
accounting standard
update related to
stock compensation
accounting (ASU
2016-09) .................
Other
comprehensive loss
Balances, April 30,
2018 ....................... 18,424,939 $
2 (6,894 ) $
(138 ) $ 181,670 $
(177,884 ) $
(9,486 )
(122 ) $
278
954
10,332
-
4
(41,171 )
(125 )
6 (48,065 ) $
(263 ) $ 193,234 $
(187,370 ) $
(10,157 )
(38 )
(160 ) $
329
-
14,642
-
12
(25,947 )
(37 )
3,528
(9,486 )
278
954
10,336
(125 )
(38 )
5,447
(10,157 )
329
-
14,654
(37 )
11
(11 )
-
-
-
18 (74,012 ) $
(300 ) $ 208,216 $
(197,538 ) $
(160 ) $
10,236
See accompanying notes to consolidated financial statements
F-7
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Twelve months ended April 30,
2018
2017
Cash flows from operating activities:
Net loss .............................................................................................................. $
Adjustments to reconcile net loss to net cash used in operating activities:
(10,157 ) $
(9,486 )
Foreign exchange (gain)/loss ........................................................................
Depreciation ..................................................................................................
Loss on disposal of property, plant and equipment .......................................
Compensation expense related to stock option grants and restricted
stock ..............................................................................................................
Change in fair value of warrant liabilities .....................................................
Payment for litigation settlement ..................................................................
Changes in operating assets and liabilities:
Accounts receivable ...................................................................................
Unbilled receivable ...................................................................................
Other receivable ........................................................................................
Other assets ...............................................................................................
Accounts payable .......................................................................................
Accrued expenses ......................................................................................
Deferred rent .............................................................................................
Unearned revenues ....................................................................................
Net cash used in operating activities .....................................................
Cash flows from investing activities:
Purchases of marketable securities ...................................................................
Maturities of marketable securities ....................................................................
Leasehold improvements and purchase of equipment ......................................
Net cash (used in) provided by investing activities ...............................
Cash flows from financing activities:
Proceeds from issuance of common stock and related warrants, net of costs ....
Payment of capital lease obligations .................................................................
Payment of debt ................................................................................................
Acquisition of treasury stock ............................................................................
Net cash provided by financing activities .............................................
Effect of exchange rate changes on cash, cash equivalents and restricted cash .....
Net increase in cash, cash equivalents and restricted cash .....................
Cash, cash equivalents and restricted cash, beginning of period ...........................
Cash, cash equivalents and restricted cash, end of period ..................................... $
(75 )
122
5
329
(122 )
-
(123 )
225
(166 )
360
(296 )
(821 )
5
18
(10,696 )
(25 )
25
(658 )
(658 )
14,654
(35 )
-
(37 )
14,582
88
3,316
8,909
12,225 $
Supplemental schedule of cash flows information:
Cash paid for interest ......................................................................................... $
3 $
Supplemental disclosure of noncash investing activities:
Acquisition of equipment pursuant to capital leases ......................................... $
Acquisition of leasehold improvements and equipment through accrued
expenses ............................................................................................................
- $
11
See accompanying notes to the consolidated financial statements
16
140
-
1,232
(1,491 )
(500 )
(48 )
(258 )
-
(212 )
213
395
-
(39 )
(10,038 )
-
50
(37 )
13
12,150
(28 )
(50 )
(125 )
11,947
(43 )
1,879
7,030
8,909
6
4
-
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 founded in 1984 in New Jersey, commenced business
operations in 1994 and re-incorporated in Delaware in 2007. The Company is developing and commercializing its proprietary
systems that generate electricity by harnessing the renewable energy of ocean waves. The Company uses proprietary
technologies that convert the mechanical energy created by the heaving motion of ocean waves into electricity. The Company
has designed and continues to develop the PowerBuoy™ product line which is based on modular, ocean-going buoys, which
the Company has been periodically ocean testing since 1997. The Company markets its PowerBuoys™ in the United States
and internationally. Since fiscal 2002, 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 or lease 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/Going Concern
Our consolidated financial statements have been prepared assuming the Company will continue as a going concern.
The Company has experienced substantial and recurring losses from operations, which have contributed to an accumulated
deficit of $197.5 million at April 30, 2018. At April 30, 2018, the Company had approximately $11.5 million in cash on hand.
The Company generated revenues of only $0.5 million and $0.8 million during the years ended April 30, 2018 and 2017,
respectively. Based on the Company’s cash and cash equivalents and marketable securities balances as of April 30, 2018, the
Company believes that it will be able to finance its capital requirements and operations into the quarter ending April 30, 2019,
including $0.6 million of payments due by August 30, 2018 as a return of an option due to ineligibility for certain emission
credits. The Company will require additional equity and/or debt financing to continue its operations. The Company cannot
provide assurances that it will be able to secure additional funding when needed or at all, or, if secured, that such funding would
be on favorable terms. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded assets amounts or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
Management is evaluating different strategies to obtain the required additional funding for future operations. These
strategies may include, but are not limited to, additional funding from current or new investors, officers and directors;
borrowings of debt; a public offering of the Company’s equity or debt securities; partnerships and/or collaborations. There can
be no assurance that any of these future-funding efforts will be successful.
In fiscal 2018 and 2017, 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 lack of available financing and insufficient capital, performance of PowerBuoys™, its inability
to market and commercialize its PowerBuoys™, technology development, scalability of technology and production,
dependence on skills of key personnel, concentration of customers and suppliers, deployment risks and laws, regulations and
permitting In order to continue to implement its business strategy, the Company requires additional equity and/or debt
financing. The Company closed five equity financing arrangements during the two year period ended April 30, 2018. The
Company does not currently have any committed sources of debt or equity financing, and the Company cannot assure that
additional equity and/or debt financing will be available to the Company as needed on acceptable terms, or at all. Historically,
the Company has raised capital through securities sales in the public capital markets. If sufficient additional financing is not
obtained when needed, the Company may be required to further curtail or limit operations, product development costs, and/or
selling, general and administrative activities in order to reduce its cash expenditures. This could cause the Company to be
unable to execute its business plan, take advantage of future opportunities and may cause it to scale back, delay or eliminate
some or all of its product development activities and/or reduce the scope of or cease its operations.
F-9
On June 2, 2016, the Company entered into a securities purchase agreement, which was amended on June 7, 2016 (as
amended, the “Purchase Agreement”) with certain institutional purchasers (the “June Purchasers”). Pursuant to the terms of the
Purchase Agreement, the Company sold an aggregate of 417,000 shares of Common Stock together with warrants to purchase
up to an aggregate of 145,952 shares of Common Stock. Each share of Common Stock was sold together with a warrant to
purchase 0.35 of a share of Common Stock at a combined purchase price of $4.60. The net proceeds to the Company from the
offering were approximately $1.7 million, after deducting placement agent fees and estimated offering expenses payable by
the Company, but excluding the proceeds, if any, from the exercise of the warrants issued in the offering. The warrants have
an exercise price of $6.08 per share, became exercisable on December 3, 2016 (“Initial Exercise Date”), and will expire five
years following the Initial Exercise Date. The Company paid the placement agents approximately $0.1 million as placement
agent fees in connection with the sale of securities in the offering. The Company also reimbursed the placement agents $35
thousand for their out of pocket and legal expenses in connection with the offering.
On July 22, 2016, the Company entered into the Second Amendment to the Purchase Agreement (the “Second
Amended Purchase Agreement”) with certain purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended
Purchase Agreement, the Company sold an aggregate of 595,000 shares of Common Stock together with warrants to purchase
up to an aggregate of 178,500 shares of Common Stock. Each share of Common Stock was sold together with a warrant to
purchase 0.30 of a share of Common Stock at a combined purchase price of $6.75. The net proceeds to the Company from the
offering were approximately $3.6 million, after deducting placement agent fees and estimated offering expenses payable by
the Company, but excluding the proceeds, if any, from the exercise of the warrants issued in the offering. The Warrants were
exercisable immediately at an exercise price of $9.36 per share. The Warrants will expire on the fifth (5th) anniversary of the
initial date of issuance.
On October 19, 2016, the Company sold 2,760,000 shares of common stock at a price of $2.75 per share, which
includes the sale of 360,000 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of
the over-allotment option by the underwriters in a public offering. The net proceeds to the Company from the offering were
approximately $6.9 million, after deducting underwriter fees and offering expenses payable by the Company.
On May 2, 2017, the Company sold 6,192,750 shares of common stock at a price of $1.30 per share, which includes
the sale of 807,750 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-
allotment option by the underwriters in a public offering. The net proceeds to the Company from the offering were
approximately $7.2 million, after deducting underwriter fees and offering expenses payable by the Company.
On October 23, 2017, the Company sold 5,739,437 shares of common stock at a price of $1.42 per share in a best
efforts public offering. The net proceeds to the Company from the offering were approximately $7.4 million, after deducting
placement fees and offering expenses payable by the Company.
The sale of additional equity or convertible securities could result in dilution to stockholders. If additional funds are
raised through the issuance of debt securities, these securities could have rights senior to those associated with the Company’s
Common Stock and could contain covenants that would restrict its operations. Financing may not be available in amounts or
on terms acceptable to the Company, or at all. If the Company is unable to obtain required financing, it may be required to
reduce the scope of its operations, including its planned product development and marketing efforts, which could materially
and adversely harm its financial condition and operating results. If the Company is unable to secure additional financing, it
may be forced to cease operations.
(2) Summary of Significant Accounting Policies
(a) Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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 non-controlling 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
The Company also periodically 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, 2018,
there were no such entities.
F-10
(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 fair value of warrant liabilities; estimated costs to
complete projects and percentage of completion of customer contracts for purposes of revenue recognition. Actual results could
differ from those estimates. The current economic environment, particularly the macroeconomic pressures in certain European
countries, 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 and may include a lease component. Under cost
plus contracts, customers are billed for actual expenses incurred plus an agreed-upon fee. Under cost plus contracts, a profit or
loss on a project is recognized depending on whether actual costs are more or less than the agreed upon amount.
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, a profit
or loss is recognized depending on whether actual costs are more or less than the agreed upon amount. Under cost-sharing
contracts, the fixed amount agreed upon with the customer is only intended to fund a portion of the costs on a specific project.
Under cost sharing contracts, an amount corresponding to the revenue is recorded in cost of revenues, resulting in gross profit
on these contracts of zero. The Company’s share of the costs is recorded as product development expense.
Generally, revenue under fixed price or cost plus contracts is recognized using the cost to cost percentage-of-
completion method, measured by 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. If an arrangement involves multiple deliverables, the delivered items are
considered separate units of accounting if the items have value on a stand-alone basis. Amounts allocated to each element are
based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately or
competitor prices for similar products or services.
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. These contracts
are subject to interpretation and management may make a judgment as to the amount of revenue earned and recorded. Because
the Company has a small number of contracts, revisions to the percentage-of-completion determination, management
interpretation or delays in meeting performance and contractual 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.
The Company classifies leases as either operating or capital lease arrangements in accordance with the authoritative
accounting guidance contained within Accounting Standards Codification (“ASC”) Topic 840, “Leases”. At inception of the
contract, the Company evaluates the lease against the four lease classification criteria within ASC Topic 840. In general, if one
of the four criteria is met, then the lease is accounted for as a capital lease. All others are treated as an operating lease. For
operating leases, lessee payments are recorded to revenue on a straight-line basis over the term of the lease.
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.
(d) Cash and Cash Equivalents, Restricted Cash and Security Agreements
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be
cash equivalents. The Company invests excess cash in a money market account. The following table summarizes cash and cash
equivalents for the years ended April 30, 2018 and 2017:
F-11
April 30, 2018 April 30, 2017
(in thousands)
Checking and savings accounts ................................................... $
Overnight repurchase account .....................................................
Money market account.................................................................
$
1,332 $
-
10,167
11,499 $
4,241
4,180
-
8,421
Restricted Cash and Security Agreements
A portion of the Company’s cash is restricted under the terms of three security agreements.
One agreement is between the Company and Barclays Bank. Under this agreement, the cash is on deposit at Barclays
Bank and serves as security for letters of credit and bank guarantees that are expected to be issued by Barclays Bank on behalf
of OPT LTD, one of the Company’s subsidiaries, under a credit facility established by Barclays Bank for OPT LTD. The credit
facility is approximately €0.3 million ($0.4 million) and carries a fee of 1% per annum of the amount of any such obligations
issued by Barclays Bank. The credit facility does not have an expiration date but is cancelable at the discretion of the bank. As
of April 30, 2018, there was €0.3 million ($0.4 million) in letters of credit outstanding under this agreement.
The other two agreements are between the Company and Santander Bank. Under the first agreement, the cash is on
deposit at Santander Bank and serves as security for letter of credit issued by Santander Bank for the lease of new
warehouse/office space in Monroe Township, New Jersey. The agreement cannot be extended beyond January 31, 2025, and
is cancelable at the discretion of the bank. Under the second the cash is on deposit at Santander Bank and serves as security for
a performance bond issued by Santander Bank as a requirement of the Eni contract. The following table summarizes restricted
cash for the years ended April 30, 2018 and 2017:
April 30, 2018 April 30, 2017
(in thousands)
Barclay’s Bank Agreement .................................................... $
Santander Bank ......................................................................
$
372 $
354
726 $
334
154
488
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the
statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows for the years
ended April 30, 2018 and 2017:
April 30, 2018 April 30, 2017
(in thousands)
Cash and cash equivalents ..................................................... $
Restricted cash- short term ....................................................
Restricted cash- long term .....................................................
$
11,499 $
572
154
12,225 $
8,421
334
154
8,909
(e) Marketable Securities
Marketable securities with original maturities longer than three months but that mature in less than one year from the
balance sheet date are classified as current assets. Marketable securities that 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, 2018 and, 2017, all of the Company’s
investments were classified as held-to-maturity.
F-12
(f) Property and Equipment
Property and equipment consists primarily of equipment, furnishings, fixtures, computer equipment and leasehold
improvements and are recorded at cost. Depreciation and amortization is calculated using the straight-line method over the
estimated useful lives of the assets. Expenses for maintenance and repairs are charged to operations as incurred. Property and
equipment is also 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 in the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Description
Estimated useful life
Equipment
Computer equipment & software
Office furniture & fixtures
Equipment under capitalized lease
Leasehold improvements
(g) Foreign Exchange Gains and Losses
5 - 7 years
3 years
3 - 7 years
Over the life of the lease
Shorter of the estimated useful life or lease term
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 are included in “foreign exchange gain (loss)” in the
accompanying consolidated statements of operations.
(h) Patents
External costs related to the filing of patents, including legal and filing fees, are capitalized if expenses related to the
filing of a patent are significant. The Company continually re-assesses the remaining useful lives of its long-lived assets and
costs are expensed when it is no longer probable that such technology will be utilized. Patents are also reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of the patent may not be recoverable. Two new
patents were granted in fiscal year 2018 and no new patents were granted in fiscal year 2017. There was no amortization of
patents recorded during the years ended April 30, 2018 and 2017, as the patents are fully amortized.
(i) 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:
Eni S.p.A. ....................................................................................
Mitsui Engineering & Shipbuilding ............................................
Premier Oil UK Limited .............................................................
U.S. Department of Defense Office of Naval Research ..............
Twelve months ended April 30,
2018
2017
33 %
43 %
10 %
14 %
100 %
0 %
80 %
0 %
20 %
100 %
The loss of, or a significant reduction in revenues from a current customer could significantly impact the Company’s
financial position or results of operations. The Company does not require its customers to maintain collateral.
F-13
(j) Warrant Liabilities
The Company’s warrants to purchase shares of its common stock are classified as warrant liabilities and are recorded
at fair value. The warrant liabilities are subject to re-measurement at each balance sheet date and the Company recognizes any
change in fair value in its consolidated statements of operations within “(Gain due to the change in fair value of warrant
liabilities”. The Company will continue to adjust the carrying value of the warrants for changes in the estimated fair value until
such time as these instruments are exercised or expire. At that time, the liabilities will be reclassified to “Additional paid-in
capital”, a component of “stockholders’ equity” on the consolidated balance sheets.
(k) Net Loss per Common Share
Basic and diluted net loss per share for all periods presented is computed by dividing net loss by the weighted average
number of shares of Common Stock outstanding during the period. Due to the Company’s net losses, potentially dilutive
securities, consisting of outstanding stock options 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, warrants on common stock and
non-vested restricted stock issued to employees and non-employee directors, totaling 910,045 and 657,078 for the years ended
April 30, 2018 and 2017, respectively, were excluded from each of the computations as the effect would be anti-dilutive due
to the Company’s losses.
(l) Share-Based Compensation
Costs resulting from all share-based payment transactions are recognized in the consolidated financial statements at
their fair values. The aggregate share-based compensation expense recorded in the consolidated statements of operations for
the years ended April 30, 2018 and 2017 was approximately $0.3 million and $1.2 million, respectively. The following table
summarizes share-based compensation related to the Company’s share-based plans by expense category for the years ended
April 30, 2018 and 2017:
Twelve months ended April 30,
2018
2017
(in thousands)
Product development ............................................................. $
Selling, general and administrative .......................................
Total share-based compensation expense .............................. $
24 $
305
329 $
525
707
1,232
Valuation Assumptions for Restricted Stock and Options Granted During the Years Ended April 30, 2018 and 2017
Options
The fair value of each stock option granted, for both service-based and performance-based vesting requirements during
the year ended April 30 2018, 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 below table. The risk-free rate is based on the
U.S. 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 SEC’s Staff Accounting Bulletin No. 110,
Share-Based Payment. Expected volatility was based on the Company’s historical volatility during the twelve months ended
April 30, 2018.
Twelve months ended April 30,
2018
2017
Risk-free interest rate ............................................................
Expected dividend yield........................................................
Expected life (in years) .........................................................
Expected volatility ................................................................
2.1 %
0.0 %
5.5
128.2 %
1.3 %
0.0 %
5.5
96.2 %
F-14
The above assumptions were used to determine the weighted average per share fair value of $1.17 and 2.52 for stock
options granted during the years ended April 30, 2018 and 2017, respectively.
Restricted Stock
Compensation expense for non-vested restricted stock is recorded based on its market value on the date of grant and
recognized ratably over the associated service and performance period. If the vesting requirement of performance-based grants
is tied to the Company’s total shareholder return (TSR) relative to the total shareholder return of alternative energy Exchange
Traded Funds as measured over a specific performance period then the compensation expense for these awards with market-
based vesting is calculated based on the estimated fair value as of the grant date utilizing a Monte Carlo simulation model and
is recognized over the service period on a straight-line basis.
(m) Deferred Rent
On March 31, 2017, the Company signed a new 7-year lease for approximately 56,000 square feet in Monroe
Township, New Jersey that will be used as warehouse/production space and the Company’s principal offices and corporate
headquarters. The lease was classified as an operating lease. Rent payments relating to the Monroe premises are subject to
annual increases. The minimum monthly payments will vary over the 7-year term of the lease. The Company will record rent
expense on a straight-line basis over the 7-year term of the lease. The difference between rent expense and the monthly lease
payment will go to a deferred rent/prepaid rent account. The Landlord has provided the Company a tenant improvement
allowance in an amount up to, but not exceeding, $137,563 to be applied to the cost of tenant improvement work. The Company
collected the full amount of the tenant improvement allowance in May 2018. The Company recorded lease incentive liability
to deferred rent. The Company will release the lease incentive liability on a straight-line basis over the 7-year term to rent
expense.
(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 carry forwards. 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 carry forwards 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 U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at
the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The unrealized
gains or losses resulting from such translation are included in accumulated other comprehensive loss within stockholders’
equity.
F-15
(p) Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 outlines a new, single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis
in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange
for those goods or services. The FASB subsequently issued additional clarifying standards to address issues arising from
implementation of the new revenue standard, including a one-year deferral of the effective date for the new revenue standard.
Public companies should now apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15,
2017 and interim periods within those annual periods. Earlier application is permitted only as of annual reporting periods
beginning after December 15, 2016, including interim periods within that annual period. As such, the Company is required to
adopt this standard effective in fiscal 2019, which begins May 1, 2018. The Company will use the modified retrospective
approach to adopt ASU 2014-09. The Company is completing its final review and therefore has not determined the final impact
on its consolidated financial statements and disclosures. However, the preliminary view is that the impact will not be material
to the consolidated financial statements and disclosures. The impact to the Company could be affected by the nature and terms
of potential future contracts with customers, as those contracts may have terms that differ from the company’s current contracts.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern”, which describes how an entity should assess its ability to meet obligations and sets rules for how this
information should be disclosed in the financial statements. The standard provides accounting guidance that will be used along
with existing auditing standards. The new standard applies to all entities for the first annual period ending after December 15,
2016, and interim periods thereafter. Early application is permitted. The Company adopted ASU 2014-15 for the fiscal year
2017. The Company’s addition of the standard did not have a material impact on its disclosures. See section (b)
“Liquidity/Going Concern” within Note (1) “Background and Liquidity” of these financial statements for further discussion on
the Company’s ability to continue as a going concern.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard establishes a right-
of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with
terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is
evaluating the effect ASU 2016-02 will have on its consolidated financial statements and disclosures and has not yet determined
the effect of the standard on its ongoing financial reporting at this time.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718).” The
amendments of ASU No. 2016-09 were issued as part of the FASB’s Simplification initiative focused on improving areas of
GAAP for which cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed
within the financial statements. The amendments focused on simplification specifically with regard to share-based payment
transactions, including income tax consequences, classification of awards as equity or liabilities and classification on the
statement of cash flows. The guidance in ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016,
and interim periods within those annual periods. The Company adopted ASU 2016-09 on May 1, 2017. Certain of the
amendments are applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity
as of May 1, 2017, while other amendments are applied retrospectively, prospectively or using either a prospective or a
retrospective transition method. Upon adoption, the Company is beginning to account for forfeitures as they occur rather than
estimate a forfeiture rate and has recorded a cumulative-effect adjustment in equity of approximately $11,000 on the date of
initial adoption. In periods subsequent to adoption, a higher expense will be recognized earlier during the respective vesting
periods of stock-based awards that are not forfeited. As a result of the valuation allowance against our deferred tax assets, there
was no net adjustment to retained earnings for the change in accounting for unrecognized windfall tax benefits.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments”, providing additional guidance on eight specific cash flow classification issues. The goal
of the ASU is to reduce diversity in practice of classifying certain items. The amendments in the ASU are effective for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The
Company is evaluating the effect ASU 2016-13 will have on its consolidated financial statements and disclosures and has
determined the standard will have no impact on its ongoing financial reporting at this time.
F-16
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which
amends guidance and presentation related to restricted cash in the statement of cash flows, including stating that amounts
generally described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. An entity is required
to provide a disclosure indicating the reconciliation of all cash accounts. The amendments in the ASU are effective for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The
Company has early adopted ASU 2016-18 effective May 1, 2017. In connection with the adoption of the standard the Company
has used a retrospective transition method for each period presented in the statement of cash flows. The Company reclassified
$300,000 of restricted cash to cash, cash equivalents and restricted cash, beginning of period for the period April 30, 2017 and
$488,000 of restricted cash to cash, cash equivalents and restricted cash, ending of period for the period April 30, 2017 in the
statement of cash flows.
(3) Marketable Securities
Marketable securities with initial maturities greater than three months but that mature within one year from the balance
sheet date are classified as current assets. For the period ended April 30, 2018 and April 30, 2017 the Company had $25,000
in certificates of deposit.
(4) Property and Equipment
The components of property and equipment as of April 30, 2018 and 2017 consisted of the following:
April 30, 2018 April 30, 2017
(in thousands)
Equipment .............................................................................. $
Computer Equipment & Software .........................................
Office Furniture & Equipment ...............................................
Leasehold improvements .......................................................
Equipment under capitalized lease .........................................
$
Less: accumulated depreciation .............................................
$
394 $
614
338
473
103
1,922 $
(1,210 )
712 $
715
556
250
182
103
1,806
(1,636 )
170
Depreciation expense was $0.1 million and $0.1 million for the years ended April 30, 2018 and 2017, respectively.
As of April 30, 2018 and 2017, computer equipment and software under capital leases was $103 thousand and $103
thousand, respectively. The terms of the leases are for 36 months. Future minimum lease payments under capital leases together
with the present value of the net minimum lease payments as of April 30, 2018 are as follows:
April 30, 2018
(in thousands)
Remaining payments in Fiscal 2019 .............................................. $
Total net future minimum lease payments ..................................... $
Less: Amount representing interest ...............................................
Present value of net minimum lease payments .............................. $
23
23
-
23
F-17
(5) Accrued Expenses
Accrued expenses consist of the following at April 30, 2018 and April 30, 2017.
April 30, 2018 April 30, 2017
(in thousands)
Project costs ................................................................................. $
Contract loss reserve ....................................................................
Employee incentive payments .....................................................
Accrued salary and benefits .........................................................
Legal and accounting fees ............................................................
Accrued taxes payable .................................................................
Other ............................................................................................
$
57 $
395
761
442
246
179
181
2,261 $
898
238
643
484
478
132
186
3,059
(6) Deferred Credits Payable
During the year ended April 30, 2001, in connection with the sale of Common Stock to an investor, the Company
received $0.6 million 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 $0.6 million, 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, 2018, the Company has not generated
any emissions credits eligible for purchase under the agreement. The $0.6 million is reflected on the balance sheet within
“Deferred credits payable current” as of April 30, 2018 and 2017. The Company is currently in process of making payments to
return the $0.6 million option fee and expects to complete the payments by August 30, 2018.
(7) Warrants
On June 2, 2016, the Company entered into a securities purchase agreement, which was amended on June 7, 2016 (as
amended, the “June Purchase Agreement”) with certain institutional purchasers (the “June Purchasers”). Pursuant to the terms
of the June Purchase Agreement, the Company sold an aggregate of 417,000 shares of Common Stock together with warrants
to purchase up to an aggregate of 145,952 shares of Common Stock. Each share of Common Stock was sold together with a
warrant to purchase 0.35 of a share of Common Stock at a combined purchase price of $4.60. The warrants have an exercise
price of $6.08 per share, became exercisable on December 3, 2016 (“Initial Exercise Date”), and will expire five years following
the Initial Exercise Date.
On July 22, 2016, the Company entered into a Second Amendment to the Purchase Agreement (the “Second Amended
Purchase Agreement”) with certain institutional purchasers (the “July Purchasers”). Pursuant to the terms of the Second
Amended Purchase Agreement, the Company sold an aggregate of 595,000 shares of Common Stock together with warrants to
purchase up to an aggregate of 178,500 shares of Common Stock. Each share of Common Stock was sold together with a
warrant to purchase 0.30 of a share of Common Stock at a combined purchase price of $6.75. The Warrants were exercisable
immediately at an exercise price of $9.36 per share. The Warrants will expire on the fifth (5th) anniversary of the initial date
of issuance.
The warrants contain a feature whereby they could require the transfer of assets and therefore are classified as a
liability in accordance with ASC 480. As such, the warrants with a value of $0.2 million at April 30, 2018 and $0.3 million at
April 30, 2017 are reflected within “Warrant liabilities” in the consolidated balance sheets.
An unrealized gain of $0.1 million and $1.5 million, were included within “Gain due to change in fair value of warrant
liabilities” in the consolidated statements of operations for the year ended April 30, 2018 and 2017, respectively. The Company
determined the fair value using the Black-Scholes option pricing model with the following assumptions for the period ended
April 30, 2018 and April 30, 2017:
F-18
April 30, 2018 April 30, 2017
Dividend rate ...............................................................................
Risk-free rate ............................................................................... 2.7% - 2.8%
Expected life (years) ....................................................................
0.0%
3.2 - 3.6
132.9% -
142.7%
0.0%
1.8%
4.2 - 4.6
131.7% -
141.3%
Expected volatility .......................................................................
(8) 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, 2018, and 2017, no shares of preferred stock had been issued.
(9) Common Stock
As of April 30, 2018, the Company has 50,000,000 shares authorized with a par value of $0.001 per share and
18,424,939 shares issued.
On June 2, 2016, the Company entered into a securities purchase agreement, which was amended on June 7, 2016 (as
amended, the “Purchase Agreement”) with certain institutional purchasers (the “June Purchasers”). Pursuant to the terms of the
Purchase Agreement, the Company sold an aggregate of 417,000 shares of Common Stock together with warrants to purchase
up to an aggregate of 145,952 shares of Common Stock. Each share of Common Stock was sold together with a warrant to
purchase 0.35 of a share of Common Stock at a combined purchase price of $4.60. The net proceeds to the Company from the
offering were approximately $1.7 million, after deducting placement agent fees and estimated offering expenses payable by
the Company, but excluding the proceeds, if any, from the exercise of the warrants issued in the offering. The warrants have
an exercise price of $6.08 per share, became exercisable on December 3, 2016 (“Initial Exercise Date”), and will expire five
years following the Initial Exercise Date. The Company paid the placement agents approximately $0.1 million as placement
agent fees in connection with the sale of securities in the offering. The Company also reimbursed the placement agents $35
thousand for their out of pocket and legal expenses in connection with the offering.
On July 22, 2016, the Company entered into the Second Amendment to the Purchase Agreement (the “Second
Amended Purchase Agreement”) with certain purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended
Purchase Agreement, the Company sold an aggregate of 595,000 shares of Common Stock together with warrants to purchase
up to an aggregate of 178,500 shares of Common Stock. Each share of Common Stock was sold together with a warrant to
purchase 0.30 of a share of Common Stock at a combined purchase price of $6.75. The net proceeds to the Company from the
offering were approximately $3.6 million, after deducting placement agent fees and estimated offering expenses payable by
the Company, but excluding the proceeds, if any, from the exercise of the warrants issued in the offering. The Warrants were
exercisable immediately at an exercise price of $9.36 per share. The Warrants will expire on the fifth (5th) anniversary of the
initial date of issuance.
On October 19, 2016, the Company sold 2,760,000 shares of common stock at a price of $2.75 per share, which
includes the sale of 360,000 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of
the over-allotment option by the underwriters in a public offering. The net proceeds to the Company from the offering were
approximately $6.9 million, after deducting underwriter fees and offering expenses payable by the Company.
On May 2, 2017, the Company sold 6,192,750 shares of common stock at a price of $1.30 per share, which includes
the sale of 807,750 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-
allotment option by the underwriters in a public offering. The net proceeds to the Company from the offering were
approximately $7.2 million, after deducting underwriter fees and offering expenses payable by the Company.
On October 23, 2017, the Company sold 5,739,437 shares of common stock at a price of $1.42 per share in a best
efforts public offering. The net proceeds to the Company from the offering were approximately $7.4 million, after deducting
placement fees and offering expenses payable by the Company.
(10) Treasury Shares
During the years ended April 30, 2018 and 2017, 25,947 and 41,171 shares of Common Stock, respectively, were
purchased by the Company from employees to pay taxes related to the vesting of restricted stock.
F-19
(11) Share-Based Compensation Plans
2006 Stock Incentive Plan
In 2007, the Company’s 2006 Stock Incentive Plan became effective. A total of 80,321 shares were authorized for
issuance under the 2006 Stock Incentive Plan. In 2009, an amendment to the 2006 Stock Incentive Plan was approved by the
Company’s stockholders, increasing the aggregate number of shares authorized for issuance by 85,000 shares to 165,321. On
October 2, 2013, a further amendment to the 2006 Stock Incentive Plan was approved by the Company’s stockholders,
increasing the aggregate number of shares authorized for issuance by an additional 80,000 shares to 245,321. The Company’s
employees, officers, directors, consultants and advisors were 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 was 20,000 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 was administered by the Company’s board of directors, who were authorized to
delegate authority to one or more committees or subcommittees of the board of directors or to the Company’s officers. The
2006 Stock Incentive Plan was terminated in December 2015 and unused shares in that Plan were transferred to the 2015
Omnibus Incentive Plan.
2015 Omnibus Incentive Plan
In 2015, upon approval by the Company’s stockholders, the Company’s 2015 Omnibus Incentive Plan (the “2015
Plan”) became effective. A total of 240,703 shares were authorized for issuance under the 2015 Omnibus Incentive Plan,
including shares available for awards under the 2006 Stock Incentive Plan remaining at the time that plan terminated, or that
were subject to awards under the 2006 Stock Incentive Plan that thereafter terminated by reason of expiration, forfeiture,
cancellation or otherwise. On October 21, 2016 upon approval by the Company’s stockholders the Company increased the
number of shares authorized for issuance to 640,703. If any award under the 2006 Stock Incentive Plan or 2015 Plan expires,
is cancelled, terminates unexercised or is forfeited, those shares become again available for grant under the 2015 Plan. As of
April 30, 2018, the Company has 89,531 shares available for future issuance under the 2015 plan.
The 2015 Plan provides for the grant of stock options, SARs, restricted stock awards, stock unit awards and
unrestricted stock awards, dividend equivalent rights, performance share awards or other performance-based awards, other
equity-based awards or cash to eligible employees, officers and non-employee directors of the Company or any affiliate of the
Company, or any consultant or adviser to the Company. The maximum number of shares of stock subject to Awards that can
be granted under the 2015 Plan in any one calendar year to any person, other than a non-employee director, is 75,000. However,
incentive stock options may only be granted to employees. The limitation on the amount of shares of stock issuable under the
2015 Plan is subject to adjustment in the event of certain changes in the Company’s capital stock, such as recapitalizations,
reclassifications, stock splits, reverse stock splits, spin-offs, combinations of our stock, exchanges of the Company’s stock and
other increases or decreases in the Company’s stock without receipt of consideration.
The 2015 Plan will terminate ten years after its effective date, in October 2025, but is subject to earlier termination as
provided in the 2015 Plan.
A dividend equivalent right is an award entitling the recipient to receive credits based on cash distributions that would
have been paid to the recipient on the shares of Common Stock specified in the dividend equivalent right if such shares had
been issued to and held by the recipient of the dividend equivalent right as of the record date. A dividend equivalent right may
be granted to any grantee under the 2015 Plan, but may not be granted in connection with or related to an award of options or
SARs under the 2015 Plan. The terms and conditions of any dividend equivalent right shall be as set forth in the award
agreement relating to such right. Unless the committee administering the 2015 Plan otherwise provides in an award agreement,
a grantee’s rights in all dividend equivalent rights will automatically terminate upon the grantee’s termination of service with
the Company.
Performance-based awards may be granted by the committee administering the 2015 Plan in such amounts and upon
such terms as the committee administering the 2015 Plan determines. Generally, performance-based awards will have an actual
or target number of shares of Common Stock or initial value that is set by the committee at the time of grant. The committee
administering the 2015 Plan has the discretion to set performance goals which, depending on the extent to which they are
achieved, will determine the value and/or the number of shares of Common stock subject to a performance-based award that
will be paid out to the grantee. The right of a grantee to exercise or receive a grant or settlement of any performance-based
award, and the timing thereof, will be subject to the performance conditions specified by the committee, and will entitle the
grantee to receive cash or shares of our Common Stock upon the attainment of the specified performance goals over a specified
performance period.
F-20
Except in connection with a corporate transaction in which the Company is involved, without obtaining stockholder
approval, the 2015 Plan may not be amended to reduce the exercise price of such outstanding options or SARs, cancel
outstanding options or SARs in exchange for or in substitution of options or SARs with an exercise price that is less than the
exercise price of the original options or SARs, or cancel outstanding options or SARs with an exercise price above the current
stock price in exchange for cash or other securities.
2018 Employment Inducement Incentive Award Plan
On January 18, 2018, the Company’s Board of Directors adopted the Company’s Employment Inducement Incentive
Award Plan (the “2018 Inducement Plan”) pursuant to which the Company reserved 500,000 shares of common stock for
issuance under the Inducement Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules,
awards under the Inducement Plan may only be made to individuals not previously employees of the Company (or following
such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry
into employment with the Company. An award is any right to receive the Company’s common stock pursuant to the 2018
Inducement Plan, consisting of a performance share award, restricted stock award, a restricted stock unit award or a stock
payment award. As of April 30, 2018, there were 97,297 shares outstanding and 402,703 shares available for grant under the
2018 Inducement Plan.
(a) Stock Options
A summary of stock options under the plans described above is as follows:
Shares
Underlying
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(In Years)
Outstanding as of April 30, 2017 ..........................................
Granted .................................................................................
Exercised ..............................................................................
Cancelled/forfeited ...............................................................
Outstanding as of April 30, 2018 ..........................................
Exercisable as of April 30, 2018 ...........................................
237,214 $
170,664 $
- $
(19,349) $
388,529 $
217,205 $
14.64
1.34
-
67.71
6.15
9.90
7.6
7.4
5.9
As of April 30, 2018, the total intrinsic value of outstanding and exercisable options was approximately $1,745 and
$1,745, respectively. As of April 30, 2018, approximately 145,627 additional options were unvested, which options had no
intrinsic value and a weighted-average remaining contractual term of 9.5 years. There was approximately $0.2 million and $0.3
million of total recognized compensation cost related to employees for stock options during the years ended April 30, 2018 and
2017, respectively. As of April 30, 2018, there was approximately $0.1 million 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
0.5 years. The Company typically issues newly authorized but unissued shares to satisfy option exercises under these plans.
(b) Restricted Stock
Compensation expense for non- vested 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. During fiscal 2018, the Company granted
211,881 shares subject to service-based vesting requirements and no shares subject to performance-based vesting requirements.
The achievement or vesting requirement of the performance-based grants is tied to the Company’s total shareholder return
(TSR) relative to the total shareholder return of three alternative energy Exchange Traded Funds as measured over a specific
performance period. No vesting of the relevant shares will occur in instances where the Company’s TSR for the relevant period
is below 80% of the peer group. However, additional opportunities to vest some or all of a portion of the shares in a subsequent
period may occur. Compensation expense for these awards with market-based vesting is calculated based on the estimated fair
value as of the grant date utilizing a Monte Carlo simulation model and is recognized over the service period on a straight-line
basis.
Restricted stock issued and unvested at April 30, 2018 does not include any shares of unvested restricted stock
subjected to performance-based vesting requirements.
F-21
A summary of unvested restricted stock under the plans described above is as follows:
Number
of Shares
Weighted
Average Price
per Share
Issued and unvested at April 30, 2017 ...................................
Granted ..................................................................................
Vested ....................................................................................
Cancelled/forfeited ................................................................
Issued and unvested at April 30, 2018 ...................................
103,412 $
211,881 $
(85,104) $
(33,125) $
197,064 $
3.99
1.27
4.67
2.00
1.35
There was approximately $0.1 million and $0.9 million of total recognized compensation cost relating to restricted
stock granted to employees during the years ended April 30, 2018 and 2017, respectively. As of April 30, 2018, there was $0.2
million of total unrecognized compensation cost related to unvested restricted stock granted under the plans. This cost is
expected to be recognized over a weighted-average period of 2.0 years.
(12) Fair Value Measurements
The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). GAAP specifies a three-level hierarchy that is used when measuring and
disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e.,
observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s
categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is
a description of the three hierarchy levels.
Level 1
Level 2
Level 3
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities
occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for
substantially the full term of the asset or liability. This category includes quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets or liabilities in inactive markets.
Unobservable inputs are not corroborated by market data. This category is comprised of financial and non-
financial assets and liabilities whose fair value is estimated based on internally developed models or
methodologies using significant inputs that are generally less readily observable from objective sources.
Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers
occurred. There were no transfers between any levels during the year ended April 30, 2018 and 2017.
The following information is provided to help readers gain an understanding of the relationship between amounts
reported in the accompanying consolidated financial statements and the related market or fair value. The disclosures include
financial instruments and derivative financial instruments, other than investment in affiliates.
Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value
and details of the valuation models, key inputs to those models and significant assumptions utilized.
Warrant Liabilities
The fair value of the Company’s warrant liabilities (refer to Note 7) recorded in the Company’s financial statements
is determined using the Black-Scholes option pricing model and the quoted price of the Company’s common stock in an active
market, volatility and expected life, is a Level 3 measurement. Volatility is based on the actual market activity of the Company’s
stock. The expected life is based on the remaining contractual term of the warrants and the risk-free interest rate is based on
the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ expected life.
F-22
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of April 30,
2018:
Total
Carrying
Value in
Consolidated
Balance Sheet
Quoted prices
in active
marKets for
identical
assets or
liabilities
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
(in thousands)
Warrant liabilities ............................................... $
201 $
- $
- $
201
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of April 30,
2017:
Total
Carrying
Value in
Consolidated
Balance Sheet
Quoted prices
in active
marKets for
identical
assets or
liabilities
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
(in thousands)
Warrant liabilities ............................................... $
323 $
- $
- $
323
The following table provides a summary of changes in the fair value of the warrant liabilities during the year ended
April 30, 2018;
Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
Total
Warrant
Liability
(in thousands)
Fair value – April 30, 2016 .................................................................................... $
Issuance .................................................................................................................
Transfers ................................................................................................................
Change in fair value ...............................................................................................
Fair value – April 30, 2017 .................................................................................... $
Change in fair value ...............................................................................................
Fair value – April 30, 2018 .................................................................................... $
-
1,814
-
(1,491 )
323
(122 )
201
(13) Income Taxes
Loss before income taxes for the years ended April 30, 2018 and 2017 consisted of the following components:
April 30, 2018 April 30, 2017
(in thousands)
Domestic ...................................................................................... $
Foreign .........................................................................................
Total loss before income taxes ................................................. $
(11,004 ) $
(272 )
(11,276 ) $
(9,805 )
(379 )
(10,184 )
The income tax benefit for the years ended April 30, 2018 and 2017 consist of state income tax benefits of $1.1 million
and $0.7 million, respectively, from the sale of New Jersey net operating losses and research and development credits.
F-23
Tax Rate Reconciliation
The effective income tax rate differed from the percentages computed by applying the US federal income tax for the
periods ended April 30, 2018 and 2017 to loss before income taxes as a result of the following:
April 30, 2018
April 30, 2017
Computed expected tax benefit .............................................................
Increase(reduction) in income taxes resulting from:
State income taxes, net of federal benefit .........................................
Federal research and development tax credits ..................................
Foreign rate differential ....................................................................
Other non-deductible expenses .........................................................
Proceeds of sale of New Jersey tax benefits .....................................
U.S. tax reform effects ......................................................................
Other .................................................................................................
Increase in valuation allowance ........................................................
Income tax benefit ............................................................................
Significant Components of Deferred Taxes
-29.7 %
-34.0 %
3.0 %
-1.5 %
0.3 %
0.4 %
-9.9 %
162.2 %
5.1 %
-139.4 %
-9.5 %
2.3 %
-1.7 %
0.3 %
0.1 %
-6.9 %
0.0 %
11.7 %
25.9 %
-2.3 %
The tax effects of temporary differences and carry forwards that give rise to the Company’s deferred tax assets and
deferred tax liabilities are presented below.
April 30, 2018
April 30, 2017
(in thousands)
Deferred tax assets:
Federal net operating loss carryforwards .......................................... $
Foreign net operating loss carryforwards ..........................................
State operating loss carryforwards ....................................................
Federal and New Jersey research and development tax credits ........
Stock compensation ..........................................................................
Unrealized foreign exchange loss .....................................................
Accrued expenses .............................................................................
Other .................................................................................................
Net deferred tax assets before valuation allowance ..........................
Valuation allowance .........................................................................
Net deferred tax assets ...................................................................... $
29,329 $
3,852
1,460
3,143
645
12
487
330
39,258
(39,258 )
- $
44,355
3,761
1,281
2,996
1,096
17
576
627
54,709
(54,709 )
-
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 carry forwards become
deductible or are utilized. As of April 30, 2018 and 2017, based upon the level of historical taxable losses, valuation allowances
of $39.3 million and $54.7 million, respectively, were recorded to fully offset deferred tax assets. The valuation allowance
decreased $15.4 million during the year ended April 30, 2018 and increased $2.1 during the year ended 2017. respectively.
F-24
As of April 30, 2018, the Company had net operating loss carry forwards for federal income tax purposes of
approximately $139.7 million, which begin to expire in fiscal 2019. The Company also had federal research and development
tax credit carry forwards of approximately $3.0 million as of April 30, 2018, which begins to expire in 2019. The Tax Reform
Act of 1986 contains provisions that limit the utilization of net operating loss and tax credit carry forwards 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 U.S. initial public offering in April 2007. The Company’s
annual Section 382 limitation is approximately $3.3 million. The Section 382 limitation is cumulative from year to year, and
thus, to the extent net operating loss or other credit carry forwards 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. Such limitation only applies
to net operating losses incurred in periods prior to the ownership change. 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, 2018, the Company had state net operating loss carry forwards of approximately $20.5 million which begin to expire in
2019, which also may be limited to utilization limitations. As of April 30, 2018, the Company had foreign net operating loss
carry forwards of approximately $17.9 million. The ability to utilize these carry forwards may also be limited in the event of a
significant change to ownership.
New Jersey Net Operating Loss
During the years ended April 30, 2018 and 2017, the Company sold New Jersey State net operating losses and research
and development credits in the amount of $11.5 million and $7.8 million, respectively, resulting in the recognition of income
tax benefits of $1.1 million and $0.7 million, respectively, recorded in the Company’s Statement of Operations.
Recent Tax Legislation
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law making significant
changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease for the Company
from 34% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from
a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative
foreign earnings as of December 31, 2017.
The TCJA reduced the U.S. federal statutory tax rate for the Company from 34% to 21% effective January 1, 2018.
For fiscal year 2018, our blended U.S. federal statutory tax rate is 29.7%. This is the result of using the tax rate of 34% for the
number of days from the start of the fiscal year until the date of rate change and the tax rate of 21% for the number of days
from the date of rate change until the end of the fiscal year. The Company completed the accounting for the income tax effects
of certain elements of the TCJA and determined the impact to its deferred tax assets to be a reduction of $17.6 million, primarily
resulting from the corporate rate reduction from 34% to 21%. Since the Company’s has historical losses, the Company
continues to have a full valuation allowance against all deferred tax assets and there is no impact to its consolidated financial
statements.
We remeasured our deferred taxes to reflect the reduced rate that will apply when these deferred taxes are settled or
realized in future periods. To calculate the remeasurement of deferred taxes, we estimated when the existing deferred taxes will
be settled or realized and which deferred taxes will be settled within the current year at the 34% tax rate and those that will
reverse after year end at the 21% tax rate. As of April 30, 2018, we have completed our accounting for the tax effects of the
TCJA, however there is no effect on the deferred tax provision since the company has a full valuation allowance.
F-25
Uncertain Tax Positions
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. We are currently
undergoing an income tax audit in Spain for the period from 2008 to 2014, when our Spanish branch was closed. The branch
reported net operating losses for each of the years reported that the Spanish tax inspector claims should have been capitalized
on the balance sheet instead of charged as an expense in the Statement of Operations. As of April 30, 2017, we had recorded a
penalty of $132,000 to Selling, general and administrative costs in the Statement of Operations. The Spanish tax inspector has
recently closed its discussion relating to the capitalization of expenses and as of April 30, 2018 the Company reversed the
penalty. However, the Spanish tax inspector has now raised questions with respect to the Company’s recognition of funds
received in 2011 to 2014 from a governmental grant from the European Commission in connection with the Waveport project.
It is anticipated that we will be assessed a penalty relating to these tax years. We have estimated this penalty to be $177,000
for the period ended April 30, 2018. We have recorded the penalty to Selling, general and administrative costs in the Statement
of Operations. At April 30, 2018 and 2017, the Company had no other 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. U.S. federal and state income tax returns were audited through fiscal 2014 and fiscal 2010 respectively.
Net operating loss and credit carry forwards 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.
(14) Commitments and Contingencies
(a) Operating Lease Commitments
The Company leases office, laboratory, manufacturing and other space in Monroe Township, New Jersey under an
operating lease that expires on October 31, 2024. The lease commencement date is November 1, 2017, with lease payments
beginning the same month. The lease expiration date is seven years from the rent commencement date. The Company provided
a cash security deposit of approximately $154,000. The Lease contains a tenant improvement allowance of up to $138,000 and
annual escalations, as such, the Company accounts for rent expense on a straight-line basis. Rent expense under operating
leases was approximately $0.4 million and $0.3 million for the years ended April 30, 2018 and 2017, respectively.
Future minimum lease payments under operating leases as of April 30, 2018 are as follows:
April 30, 2018
(in thousands)
2019 ...............................................................................................
2020 ...............................................................................................
2021 ...............................................................................................
2022 ...............................................................................................
2023 ...............................................................................................
Thereafter .......................................................................................
$
312
322
331
341
352
546
2,204
Shareholder Litigation and Demands
The Company and certain of its current and former directors and officers were defendants in a derivative lawsuit filed
on March 18, 2015 in the United States District Court for the District of New Jersey captioned Labare v. Dunleavy, et. al., Case
No. 3:15-cv-01980-FLW-LHG. The derivative complaint alleged claims for breach of fiduciary duty, abuse of control, gross
mismanagement and unjust enrichment relating to the now terminated agreement between Victorian Wave Partners Pty. Ltd.
(VWP) and the Australian Renewable Energy Agency (ARENA) for the development of a wave power station. The derivative
complaint sought unspecified monetary damages and other relief.
F-26
On July 10, 2015, a second derivative lawsuit, captioned Rywolt v. Dunleavy, et al., Case No. 3:15-cv-05469, was
filed by another shareholder against the same defendants in the United States District Court for the District of New Jersey
alleging similar claims for breach of fiduciary duty, gross mismanagement, abuse of control, and unjust enrichment relating to
the now terminated agreement between VWP and ARENA. The Rywolt complaint also seeks unspecified monetary damages
and other relief. On February 8, 2016, the Court issued an order consolidating the Labare and Rywolt actions, appointing co-
lead plaintiffs and lead counsel, and ordering a consolidated amended complaint to be filed within 30 days of the order. On
March 9, 2016, the co-lead plaintiffs filed an amended complaint consolidating their claims and sought unspecified monetary
damages and other relief.
On April 21, 2016, a third derivative lawsuit, captioned LaCalamito v. Dunleavy, et al., Case No. 3:16-cv-02249, was
filed by another shareholder against certain current and former directors and officers of the Company in the United States
District Court for the District of New Jersey alleging similar claims for breach of fiduciary duty relating to the now terminated
agreement between VWP and ARENA. The LaCalamito complaint sought unspecified monetary damages and other relief. The
Company was not been formally served and did not yet responded to the complaint.
On June 9, 2016, a fourth derivative lawsuit, captioned Pucillo v. Dunleavy, et al., was filed by another shareholder
against certain current and former directors and officers of the Company in the United States District Court for the District of
New Jersey alleging similar claims for breach of fiduciary duty, unjust enrichment, and abuse of control relating to the now
terminated agreement between VWP and ARENA. The Pucillo complaint seeks unspecified monetary damages and other relief.
On August 2, 2016, the parties in the Pucillo lawsuit filed a Stipulation and Proposed Order pursuant to which: (i) the defendants
agreed to accept service of the Pucillo complaint; (ii) the parties agreed to stay the Pucillo action pending the filing and
resolution of a motion to consolidate the Pucillo action with the Labare and Rywolt actions; and (iii) the parties agreed that the
defendants shall not be required to respond to the Pucillo complaint during the pendency of the stay. The Court approved the
Stipulation on August 3, 2016.
On October 25, 2016, the Court approved and entered a Stipulation and Order that, among other things, (i) consolidated
the four derivative actions; (ii) identified plaintiff Pucillo as the lead plaintiff in the consolidated actions; and (iii) stayed the
consolidated actions pending the November 14, 2016 settlement hearing in the now-settled securities class action and further
order of the Court.
On October 23, 2017, the parties entered into a Stipulation and Agreement of Settlement to resolve the four
consolidated derivative lawsuits. The settlement provided for, among other things, the Company to implement certain corporate
governance changes, a $350,000 payment to the plaintiffs’ attorneys for attorneys’ fees and costs that will be made by the
Company’s insurance carrier, dismissal of the derivative lawsuits, and certain releases. On November 21, 2017, the plaintiffs
filed an unopposed motion seeking preliminary approval of the settlement, which the Court granted on March 9, 2018. On
May14, 2018, the Court held a final settlement approval hearing at which the Court stated that it was approving the settlement.
On June 13, 2018, the Court issued a Final Order and Judgement, approving the Stipulation and Agreement of Settlement. The
Company has accrued $350,000 related to this matter as a probable and reasonably estimable loss contingency during the twelve
months ended April 30, 2018. The Company also recorded a receivable of $350,000 from its insurance carrier with the offset
to the statement of operations.
On May 26, 2017, an attorney claiming to represent two stockholders sent the Company’s Board of Directors a
Stockholder Litigation Demand letter (“Stockholder Demand”). The Stockholder Demand alleges that the voting of shares for
the 1-for-10 reverse stock split at the 2015 annual meeting of stockholders held on October 22, 2015 was not properly counted,
and further alleges that, although the Company reported the reverse stock split as having been passed, if the vote was properly
counted the reverse stock split would not have been approved. The Stockholder Demand requests the Board of Directors either
to deem the reverse stock split as ineffective and disclose the same or to seek a proper and effective stockholder ratification of
the reverse stock split. In addition, the Stockholder Demand requests the Board of Directors to adopt and implement adequate
internal controls and systems to prevent the alleged improper voting from recurring. On June 23, 2017, the Company responded
to the Stockholder Demand, explained the procedures that were followed for the 2015 annual meeting of stockholders and
provided the Oath of the Inspector of Elections and the Certificate of the Inspector of Elections that certified as accurate the
results of the voting at the meeting including voting on the reverse stock split proposal. On June 26, 2017, the attorney
representing the alleged stockholders replied to the Company’s response, further alleged that the proxy statement underlying
the 2015 annual meeting provided voting instructions that misled the stockholders regarding whether their brokers could vote
on the reverse stock split proposal and renewed their requests of the Board. On July 24, 2017, the Company provided an
additional response to the Stockholder Demand, denied the allegations, and declined to take any of the actions requested.
F-27
Employment Litigation
On June 10, 2014, the Company announced that it had terminated Charles Dunleavy as its Chief Executive Officer
and as an employee of the Company for cause, effective June 9, 2014, and that Mr. Dunleavy had also been removed from his
position as Chairman of the Board of Directors. On June 17, 2014, Mr. Dunleavy wrote to the Company stating that he had
retained counsel to represent him in connection with an alleged wrongful termination of his employment. On July 28, 2014,
Mr. Dunleavy resigned from the Board and the boards of directors of the Company's subsidiaries. In 2014, the Company and
Mr. Dunleavy have agreed to suspend his alleged employment claims pending resolution of a class action shareholder litigation
(resolved in May 2017) and then agreed to continue to the suspension pending resolution of the derivatives litigation (resolved
in June 2018). As of the filing of this report, the claims are still suspended.
Except for the Stipulation agreement noted previously, we have not established any provision for losses relating to
these claims and pending litigation. Due to the stages of these proceedings, and considering the inherent uncertainty of these
claims and litigation, at this time we are not able to predict or reasonably estimate whether we have any possible loss exposure
or the ultimate outcome of these claims.
(b) Regulatory Matters
SEC Investigation
On April 30, 2018, the Company received a letter from the SEC staff in the Philadelphia regional office announcing
that the SEC had concluded its investigation of the Company. The investigation began on February 4, 2015, when the Company
received a subpoena from the SEC requesting information related to the discontinued VWP Project in Australia. On July 12,
2016, the SEC issued second subpoena requesting information related to the Company’s April 4, 2014 public offering. The
Company provided information to the SEC in response to both subpoenas and cooperated with the SEC throughout its
investigation. In its letter of April 30, 2018, the SEC stated that it does not intend to recommend an enforcement action by the
SEC against the Company.
Spain IVA (sales tax)
In June 2012, 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 $0.3 million of input tax. The Company
believed that the tax credit was properly claimed and, therefore, no liability was recorded. The Company issued two letters of
credit totaling €0.3 million ($0.3 million) at the request of the Spanish tax authorities. On January 31, 2017 the Company
received $0.2 million from the Spanish tax authorities as a result of the conclusion of the inquiry. In addition, during February
2017, the Spanish tax authorities approved of the release of the two outstanding letters of credit.
Spain Income Tax Audit
We are currently undergoing an income tax audit in Spain for the period from 2008 to 2014, when our Spanish branch
was closed. The branch reported net operating losses for each of the years reported that the Spanish tax inspector claims should
have been capitalized on the balance sheet instead of charged as an expense in the Statement of Operations. As of April 30,
2017, we had recorded a penalty of $132,000 to Selling, general and administrative costs in the Statement of Operations. The
Spanish tax inspector has recently closed its discussion relating to the capitalization of expenses and as of April 30, 2018 the
Company reversed the penalty. However, the Spanish tax inspector has now raised questions with respect to the Company’s
recognition of funds received in 2011 to 2014 from a governmental grant from the European Commission in connection with
the Waveport project. It is anticipated that we will be assessed a penalty relating to these tax year. We have estimated this
penalty to be $177,000 for the period ended April 30, 2018. We have recorded the penalty to Selling, general and administrative
costs in the Statement of Operations.
(15) Operating Segments and Geographic Information
The Company’s business consists of one segment as this represents management’s view of the Company’s operations.
The Company operates on a worldwide basis with one operating company in the US 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:
F-28
North
America
Year Ended April 30, 2018
Asia and
Australia
Europe
(in thousands)
Total
Revenues from external customers ........................ $
Operating loss ........................................................
Long-lived assets ...................................................
Total assets ............................................................
511 $
(11,282 )
712
13,762
- $
(243 )
-
22
- $
(35 )
-
337
511
(11,560 )
712
14,121
North
America
Year Ended April 30, 2017
Asia and
Australia
Europe
(in thousands)
Total
Revenues from external customers ........................ $
Operating loss ........................................................
Long-lived assets ...................................................
Total assets ............................................................
843 $
(11,270 )
170
9,498
- $
(389 )
-
209
- $
(28 )
-
366
843
(11,687 )
170
10,073
(16) Subsequent Events
On June 13, 2018, Tiderunner Marine, Inc. filed a lawsuit in the United States District Court for the District of New
Jersey captioned Tiderunner Marine, Inc. v. Ocean Power Technologies, Inc., Case No. 1:18-cv-10496. The complaint names
Ocean Power Technologies, Inc. as defendant and alleges claims for breach of contract, unjust enrichment, conversion, and
fraud, negligent and/or reckless misrepresentation all as associated with the removal of an OPT mooring system off the coast
of New Jersey that was completed in May 2017. The complaint seeks damages in the amount of $2,825,130 together with
interest, costs, attorney’s fees, punitive damages and such other relief as may be appropriate under the circumstances. OPT has
retained counsel, is investigating the claims, and has not yet responded to the lawsuit. As of April 30, 2018. The Company has
not accrued any provision related to this matter since it cannot reasonably estimate the loss contingency.
On June 27, 2018, Ocean Power Technologies, Inc. (the “Company”) entered into a contract with Premier Oil UK
Limited (“PMO”) for the lease of a PB3 PowerBuoy™ (the “PMO Agreement”) to be deployed in one of PMO’s offshore fields
in the North Sea. Under the agreement, the PowerBuoy™ will provide communications and remote monitoring services for
PMO assets and will demonstrate its ability to monitor and alert vessels in the area after the Floating Production, Storage and
Offloading vessel is removed. The initial trial phase shall last for three months, and if successful, PMO may elect to extend for
a second six-month trial phase and a third three-month trial phase. The Company will be paid a flat fee specified in the contract
for each phase of the lease. At the end of the twelve months, PMO will have the option to extend the lease on a month-to-month
basis as well as to purchase the PowerBuoy™. If PMO elects to purchase the unit, the parties will negotiate mutually agreeable
terms. The Company has agreed to assist PMO in deployment and commissioning of the unit, as well as related data collection
and assessment of performance. PMO is responsible for all costs associated with deployment and installation.
F-29
OCEAN POWER TECHNOLOGIES, INC.
Directors
Executive Officers
Registrar
George H. Kirby III
President, Chief Executive Officer and Director
Matthew T. Shafer
Chief Financial Officer, Vice President
of Finance and Treasurer
Christopher A. Phebus
Vice President of Engineering
John W. Lawrence
General Counsel and Corporate Secretary
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021-1011
US & Canada: 800-662-7232
International: 781-575-4238
www.computershare.com
Terence J. Cryan
Independent Director and Chairman of
Ocean Power Technologies, Inc., Co-Founder,
Concert Energy Partners, LLC
Dean J. Glover
Independent Director and Vice Chairman
of Ocean Power Technologies, Inc., Chief
Executive Officer of Teckniks Tool Group
George H. Kirby III
President, Chief Executive Officer and Director
Steven M. Fludder
Independent Director, Chief Executive Officer
of NEC Energy Solutions
Kristine S. Moore
Independent Director, former Royal Dutch
Shell Executive
Robert K. Winters
Independent Director, Senior Managing
Director of Alpha IR Group
Independent Registered
Public Accounting Firm
KPMG LLP
1601 Market Street
Philadelphia, PA 19103-2499
USA
Legal Advisor
Porter Hedges LLP
1000 Main Street, 36th Floor
Houston, TX 77002
Bankers
Santander Bank
3 Terry Drive
Newtown, PA 18974
USA
Barclays Bank Plc
1 Churchill Place
London E14 5HP
UK
Share Price Information
The Company’s share price is quoted on the NASDAQ Capital 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.
28 Engelhard Drive
Monroe Township, NJ 08831
USA
Website Address: www.oceanpowertechnologies.com
Markets
Oil & Gas
Defense & Security
Communications
Science & Research
Target Applications
First customer buoy shipped from OPT’s new Monroe
Township, NJ facility
Subsea
Power
• Sea floor equipment and
system operation
• Unmanned underwater
vehicle charging
Surveillance and
Monitoring
• Sea floor equipment and
system monitoring
• Topside and subsea threat
surveillance
• Reduce need for power and
communications umbilicals
• Traffic monitoring and
collision avoidance
• Enhance subsea battery
systems with charging and
communications platform
• Environmental monitoring
• Unmanned station
replaces manned vessels
Offshore
Connectivity
• Persistent power and
unmanned platform
for 4G, Wi-Fi, and satcom
• Real-time data processing,
storage and communication
• Amplifies and extends
connectivity where
infrastructure does not
yet exist
GROWTH Ocean Power Technologies, Inc.
28 Engelhard Drive
Monroe Township, NJ 08831
www.oceanpowertechnologies.com