ITEM
1. BUSINESS
Overview
Ocean
Power Technologies aspires to transform the world through innovative ocean-energy solutions. We are a marine power solutions provider
that designs, manufactures, sells, and services our products while working closely with partners that provide payloads, integration
services, and marine installation services. Our solutions provide distributed offshore power which is persistent, reliable, and
economical along with power and communications for remote surface and subsea applications. Our mission and purpose is to utilize
our proprietary, state-of-the-art technologies to reduce the global carbon footprint by providing renewable energy solutions for reliable electrical power and, in so doing, drive demand for our products and services, thus
realizing positive stockholder returns.
We
also continue to develop and commercialize our proprietary systems that generate electricity by harnessing the renewable energy
of ocean waves for our PowerBuoy®, and solar power for our newest product, the hybrid PowerBuoy® (the “hybrid”).
The PB3 PowerBuoy® (the “PB3”) uses proprietary technologies that convert the kinetic energy created by the heaving
motion of ocean waves into electricity. Based on feedback from our current customers, discussions with potential future customers
in the offshore oil and gas, defense and security, science and research, and communications, as well as government
applications in fishery protection, together with our market research and publicly available data, we believe that numerous
markets have a direct need for our solutions. While our recent projects have been in the oil and gas industry, we believe there
is an increasing need for our products and solutions in areas such as fishery protection, offshore windfarm support, marine surveillance,
and ocean-based laboratories. We believe that having demonstrated the capability of our solutions we can advance our product and
services and gain further adoption from our target markets. Our marketing efforts are focused on offshore locations that
require a cost-efficient solution for renewable, reliable and persistent power and communications, either by supplying
electric power to payloads that are integrated directly with our product or located in its vicinity, such as on the seabed and
in the water column. We believe we are the leader in offshore autonomous ocean wave power conversion technology which provides
renewable power for offshore operations that were previously difficult to decarbonize.
Our achievements during
fiscal 2020 included the Company’s first commercial sale of a PB3 to Enel Green Power (“EGP”). We continued
work on projects with Premier Oil (“PMO”) and Eni S.p.A. (“Eni”) and commenced work with the U.S. Navy
Small Business Innovation Research (“U.S. SBIR”) program, and a leading oil & gas operator. During the fiscal
year, the Company continued development of the hybrid and its subsea battery solutions. The Company also signed
a memorandum of understanding with Modus Seabed Intervention Ltd. (“Modus”) to develop and deliver innovative
solutions including a combined Autonomous Underwater Vehicle (“AUV”) charging station which will be able
to utilize the PowerBuoy® system for topside charging and communications.
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
Products
PB3
PowerBuoy®
The
PB3 generates electricity by harnessing the renewable energy of ocean waves. In addition
to our PB3, we continue to develop our PowerBuoy® product line including our turnkey surveillance system, the hybrid
and the subsea battery.
The
PB3 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 a nominal 3 kilowatts 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 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.
The
PB3 is designed to generate power for use independent of the power grid in remote offshore locations. The hull consists of a main
spar structure loosely moored to the seabed and surrounded by a floating annular-structure that can freely move up and down in
response to the passage of the waves. The PTO system includes a mechanical actuating system, an electrical generator, a power
electronics system, our control system, and our ESS which is sealed within the hull. As ocean waves pass the PB3, 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 electric generator. The power electronics system then conditions the electrical output which is collected
within an ESS. The operation of the PB3 is controlled by our customized, proprietary control system.
The
control system uses sensors and an onboard computer to continuously monitor the PB3 subsystems. We believe that this ability to
optimize and manage the electric power output of the PB3 is a significant advantage of our technology. In the event of large storm
waves, the control system automatically locks the PB3 and electricity generation is suspended. However, the load center (either
the on-board payload or one in the vicinity of the PB3 may continue to receive power from the ESS. When wave heights return to
normal operating conditions, the control system automatically unlocks the PB3 and electricity generation and ESS replenishment
recommences. This safety feature helps to prevent the PB3 from being damaged by storms.
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.
We
believe that using wave energy for electricity generation has the following potential benefits, compared to existing incumbent
solutions.
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Scalability
within a small site area. Due to the dense energy in ocean waves, we believe that the electricity may be aggregated to
supply electricity to larger payloads as a result of multiple PB3 which are placed in an array, occupying a relatively small
area. We believe the array of a larger number of PB3 could offer end users a variety of advantages in availability, reliability
and scalability.
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Predictability.
The generation of power from wave energy can be forecasted several days in advance. Available wave energy can be calculated
with a high degree of accuracy based on satellite images and meteorological data, even when the wave field is hundreds of
miles away and days from reaching a PB3. Therefore, we believe end-users relying on PB3 for power may be able to proactively
plan their logistics, payload scheduling and other operational activities based on such data.
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Constant
source of energy. The annual occurrence of waves at 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
PB3 in locations where the waves could produce usable electricity for the majority of the year.
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Based
on our market research and publicly available data, including but not limited to the U.S. Department of Energy
(“DOE”) 2019 Powering the Blue Economy Report, the Westwood Energy World ROV Operations Forecast 2019-2023, and
the World Bank Database, we believe that numerous markets have a direct need for our PB3 including offshore oil and
gas, defense and security, science and research and communications, as well as government applications in fishery
protection. Depending on payload power requirements, sensor types and other considerations, we have found that our PB3 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, and that the hybrid could
provide ample power in geographies where wave conditions may not be sufficient to allow the PB3 to generate sufficient power
on its own for load center requirements.
hybrid
PowerBuoy®
The Company has created
a hybrid PowerBuoy® that is a solar powered and liquid-fueled surface buoy, compared to the wave power generating PB3.
The hybrid is powered primarily through solar panels with liquid-fueled back-up and is capable of providing reliable power
in remote offshore locations, regardless of ocean wave conditions. We believe this product is to be highly complementary to the
PB3 by providing the Company the opportunity to address a broader spectrum of customer deployment needs, including low-wave environments,
with the potential for greater product integration within each customer project. It is primarily intended for shorter term deployment
applications such as electric remotely operated vehicle (“eROV”) or (“ROV”) and AUV inspections and short-term
maintenance, topside surveillance and communications, and subsea equipment and controls. The hybrid is anticipated to be quickly
deployable and cost-effective solution. The design has a high payload capacity for communications and surveillance, with the capability
of being tethered to subsea payloads such as batteries, or with a conventional anchor mooring system. The hybrid generates power
from both an array of solar panels and an efficient, clean burning 1kW Stirling engine fueled by liquid propane (or biofuel for
Generation 2). This energy is stored in onboard batteries which power the aforementioned subsea and topside payloads. The Company
has designed the hybrid with a Stirling engine backup system to outperform traditional diesel buoys, which we believe have more
frequent service and refueling intervals and higher carbon intensities. We believe the hybrid will be able to operate over
a broad range of temperature and ocean wave conditions than existing diesel buoys.
The
towable, boat-shaped hull design of the hybrid is appropriate for deployment anywhere in the world. Power is generated independent
of wave activity, making it a perfect solution for providing power through extreme weather and in heaving seas, or in calm, low
wave environments and is complimentary to the PB3.
As
with the PB3, the control system uses sensors and an onboard computer to continuously monitor the hybrid subsystems. We believe
that this ability to optimize and manage the electric power output of the hybrid is a significant advantage of our technology.
In the event of extended cloudy periods, the control system automatically switches electricity generation from the solar panels
to the backup engine. However, the load center, either the on-board payload or one in the vicinity of the hybrid, may continue
to receive power from the on-board ESS. When more suitable solar power generation conditions return, the control system automatically
stops the backup up engine and ESS replenishment recommences by way of solar electricity generation.
The
hybrid is designed for use with a single point umbilical and mooring but can be adapted for a 3-point mooring installation for
use as a temporary replacement for PB3 installations during planned maintenance or repairs.
The hybrid can be transported
over land to the deployment port using conventional transportation methods. Once at port, the hybrid can be lifted into the water
or onboard a vessel using a readily available crane of appropriate capacity. The hybrid may then be towed to site using a standard
vessel (if the location is within an appropriate distance from the port), or the hybrid may be carried aboard a vessel to its offshore
location and craned into the water at site. The hybrid is then attached to the single point mooring system, which is installed
during a separate operation, after which a brief commissioning process places the hybrid into operation.
The hybrid is configured
with a nominal 30 kilowatt-hours of battery energy storage and over 1 megawatt-hour of stored energy in the propane system.
While the batteries are primarily charged through solar power generation, the propane powered Stirling engine system on the hybrid
can be considered reserve energy storage, with propane having a much higher energy storage density than lithium-ion batteries.
It can be utilized when needed based on load demand and will provide approximately 1megawatt-hour of stored energy capacity.
Our research suggests this amount of stored energy offers an attractive local, autonomous energy solution for clients in a range
of industries, including but not limited to oil and gas and marine observation, particularly for shorter term deployments.
Subsea
Battery
We are also developing
a subsea battery that is complementary to both of our PowerBuoy® products and can be deployed together with our PowerBuoys®
or on its own. It offers customers the option of placing additional modular and expandable energy storage on the seabed near existing
or to be installed subsea equipment. Our lithium ion subsea batteries supply power that can enable subsea equipment, sensors,
communications and AUV and eROV recharge. Our range of PowerBuoys® is complimentary to the subsea batteries by providing a
means for recharging during longer term deployments, or the batteries can be used independently for shorter term deployments.
Ideal for many remote offshore customer applications, these subsea batteries are anticipated to be high performance, cost-efficient,
and quickly deployable. The subsea battery solutions are currently undergoing prototyping.
The
subsea battery has been designed to provide continuous and/or short-term power supply from its integrated energy storage
system, enabling us to supply into a range of industries and applications, from backup power to critical subsea
infrastructure to continuous operation of subsea equipment, such as electric valves. The base design of the subsea battery
has a nominal 100 kilowatt-hours of energy storage. The subsea battery can be transported over land to the deployment
port using conventional transportation methods. Once at port, the subsea battery can be lifted onboard a vessel using a
readily available crane of appropriate capacity. The battery can then be carried aboard a vessel to its offshore location and
craned into the water at site. It comes installed on a ready deployable subsea skid suitable for installation on the seabed.
The subsea battery can be integrated into other subsea equipment on land prior to deployment. The battery is then connected
to the other components on the seabed with the use of ROVs or divers.
Our analysis suggests
that the growing demand for electrification of subsea infrastructure, and an increased switch to autonomous and renewable
solution, offers multiple opportunities for deploying subsea battery powered solutions over the next few years.
Competitive
Advantages
We are commercializing
our PB3 and hybrid PowerBuoys® and subsea battery by targeting customers in our principal markets (offshore oil and gas, defense
and security, science and research and communications, as well as government applications in fishery protection
that require reliable and persistent power sources in remote offshore locations for short and long-term deployments. We believe
that our solutions and our existing commercial relationships provide the following competitive advantages in our target markets.
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Numerous
applications within multiple major market segments. We have designed our products to address multiple offshore
applications around the world. In particular, we are targeting customers with multiple applications within the offshore oil
and gas, defense and security, science and research, and communications, as well as government applications
in fishery protection. Our PB3 is designed for longer-term deployment in high ocean wave climates. Our hybrid is designed
to meet the needs of customers with projects in low sea state locations and/or those requiring short-term deployments. We
believe our subsea battery enables persistent power to be delivered from the seabed to support autonomous, all-electric
subsea operations. Together, all these products can be integrated to provide customized power solutions for our customers.
Our PowerBuoy® products can also act as self-powered solution platforms for payloads such as our surveillance
package which can provide real-time perimeter security, vessel tracking and Exclusion Zone Monitoring® (“EZM”)
for government defense and fishery protection.
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Considerable
life-cycle cost savings over current solutions for many applications. Our PB3 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 reduces costs over multi-year operations compared with current solutions. These cost reductions
are mostly due to reduced vessel and personnel servicing activities. For short term deployments, our hybrid is cost efficient
means of providing surveillance and subsea power solutions. Our subsea battery can provide power to sea floor systems when
combined with either the PB3 or hybrid for power regeneration, thus reducing or even potentially eliminating the need for
manned vessels to replace expended subsea batteries during mission life.
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Real-time
data communications. Some current solutions with less available power than our PowerBuoys® may have limited communication
capabilities or may only be able to communicate data over shorter periods due to power limitations. Some current solutions
may only make data accessible upon physical retrieval of the sensor. Our PowerBuoys® 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
or near-continuous 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. Real-time data communications is an essential component
of our EZM surveillance payload, allowing continued autonomous remote monitoring of marine traffic from land.
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Increased
power and persistence compared to certain current solutions. We have found that our PowerBuoys® may provide substantially
increased power and persistence than certain existing battery and solar powered systems for long term deployments. 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.
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Standard
transportation and deployment. Our PB3 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 can be deployed using conventional vessels
and conventional marine cranes and lifts. Our hybrid can be installed without the need of cranes by simply towing it out to
location.
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Modular
and scalable designs. Our PB3 and hybrid are 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 PB3 is scalable to higher power levels, and multiple
PB3 may also be installed in an array in order to achieve higher levels of aggregate power, although we have not yet demonstrated
a PB3 array. We believe that the modular design of our subsea battery enables clients to specify larger energy storage than
would be possible with just buoys and have this placed at the seabed and near existing electric subsea equipment.
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Flexible
electrical, mechanical and communication interfaces for sensors. The PB3 and hybrid PowerBuoys® can be equipped with
payloads, either mounted on or within the PowerBuoy®, or tethered to the PowerBuoy®. The PowerBuoys® have mechanical
and electrical interfaces which allow for simplified integration of payloads, creating flexibility for the end-user. Our subsea
battery will have specific interfaces for simplified integration with our PowerBuoys® for electric power recharging,
as well as for surface communications. Our PowerBuoys® will also have standard interfaces for subsea batteries
of other providers charging as well as multiple payloads. Flexible interfaces reduce cost through simplified integration and
deployment.
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Environmentally
benign and aesthetically non-intrusive system design. We believe that our PB3 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 to the surrounding environment. We believe that our PB3 produces
renewable electricity through the conversion of renewable ocean wave energy.
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Ocean
and factory-tested technology. Our PB3 is designed to be durable, with a three-year interval between required maintenance
activities. The PB3 has survived hurricanes, tropical storms and North Sea winter storms. 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 under
a contract with the U.S. Navy. More recently, we conducted multiple ocean tests of our current generation PB3. Commercial
versions of the PB3 have been successfully deployed for MES and Eni. The MES PB3 performed well in a challenging shallow-water,
high-current environment, and achieved its performance and duration objectives. The Eni PB3 deployed in the Adriatic Sea has
been in the water for over eighteen months (as of May 2020) and has generated over 2.5 megawatts of energy. In 2015, we instituted
factory-based PTO-accelerated life testing which simulates continuous operations under extremely harsh conditions. During
the 2018 fiscal year, we also implemented additional features to the PB3 design to accommodate heavy topside payloads and
seafloor-based payloads. Further, we continue to focus on standardizing manufacturing and production testing procedures and
to work closely with our supply base to ensure production repeatability.
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Efficient
design in harnessing renewable energy. We have designed and validated our PB3 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.
For locations with consistent periods of low or no wave activity, or for locations with short-term power requirements,
we are introducing our new hybrid which generates power using solar panels and a liquid-fuel backup power generation system.
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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, MES, Eni and PMO have allowed us to further develop our solutions for a variety
of needs in various industries. We believe these relationships have helped position us within the private sector for future
commercial opportunities, 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 these instances, the resulting data have informed our next round of design iterations to improve critical operations and
reliability. We believe that our deployments with MES, Eni and PMO have provided commercial market credibility and allowed
us to develop and market end-user solutions which we believe are valued in our principal markets.
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Market
Opportunities
The
Company takes a rigorous approach to market evaluation. Utilizing publicly available and purchased data, we evaluate total addressable
market sizes. We apply screening criteria to narrow our focus within these markets and identify sub-segments and associated serviced
addressable market sizes. These market evaluations are updated on an ongoing basis throughout the year and more formally twice
annually in line with our financial calendar. In 2019 the DOE’s Water Power Technology Office (WPTO) released the report
Powering the Blue Economy: Exploring Opportunities for Marine Renewable Energy in Maritime Markets. The report described eight
non-grid applications where renewable marine energy could provide consistent, reliable power. The identified marine energy applications
are ocean observation, underwater vehicle charging, marine aquaculture, marine algae, seawater mining, seawater desalination,
coastal resiliency and disaster recovery, and isolated communities. We have been focused on addressing the energy needs of many
of these applications (e.g., ocean observation, underwater vehicle charging), and other offshore applications (e.g., maritime
domain awareness / EZM, well-head monitoring and subsea equipment control).
Offshore
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 electrification and 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 organizations
such as 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 at a large number of these sites to provide power in applications that are not
currently possible, displace current power solutions, or augment existing technologies. This is partially driven by the growing
demand for electrification, for example Norway is estimated to have 40% of its oil and gas production from electrified fields
[Rystad 2019], as well as a growing desire for decarbonization and autonomous operations. For example, the market for remote and
autonomous charging of subsea assets, such as ROVs and AUVs, is rapidly taking shape. The 2019 WPTO report states that “globally,
the AUV market is estimated at $2.6 billion and it is expected to double by 2022”. Based on various reports, other applications
in the oil and gas market include providing power to unmanned platforms and EZM during decommissioning activities. Although estimates
vary in these reports, they generally point towards more then 4,000 platforms (and corresponding wells) that need to be decommissioned
over the next 10 years.
Defense and Security
We
believe that our PB3 is uniquely positioned to be used to provide power and communications for multiple applications within the
defense and security markets. The PB3’s ability to power multiple payloads may be an attractive feature for these markets,
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 perimeter security, 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.
Illegal,
unregulated and unreported (IUU) fishing has become a global issue with both environmental and economic consequences. According
to a report published in Sciences Advances by The University of British Columbia in February 2020, it is estimated the economic
impact from illegal fishing to be as high as $50 billion. We believe our commercially proven EZM surveillance solution using the
PB3 offers governments and non-governmental organizations (“NGO”) the ability to monitor fish resources and support
securing exclusive economic zones (“EEZ”). Most EEZ monitoring is done by offshore patrol vessels (“OPV”),
one of the fastest growing naval product markets with around 1,242 OPVs in service currently. We believe that our autonomous surveillance
solution, which can be combined with satellite imagery, can deliver substantial economic impact to governments over incumbent
solutions in securing remote fisheries.
Science
and Research
The
science and research market 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 in areas such as meteorology, climate change, ocean currents,
and biological processes 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. Additionally, the increased
interest in protecting marine habitats, offers opportunities to collaborate with governments and NGOs to monitor marine sanctuaries.
Based on an article published in Gurufocus in February 2020, the Metocean data market alone is estimated at $143 million and estimated
to grow at nearly 3% compound annual growth rate between 2020 and 2026.
Communications
and Other Markets
We
believe that opportunities also exist in other markets such as communications and renewable energy development, such as offshore
windfarms. 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 and offshore oil and gas industries. According to an industry
research paper titled “Prospects for Maritime Satellite Communications” in 2015 the global maritime satellite communications
market had already reached close to 338,000 terminals, with $1.7 billion in revenue at the satellite communications service provider
level. The report also noted 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. Based on an article in Wind Power Monthly in October 2019 the offshore wind fleet is forecast
to grow 15-fold by 2040 and move further offshore with Europe alone connecting over 500 turbines in 2019. These developments require
ocean data during the early stages, monitoring of marine habitats during construction, and ongoing survey work once operational.
Providing wave power solutions to utility scale renewable developments offers an attractive proposition to support renewable
power and autonomous operations.
Business
Strategy
We
have made significant progress in redesigning and validating our commercially proven PB3 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 and to prepare for low rate initial production. In 2020, we completed our prototype hybrid.
In December 2017, we relocated our production and corporate headquarters to a larger facility. This facility allows for expansion
of our manufacturing capabilities and a move toward higher volume production of our solutions.
In
fiscal 2020 we made progress in marketing our PB3, as evidenced by the volume of proposals submitted to customers and requests
for proposals from customers. We have made substantial progress in transitioning from R&D to a commercialization focus with
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 close of contract, and from channel strategies to customer care.
A
majority of the Company’s opportunities with
potential customers have been for projects in Western Europe, including the North Sea, as well as North America and
Asia. Nearly two-thirds of these opportunities have progressed past initial feasibility and NDA stages
to more detailed, confidential discussions around specific customer applications. Many of these discussions occur at
the executive, decision-making level, as well as the implementation level.
Many
proposal requests are for projects where one of our PowerBuoys® products, either the PB3 or the hybrid, is part of a larger
solution demonstration, and typically include the potential lease or sale of one or more PowerBuoys®, as well as required
services and maintenance support. A majority of hybrid inquiries are for shorter term deployments and in calmer waters.
Historically, demonstration projects have been 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 our PowerBuoy® product 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 our
PowerBuoy® products. 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, project 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
PowerBuoy® products and the initial indications of demand for our PowerBuoy® products in multiple customer applications.
We
continue to commercialize our PowerBuoy® products for use in remote offshore power and real-time data communications applications.
To achieve this goal, we are pursuing the following business objectives:
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Integrated
turn-key solutions sales or leases incorporating our products and services. We believe our PB3 and hybrid PowerBuoys®
are well suited to enable many unmanned, autonomous (non-grid connected) offshore solutions, such as topside and subsea surveillance
and communications, subsea equipment monitoring, early warning systems platform and subsea power and buffering, and weather
and climate data collection. We have investigated and realized market demand for some of these solutions leveraging both PowerBuoy®
and subsea battery sales and leases within our selected markets, and we intend to sell and lease our products to these
markets as part of these broader integrated solutions. Additionally, we intend to provide services associated with our solution
offerings such as paid engineering studies, value-added engineering, maintenance, remote monitoring and diagnostic, application
engineering, planning, training, project management, and marine and logistics support required for our solution life-cycle.
We also intend to pursue turn-key projects where we take on a prime contractor role to capture broader revenue opportunities
while ensuring that solutions effectively address customer needs. We continue to increase our commercial capabilities through
new hires in sales, and application support, and through engagement of expert market consultants in various geographies.
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Expand
customer system solution offerings through new complimentary products that enable shorter
and more cost-efficient deployments. We completed the prototype of
the hybrid in 2020. This product builds on our existing expertise in offshore
power systems and is targeted for a near term deployment. The hybrid is a solar
powered buoy with a liquid propane powered Stirling engine burning propane as a backup.
The hybrid is to be highly complementary to the PB3 by providing the Company the opportunity
to address a broader spectrum of customer deployment needs, including low-wave environments,
with the potential for greater system integration within each customer project. The hybrid
is primarily intended for shorter term deployment applications such as eROV and AUV inspections
and short-term maintenance, topside surveillance and communications, and subsea equipment
and controls. The Company is developing a subsea battery system which will be complimentary
to the Company’s PowerBuoy® products. The subsea battery system is expected
to offer the possibility of creating a sea floor energy storage solution for remote offshore
operations. These subsea battery systems will contain lithium ion batteries, which provide
high power density to supply power to subsea equipment, sensors, communications, and
the recharging of AUVs and eROVs. Ideal for many remote offshore customer applications,
these subsea battery systems are anticipated to be high performance, cost-efficient,
and quickly deployable.
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Concentrate
sales and marketing efforts in specific geographic markets. We are currently focusing our marketing efforts on parts
of North and South America, Europe and Asia. We believe that each of these areas has demand for our solutions, sizable
end market opportunities, political and economic stability, and high levels of industrialization and economic development.
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Expand
our relationships in key market areas through strategic partnerships and collaborations. We believe that strategic partners
are an important part of commercializing solutions and new products. 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. We have formed such a relationship with several well-known groups, including Modus Seabed Intervention
Ltd. (“Modus”), Saab Seaeye Ltd. (“Saab”), Acteon Field
Life Service Ltd. (“Acteon”), MES, PMO and Eni. We continue to seek other opportunities to collaborate with application
experts from within our selected markets.
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Outsourcing
of fabrication, deployment and service support. We outsource all fabrication, anchoring, mooring, cabling supply, and
in most cases deployment of our PowerBuoy® 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 products.
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Cost
reduction and PowerBuoy® solution development. Our engineering efforts are mainly focused on addressing customer
solutions; PowerBuoy® sales; reducing product, installation, and life-cycle costs; and improving the energy output, reliability,
maintenance interval and expected operating life of our products. 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 payloads
and solutions that address customer needs.
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Marketing
and Sales
We
continue to enhance our marketing capabilities across our target markets and we actively marketing our PowerBuoys® solutions.
We currently use a direct sales force consisting of employees and industry expert consultants. Because our solutions use technology
which is not yet fully adopted 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 trade shows and conferences that represent our pursued markets. In September 2019 the Company
held a Technology Day in Montrose, Scotland. In May 2019, the Company was an exhibitor at the Offshore Technology Conference in
Houston, Texas and also an exhibitor at the U.S. Navy League’s Sea-Air-Space Exposition in National Harbor, Maryland.
We
market our PowerBuoys® to companies and entities requiring remote offshore power and communications solutions, including for
example, offshore oil and gas companies for potential applications such as EZM and surveillance, and power and communications
for remotely operated vehicles or AUV charging stations. We also see opportunities for defense and security applications
such as perimeter security 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 PowerBuoys® or PowerBuoy®
subsystems.
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 have the opportunity to cooperate with other solution providers, such as other providers of subsea batteries
where our PowerBuoys® might provide recharging capabilities.
As
of April 2020, there were over 400 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 MHK 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
continues to evolve 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.
We
believe there are only a small number of companies that 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, and because of this we believe that we
continue to maintain a first mover advantage.
We
continuously monitor non-traditional competitive threats, such as multi domain drones and artificial intelligence tools utilizing
satellite data. We are in active discussions with companies in these markets to evaluate synergistic solution development where
we believe there may be a demand for cooperative solutions.
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.
The
table below shows the percentage of our revenue we derived from significant customers for the periods indicated:
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Twelve months ended April 30,
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2020
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2019
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Eni S.p.A.
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|
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10
|
%
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54
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%
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Premier Oil UK Limited
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|
|
9
|
%
|
|
|
33
|
%
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EGP
|
|
|
72
|
%
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|
|
4
|
%
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|
Other
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
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® solutions and related services to customers. Our potential customer base for our PowerBuoys®
solutions 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.
Current
Customers
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●
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In
March 2020, Eni exercised their option from the March 2018 contract to extend their lease of the PB3 for an additional 18
months. The initial provision in March 2018 agreement provided for a minimum 24-month contract that included an 18-month PB3
lease and associated project management.
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●
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In
September 2019, we entered into two contracts with subsidiaries of EGP which include the sale of a PB3 and the development
and supply of a turn-key integrated Open Sea Lab (“OSL”) that will be the Company’s first deployment off
the coast of Chile. The contract is a result of a detailed feasibility study of the PB3 as an offshore autonomous platform
hosting oceanographic sensor systems conducted in September 2018.
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In
April 2019 we entered into an agreement with a leading oil and gas operator to conduct a detailed feasibility study of using
the Company’s technology to monitor subsea wells.
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In
February 2019, we entered into a contract with the U.S. Navy to carry out the first phase of a project to design and develop
a buoy mooring system which incorporates fiber optics for the transmission of subsea sensor data to airplanes, ships, and
satellites.
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In
June 2018, we entered into a contract with PMO for the lease of a PB3 to be deployed in one of PMO’s offshore fields
in the North Sea. During its deployment, the PB3 provided unmanned EZM service. With an opportunistic marine weather window
that allowed for offshore equipment retrievals, in early March 2020 the Company and Premier Oil retrieved the PB3 and is preparing
to ship the PB3 back to the Company’s headquarters in Monroe, New Jersey. The PB3 will be serviced to prepare for one
of multiple upcoming commercial opportunities. In addition, the Company will perform an inspection and review of the system’s
performance with the intention to develop a Phase II deployment scope with Premier Oil. As a result of this, revenue recognized
was impacted for the fourth quarter, 2020 and we removed the remaining lease payments from fiscal 2020 backlog.
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Partnerships
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●
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In
May 2019, we signed a memorandum of understanding with Modus, Ltd. for the purpose of developing and delivering commercial
market solutions that offer a step-change in innovation and market value against conventional methodologies, specifically
through development and marketing of a combined HAUV charging station which will be able to utilize the PowerBuoy® system
for topside charging and communications.
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In
April 2019, we signed a memorandum of understanding with Acteon to develop, explore and exploit mutual opportunities in the
global oil and gas and renewable markets.
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In
January 2019, we entered into a Joint System Solution Development and Marketing Agreement with Saab. The agreement anticipates
a preliminary focus on AUV and eROV charging and communications systems.
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Backlog
As
of April 30, 2020, our backlog was $1.0 million compared to a backlog of $0.9 million as of April 30, 2019. Our backlog includes
unfilled firm orders for our products and services from commercial or governmental customers. 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.
Research
and Development
PB3
PowerBuoy®
Our
team has a broad range of experience in mechanical, electrical, and ocean engineering. We have engaged in extensive efforts to
improve the PB3 PowerBuoy® efficiency, reliability and power output, and improve manufacturability while reducing cost and
complexity. Our recent efforts have been focused on reducing cost of our PB3 PowerBuoys® and their deployment costs in order
to balance customer cost with our solution value proposition. We continue to seek to increase the capabilities of our PB3 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.
A
concerted effort has been underway which is focused on proactively implementing additional features driven by extensive and direct
discussions with potential users, customers, marketing partners, and end users in our target markets. Such features include:
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Enhancement
and cost-out of our current PB3 PowerBuoy® product and supporting systems and deployment and installation methods through
customary product life cycle management.
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Design
and development of a single point combined mooring umbilical solution that allows for quicker deployment of the PowerBuoy®
and enables effective stationkeeping while providing a pathway for the delivery of power and communication capabilities to
customer payloads which are external to the PowerBuoy®, or for recharging and communication capabilities from our PowerBuoy®
to our subsea battery.
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Design,
development and implementation of an advanced buoy controller that significantly reduces power consumption and continues to
address buoy reliability, and supports high computational speeds needed for the PowerBuoy® monitoring and control as well
as integrated solutions requiring real-time data communications.
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hybrid
PowerBuoy®
We
have created a hybrid PowerBuoy® that is a solar powered and liquid-fueled surface buoy, compared to the wave power
generating PB3. The hybrid is powered primarily through solar with liquid-fueled back-up and is capable of providing reliable
power in remote offshore locations, regardless of ocean wave conditions. It is primarily intended for shorter term deployment
applications such as eROV and AUV inspections and short-term maintenance, topside surveillance and communications, and subsea
equipment and controls. The hybrid is anticipated to be quickly deployable and cost-effective solution. The design has a high
payload capacity for communications and surveillance, with the capability of being tethered to subsea payloads such as batteries,
or with a conventional anchor mooring system. A validation test is anticipated to take place in U.S. waters during the summer
of 2020.
Subsea
battery solutions
The
Company is finalizing the commercialization schedule of its subsea battery. The subsea battery has been designed to provide continuous
and/or short-term power supply from its integrated energy storage system, enabling us to supply into a range of industries and
applications.
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 2020, we have been issued 66 U.S. patents, of which 36 are active, 23 have expired and seven were abandoned. Outside of
the U.S. we have been issued 256 patents across 13 countries with 32 of the active U.S. patents having at least one corresponding
issued foreign patent. We have filed for 4 additional U.S. patents and 3 of the U.S. patents applications have corresponding foreign
patent applications at this time. Our patent portfolio includes patents and patent applications with claims directed to:
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system
design;
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control
systems;
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power
conversion;
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anchoring
and mooring; and
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●
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wave
farm architecture.
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The
expiration dates for our issued U.S. patents range from 2021 to 2037. 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 our products and believe that having distinctive marks is an important factor in marketing our products.
We have registered our PowerBuoy®, PB-Vue ®, PowerTower ®, Making Waves in Power
®, Talk on Water ® marks in the United States. Trademark ownership is generally of indefinite duration
when marks are properly maintained in commercial use.
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. 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.
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.
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. 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.
Our
corporate headquarters and manufacturing operations are located in Monroe Township, New Jersey. Our facility offers approximately
56,000 square feet of manufacturing and office space. This facility allows for expansion of our manufacturing capabilities and
a move toward higher volume production of our solutions.
Employees
As
of April 30, 2020, we had 36 full-time employees. Of these employees, 35 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.
Available
Information
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
are made available free of charge through the Investor Relations section of the Company’s website (www.oceanpowertechnologies.com)
as soon as practicable after such material is electronically filed with, or furnished to, the SEC. Material contained on our website
is not incorporated by reference in this report. Our executive offices are located at 28 Engelhard Drive, Suite B, Monroe Township,
New Jersey, 08831, and our telephone number is (609) 730-0400. 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. The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports and other information regarding
issuers that file electronically with the SEC located at http://www.sec.gov.
ITEM
1A. RISK FACTORS
You
should carefully consider the following risk factors together with the other information contained in this Annual Report, and
in prior periodic and current reports. 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. Due to the significant engineering and product
development costs associated with our business and operations, we have experienced substantial and recurring losses from operations,
which have contributed to an accumulated deficit of $220.1 million at April 30, 2020. On April 30, 2020, the Company had approximately
$10.9 million in cash, cash equivalents and restricted cash on hand. On May 5, 2020 the Company received $0.9 million from the
Paycheck Protection Program (“PPP”) (see Note 17 to the Consolidated Financial Statements for more information). The
Company generated revenues of $1.7 million and $0.6 million during the twelve months ended April 30, 2020 and 2019. Based on the
Company’s cash, cash equivalents and restrictive cash balances as of April 30, 2020, the Company believes that it will be
able to finance its capital requirements and operations into the quarter ending April 30, 2021.
We
continue to experience operating losses and currently have three revenue producing contracts. During fiscal 2020, our net burn
rate (cash used in operations less cash generated by operations) including product development spending was approximately $0.9
million per month.
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 $14.0 million in fiscal 2021 including product development spending of more
than $6.9 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 2021, if we are not successful in our efforts to sell more
of our products. 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.
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 $10.4 million and $12.2 million in fiscal
2020 and 2019, respectively. As of April 30, 2020, we had an accumulated deficit of $220.1 million. To date, our activities have
consisted primarily of activities related to the development and testing of our technologies and commercializing our products.
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 products or whether we can achieve profitability. There
is significant uncertainty about our ability to successfully commercialize our products in our targeted markets. Even if we do
achieve commercialization of our products 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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delays
in permitting or acquiring necessary regulatory consents;
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delays
in the timing of contract awards and determinations of work scope;
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delays
in funding for or deployment of wave energy projects;
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the
impact of COVID-19 on our customers and contracts;
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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;
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our
inability to successfully develop and market new products;
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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;
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decisions
made by parties with whom we have commercial relationships not to proceed with anticipated projects;
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increases
in the length of our sales cycle; and
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inherent
uncertainties in our manufacturing processes.
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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 sometimes we incur costs in the local currency of countries in which our customers
and suppliers are located. As a result, we are subject to currency translation risk. A large percentage of our revenues are generated
outside the United States and can be denominated in foreign currencies of our customers. 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. 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.
The
scale and scope of the recent COVID-19 outbreak, the resulting pandemic, and the impact on the financial markets is unknown and
could adversely affect the Company’s business, financial condition and results of operation at least for the near term.
Since
the beginning of January 2020, the COVID-19 outbreak has caused significant disruption in the financial markets both globally
and in the U.S. As the U.S. faces the COVID-19 pandemic, we are following the recommendations of government and health authorities
to minimize exposure risk for our employees. The rapid spread of COVID-19 globally also has resulted in increased travel restrictions
and disruption and shutdown of certain businesses in the U.S. and abroad, including disruptions to our own business. We are closely
monitoring this global health crisis and will reassess its strategy and operational activities on a regular, ongoing basis as
the situation evolves.
As
a result of the changes in work protocols, as well as related pandemic fears, quarantines and market downturns, we may experience
impacts from changes in customer behavior. Our business is dependent upon the willingness and ability of our customers to conduct
transactions, as well as the ability of customers to meet existing payment or other obligations. The spread of COVID-19 has caused
severe disruptions in the worldwide economy, which has in turn disrupted the business, activities, and operations of our business
and operations, as well as that of our customers. For example, our employees have been unable to travel to Chile to perform final
testing and assembly of our PB3 PowerBuoy® for EGP.
If
COVID-19 were to continue to affect a significant amount of our workforce, we may experience delays or the inability to produce
and deliver solutions to our customers on a timely basis. In addition, one or more of our customers, service providers or suppliers
may experience financial distress, file for bankruptcy protection, go out of business, or suffer disruptions in their business
due to the COVID-19 outbreak. As with EGP, travel restrictions due to COVID-19 may also prevent our employees from completing
customer work. The global scale and scope of COVID-19 is unknown and the duration of the business disruption and related financial
impact cannot be reasonably estimated at this time.
The
extent to which the coronavirus impacts our results will ultimately depend on future developments, which are highly uncertain,
and will include emerging information concerning the severity of COVID-19 and the actions taken by governments and private businesses
to attempt to contain COVID-19. However, we believe the coronavirus has and will continue to adversely affect our business, financial
condition and results of operations at least for the near term.
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 2020 commercial contracts accounted for 94% of our revenues and governmental contracts accounted
for 6%. In fiscal 2019, revenues from commercial contacts accounted for 92% of our revenues and governmental contracts accounted
for 8%. 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:
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performance,
reliability and cost-effectiveness of wave energy technology compared to conventional sources and products;
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fluctuations
in economic and market conditions, such as increases or decreases in the prices of oil and other fossil fuels;
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the
development of new and profitable applications requiring the type of remote electric power provided by our autonomous wave
energy systems.
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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 PowerBuoys® or new products 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® or new products 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 parts of North and South America, Europe and Asia, may not develop or may develop to
a lesser extent than we anticipate.
If
we are not successful in commercializing our PowerBuoy® or new products, or are significantly delayed in doing so, our business,
financial condition and results of operations will be adversely affected.
If
we are unable to attract and retain management and other qualified personnel, we may not be able to achieve our business objectives.
Our
success depends on the skills, experience and efforts of our senior management and other key 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 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 North and South America, Europe
and Asia, 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.
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
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.
Our
principal targeted markets include offshore oil and gas, defense and security, science and research and communications. 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 products are 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
products, 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.
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 parts of North and South America, Europe, and 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 94% of our revenues in fiscal 2020 and 92% of our revenues in fiscal 2019. Risks inherent in international
operations include, but are not limited to, the following:
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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 renewable energy, environmental
protection, permitting, export duties and quotas;
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trade
barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices
of our products and make us less competitive in some countries;
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fluctuations
in exchange rates may affect demand for our products and may adversely affect our profitability in U.S. dollars to the extent
the price of our products and cost of raw materials and labor are denominated in a foreign currency;
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difficulty
with staffing and managing widespread operations;
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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 products;
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inability
to obtain, maintain or enforce intellectual property rights; and
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difficulty
in enforcing agreements in foreign legal systems.
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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.
Cyber-security
breaches of our systems and information technology could adversely impact our ability to operate.
We
utilize, develop, install and maintain a number of information technology systems. Various privacy and security laws require us
to protect sensitive and confidential information from disclosure. In addition, we are bound by our customers and other contracts,
as well as our own business practices, to protect confidential and proprietary information (whether it be ours or a third party’s
information entrusted to us) from disclosure. Our computer systems, as well as those of our customers, contractors and other vendors,
face the threat of unauthorized access, computer hackers, viruses, malicious code, cyber-attacks, phishing and other security
incursions and system disruptions, including attempts to improperly access our confidential and proprietary information as well
as the confidential and proprietary information of our customers and other business partners. While we endeavor to maintain industry-
accepted security measures and technology to secure our computer systems and while we endeavor to ensure our cloud vendors that
store our data maintain similar measures, these systems and the information stored on these systems may still be subject to threats.
There can be no assurance that our efforts will prevent these threats. Further, as these security threats continue to evolve,
we may be required to devote additional resources to protect, prevent, detect and respond against such threats. A party who circumvents
our security measures, or those of our customers, contractors or other vendors, could misappropriate confidential or proprietary
information, improperly manipulate data, or cause damage or interruptions to systems. Any of these events could damage our reputation,
result in litigation and regulatory fines and penalties, or have a material adverse effect on our business, financial condition,
results of operations or cash flows.
Risks
Related to Product Development and Commercialization
Our
engineering and product development costs are substantial and may increase in the future.
Our
engineering and product development costs primarily relate to our efforts to increase the output, durability and commercial viability
of our products. Our engineering and product development costs were $4.3 million and $5.0 million in fiscal 2020 and 2019, respectively.
It is our goal to fund the majority of our engineering and 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 engineering and
product development expenses, among other consequences.
We
have only manufactured a limited number of PowerBuoys® and to date we have not produced PowerBuoys® in any significant
quantity for commercial production. Our PowerBuoys® 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 commercialization. The longest continuous in-ocean deployment of our PowerBuoy®
was from December 2009 to January 2012. 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. If our PowerBuoy® is ultimately proven ineffective or
unfeasible, we may not be able to expand our commercial production of our PowerBuoys® 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 products.
These hazards and risks could result in personal injuries, loss of life, liberation of a product 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 products®, 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. 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 products. 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 products 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 products, including the PTO advanced control and generation systems, while outsourcing
the manufacturing for other components of our products. However, we have only manufactured our products 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.
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 products. 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 products 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 products. Because
of the limited operating history of our products, 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 products, 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 products 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 products, the commercial prospects for our products may be adversely
affected.
Our
goal is to commercialize our products. 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. If we are unable to demonstrate to our prospective customers that our products are 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 products, 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.
We
must continually improve existing products, design and sell new products and invest in research and development in order to compete
effectively.
The
markets for our products are characterized by rapid technological change, evolving industry standards and continuous improvements
in products. Due to constant changes in our markets, future success depends on our ability to develop new technologies, products,
processes and product applications. New product development and commercialization efforts, including efforts to enter markets
or product categories in which we have limited or no prior experience, have inherent risks. These risks include the costs involved,
such as development and commercialization, product development or launch delays, and the failure of new products and line extensions
to achieve anticipated levels of market acceptance or growth in sales or operating income. We also face the risk that our competitors
will introduce innovative new products that compete with our products. If new product development and commercialization efforts
are not successful, our financial results could be adversely affected.
Product
and technological developments are accomplished primarily through internally-funded R&D projects. Because it is not generally
possible to predict the amount of time required and costs involved in achieving certain R&D objectives, actual development
costs may exceed budgeted amounts and estimated product development schedules may be extended. Our financial condition and results
of operations may be materially and adversely affected if:
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Product
improvements are not completed on a timely basis;
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New
products are not introduced on a timely basis or do not achieve sufficient market penetration;
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There
are budget overruns or delays in R&D efforts; or
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New
products experience reliability or quality problems, or otherwise do not meet customer preferences or requirements.
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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 infringement 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. 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.
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
prior agreements with government agencies in large part funded 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.
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. 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.
A
portion of products we acquire from our suppliers are manufactured in foreign countries, making the price and availability of
these products subject to international trade risks and other international conditions.
A
portion of our parts for our products are sourced from foreign countries, some of which in the future are or could become subject
to trade restrictions, including increased tariffs or quotas, embargoes and customs restrictions, which would increase the cost
or could reduce the supply of products available to us, and could have a material adverse effect on our business, financial condition
and results of operations. Tariffs on imports from foreign countries, as well as changes in tax and trade policies, such as a
border adjustment tax or disallowance of certain tax deductions for imported product, could materially increase our manufacturing
costs, the costs of our imported products or our income tax expense, which would have a material adverse effect on our financial
condition and results of operations. Tariffs imposed by foreign countries on imports of our products could also adversely affect
our international sales. Any increase in manufacturing costs, the cost of our products or limitation on the amount of products
we are able to purchase, could have a material adverse effect on our financial condition and results of operations.
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. These include batteries for the PB3, propane for the hybrid and various lubricants
and oils. 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.
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 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 15 “Commitments
and Contingencies - Litigation” in the accompanying consolidated financial statements for the fiscal year ended April 30,
2020.
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 100,000,000 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.
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,
2020, the 52-week low and high prices for our common stock was $0.33 and $2.84, 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:
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developments
in our business or with respect to our projects;
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the
success of competitive products or technologies;
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regulatory
developments in the United States and foreign countries;
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developments
or disputes concerning patents or other proprietary rights;
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the
recruitment or departure of key personnel;
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quarterly
or annual variations in our financial results or those of companies that are perceived to be similar to us;
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market
conditions in the conventional and renewable energy industries and issuance of new or changed securities analysts’ reports
or recommendations;
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the
failure of securities analysts to cover our common stock or changes in financial estimates by analysts;
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the
inability to meet the financial estimates of analysts who follow our common stock;
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investor
perception of our company and of our targeted markets; and
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general
economic, political and market conditions.
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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:
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advance
notice requirements for stockholder proposals and nominations;
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the
inability of stockholders to act by written consent or to call special meetings; and
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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.
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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.
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.