UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended April 30, 2018
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or
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from to .
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Commission
File Number 001-33417
Ocean
Power Technologies, Inc
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Delaware
(State
or other jurisdiction of
incorporation
or organization)
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22-2535818
(I.R.S.
Employer
Identification
No.)
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28
ENGELHARD DRIVE
MONROE
TOWNSHIP, NJ 08831
(Address
of principal executive offices, including zip code)
Registrant’s
telephone number, including area code: (609) 730-0400
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Exchange on Which Registered
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Common
Stock, par value $0.001
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The
Nasdaq Capital Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [ ]
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Smaller
reporting company [X]
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(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
Emerging
growth company [ ]
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.[ ]
The
aggregate market value of the common stock of the registrant held by non-affiliates as of October 31, 2017, the last business
day of the registrant’s most recently completed second fiscal quarter, was $22.6 million based on the closing sale price
of the registrant’s common stock on that date as reported on the NASDAQ Capital Market.
The
number of shares outstanding of the registrant’s common stock as of July 5, 2018 was 18,368,286.
OCEAN
POWER TECHNOLOGIES, INC.
ANNUAL
REPORT ON FORM 10-K
TABLE
OF CONTENTS
PowerBuoy™
and the Ocean Power Technologies logo are trademarks of Ocean Power Technologies, Inc. All other trademarks appearing in this
annual report are the property of their respective holders.
Special
Note Regarding Forward-Looking Statements
We
have made statements in this Annual Report on Form 10-K (the “Annual Report”) in, among other sections, Item 1 —
“Business,” Item 1A — “Risk Factors,” Item 3 — “Legal Proceedings,” and Item 7
— “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are forward-looking
statements. Forward-looking statements convey our current expectations or forecasts of future events. Forward-looking statements
include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives
of management for future operations. The words “may,” “continue,” “estimate,” “intend,”
“plan,” “will,” “believe,” “project,” “expect,” “anticipate”
and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that
a statement is not forward-looking.
Any
or all of our forward-looking statements in this Annual Report may turn out to be inaccurate. We have based these forward-looking
statements on our current expectations and projections about future events and financial trends that we believe may affect our
financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions
we might make or unknown risks and uncertainties, including the risks, uncertainties and assumptions described in Item 1A —
“Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances
discussed in this Annual Report may not occur as contemplated and actual results could differ materially from those anticipated
or implied by the forward-looking statements.
You
should not unduly rely on these forward-looking statements, which speak only as of the date of this filing. Unless required by
law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future
events or otherwise.
Our
fiscal year ends on April 30. References to fiscal 2018 are to the fiscal year ended April 30, 2018.
PART
I
ITEM
1.
BUSINESS
Overview
Nearly
70% of the Earth’s surface is covered by water, and over 40% of the world’s population lives within approximately
150 miles of a coast. Thousands of information gathering and/or power systems are deployed in the oceans today to increase our
understanding of weather, climate change, biological processes, and marine mammal patterns as well as supporting exploration and
operations for industries such as oil and gas. Most of these systems are powered by battery, solar, wind, fuel cell, or fossil
fuel generators that may be unreliable and expensive to operate while they also may be limited in their ability to deliver ample
electric power. These current systems often necessitate significant tradeoffs in sensor accuracy, data processing and communications
bandwidth and frequency in order to operate given limited available power. More persistent power systems requiring less maintenance,
such as our systems, may have the ability to save costs over these current systems. Equally important are increases in available
power which may allow for better sensors, faster data sampling and higher frequency communication intervals up to real-time which
could improve scientific and economic returns.
Founded
in 1984 and headquartered in Monroe Township, New Jersey, we believe we are the leader in ocean wave power conversion technology.
Our PB3 PowerBuoy™ is our first fully commercial product which generates electricity by harnessing the renewable energy
of ocean waves. In addition to our PB3 PowerBuoy™, we continue to develop our PowerBuoy™ product line based on modular,
ocean-going buoys, which we have been periodically ocean testing since 1997.
The
PB3 PowerBuoy™ generates power for use in remote offshore locations, independent of a conventional power grid. It features
a unique onboard power take-off (“PTO”) system, which incorporates both energy storage and energy management and control
systems. The PB3 generates a nominal name-plated capacity rating of up to 3 kilowatts (“kW”) of peak power during
recharging of the onboard batteries. Power generation is deployment-site dependent whereby average power generated can increase
substantially at very active sites. Our standard energy storage system (“ESS”) has an energy capacity of up to a nominal
150 kilowatt-hours (“kWh”) to meet specific application requirements. We believe there is a substantial addressable
market for the current capabilities of our PB3, which we believe could be utilized in a variety of applications.
In
addition to leveraging earlier design aspects of our autonomous PowerBuoy™, the PB3 has undergone extensive factory and
in-ocean design validation testing. Currently, our engineering efforts are continuing to expand the PowerBuoy™ capability
with simplified deployment and mooring options and working together with our customer base to ensure flexible systems integration
and to optimize energy output. Our marketing efforts are focused on applications in remote offshore locations that require reliable
and persistent power and communications, either by supplying electric power to payloads that are integrated directly in or on
our PowerBuoy™ or located in its vicinity, such as on the seabed and in the water column.
Based
on our market research and publicly available data, we believe that numerous markets have a direct need for our PowerBuoy™
including oil and gas, science and research, defense and security, and communications. Depending on payload power requirements,
sensor types and other considerations, we have found that our PowerBuoy™ could satisfy several application requirements
within these markets. We believe that the PB3 consistently generates sufficient power to meet the requirements of many potential
customer applications within our target markets.
Since
fiscal 2002, government agencies have accounted for a significant portion of our revenues. These revenues were largely for the
support of our development efforts relating to our technology. Today our goal is to generate the majority of our revenue from
the sale or lease of our products, and sales of services to support our business operations. As we continue to develop and commercialize
our products, we expect to have a net loss of cash from operating activities unless and until we achieve positive cash flow from
the commercialization of our products and services. During fiscal 2017 and 2018, we continued work on projects with the U.S. Department
of Defense (“DOD”) and Mitsui Engineering and Shipbuilding Co., Ltd. (“MES”), Premier Oil (“PMO”)
and Eni S.p.A. (“Eni”) while we continued to validate the reliability and power output of our PB3 PowerBuoy™.
We
were incorporated under the laws of the State of New Jersey in April 1984 and began commercial operations in 1994. On April 23,
2007, we reincorporated in Delaware. Our principal executive offices are located at 28 Engelhard Drive, Monroe Township, New Jersey
08831, and our telephone number is (609) 730-0400. Our website address is www.oceanpowertechnologies.com. We make available free
of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable after such material is filed electronically with the SEC. The information
on our website is not a part of this Annual Report. Our common stock has been listed on NASDAQ since April 24, 2007, and since
July 2015, our common stock has been listed on the NASDAQ Capital Market. Our fiscal year begins on May 1 and ends on April 30.
When we refer to a particular fiscal year, we are referring to the fiscal year ending on April 30 of that year.
Competitive
Advantages
We
are commercializing our PB3 PowerBuoy™ by targeting customers principally in four markets that require reliable and persistent
power sources in remote offshore locations (as discussed in further detail below). We believe that our wave energy products and
services, and our existing commercial relationships provide the following competitive advantages in our target markets.
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Numerous
applications within multiple, major market segments.
We have designed our PB3 PowerBuoy™ to address multiple offshore
applications around the world. In particular, we are targeting customers with multiple applications within the oil and gas,
defense and security, ocean observing, and communications markets.
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Considerable
life-cycle cost savings over current solutions for many applications.
Our PB3 PowerBuoy™ is designed to operate
over extended intervals between required servicing, compared to several current solutions which we found to require more servicing
using offshore vessels. We believe that our PB3 PowerBuoy™ reduces costs over multi-year operations compared with current
solutions. These cost reductions are mostly due to reduced vessel and personnel servicing activities.
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Real-time
data communications.
Some current solutions with less available power than our PowerBuoy™ may have limited communication
capabilities or may be able to communicate data only over shorter periods due to power limitations. Some current solutions
may only make data accessible upon physical retrieval of the sensor. Our PowerBuoy™ can be equipped with a variety of
communications equipment, such as 4G LTE, satellite (VSAT) and Wi-Fi, which enables the transmission of data on a more frequent
basis. We believe that more frequent data communication could enable an end-user to more quickly and proactively make data-driven
decisions which could result in economic advantages.
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Increased
power and persistence compared to certain current solutions
. We have found that our PowerBuoy™ may provide substantially
increased power and persistence than certain existing battery and solar powered systems. We believe that this may allow additional
sensors to be employed at the same site, a higher sensor data transmission rate to be achieved, extended operation and reduced
downtime, and improved operational costs for the customer. Enabling these new capabilities may contribute to enhanced operations
through real-time decision making and increased life-cycle cost savings.
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Standard
transportation and deployment.
Our PB3 PowerBuoy™ does not require special handling or transportation, and instead
uses conventional transportation and handling methods that are economical and readily available in standard marine operations.
This may result in lower global transportation and deployment costs than current solutions. Our PB3 PowerBuoy™ can be
deployed using conventional vessels and conventional marine cranes and lifts.
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Modular
and scalable designs.
Our PB3 PowerBuoy™ is designed with a modular ESS which allows us to tailor its configuration
to specific application requirements, including expansion of energy storage capacity, potentially allowing for a more customized
solution and potential cost savings for our customers. We believe that our PowerBuoy™ is scalable to higher power levels,
and multiple PowerBuoys™ may also be installed in an array in order to achieve higher levels of aggregate power, although
we have not yet demonstrated a PowerBuoy™ array.
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Flexible
electrical, mechanical and communication interfaces for sensors.
The PB3 PowerBuoy™ can be equipped with payloads,
either mounted on or within the PowerBuoy™, or tethered to the PowerBuoy™. The PB3 PowerBuoy™ has mechanical
and electrical interfaces which allow for simplified integration of payloads, creating flexibility for the end-user.
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Environmentally
benign and aesthetically non-intrusive system design.
We believe that our PB3 PowerBuoy™ does not present significant
risks to marine life, or emit significant levels of pollutants, and therefore has minimal environmental impact as compared
to some other current solutions. We believe there is no significant audible impact and our system does not have a negative
effect on marine life, as validated by the U.S. Navy and DOE.
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Ocean
and factory-tested technology.
Our PB3 PowerBuoy™ is designed to be durable, with a three-year interval between
required maintenance activities. The PB3 has survived hurricanes and tropical storms during harsh sea conditions. Since 1997
we have conducted ocean tests to demonstrate the viability of our technology. In 2011, we conducted multiple ocean tests of
the predecessor PB3 PowerBuoy™ under a contract with the U.S. Navy. More recently, we conducted multiple ocean tests
of our current generation PB3 PowerBuoy™, including our now commercial version. In 2015, we instituted factory-based
PTO-accelerated life testing which simulates continuous operations under extremely harsh conditions. During the 2017 fiscal
year, we also implemented additional features to accommodate the feedback received from potential customers and end-users
in support of further simplifying ocean deployments and increasing product application versatility. Further, we also focused
on standardizing manufacturing and production testing procedures and worked closely with our supply base in order to ensure
production repeatability. To date, we have achieved over 67 million cumulative strokes across our fleet of power takeoffs
with no material failures in our commercial PTO design. This is equivalent to more than four cumulative years of continuous
typical ocean operation for the markets we are pursuing.
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Efficient
design in harnessing wave energy.
We have designed and validated our PB3 PowerBuoy™ for maximized power generation
in average ocean wave conditions through optimized mechanical to electrical wave energy conversion. We have designed the onboard
ESS to provide several days of continuous rated power during periods of low or no wave activity, depending on payload power
consumption. The PB3 PowerBuoy™ is equipped with a variety of communication capabilities including satellite, cellular,
and Wi-Fi that are capable of transmitting payload data in real time (e.g., sensors or equipment that require power and communications
capabilities), subject to the limits of the service provider.
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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 and MES have allowed us to develop our PB3 PowerBuoy™ for a variety
of needs in various industries. We believe these relationships have helped position us within the private sector in support
of commercialization, which we believe enhances our market visibility and attractiveness to our prospective customers. For
example, in 2011 our PowerBuoy™ provided persistent power to an integrated radar and sonar system, significantly extending
the U.S. Navy’s surveillance range. We have also demonstrated persistent maritime vessel detection with the U.S. Department
of Homeland Security by integrating a hydrophone onto our PowerBuoy™ and demonstrating enhanced maritime traffic detection.
In each instance, the resulting data have informed our next design iterations to improve critical operations and reliability.
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Business
Strategy
We
continue to commercialize our PB3 PowerBuoy™ for use in remote offshore power and real-time data communications applications.
In order to achieve this goal, we are pursuing the following business objectives:
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Sell
and/or lease the PB3 PowerBuoy™.
We believe our PB3 PowerBuoy™ is well suited for many remote offshore applications.
We have observed potential market demand for both PowerBuoy™ sales and leases within our selected markets, and we intend
to sell and lease the PB3 PowerBuoy™ to these markets. Additionally, we intend to provide services associated with product
sales and leases such as maintenance, remote monitoring and diagnostic, application engineering, planning, training, and logistics
support required for the PB3 PowerBuoy™ life-cycle. We continue to increase our commercial capabilities through new
hires in marketing, sales, and application support, and through engagement of expert market consultants in various geographies.
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Concentrate
sales and marketing efforts in specific geographic markets.
We are currently focusing
our marketing efforts in North America, Europe, Australia, and parts of Asia and South
America. We believe that each of these areas has sizable end market opportunities, political
and economic stability, and high levels of industrialization and economic development.
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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 a new product. Partnerships and collaborations can be used to improve the development
of overall integrated solutions, create new market channels, expand commercial know-how and geographic footprint, and bolster
our product delivery capabilities. We believe that offering a turn-key solution, and not just power, is key to securing long
term success.
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Commercial
collaborations.
We believe that an important element of our business strategy is to collaborate with other organizations
to leverage our combined expertise, market presence and access, and core competences across key markets. We have formed such
a relationship with several well-known groups, including MES in Japan, PMO in the United Kingdom, Eni in Italy, the National
Data Buoy Center (“NDBC”), the Wildlife Conservation Society (“WCS”), Sonalysts (with expertise in
subsea and surface communications, systems integration, and big-data management), and HAI Technologies (an innovative company
focusing on bringing new capabilities to the oil and gas industry). We continue to seek other opportunities to collaborate
with application experts from within our selected markets.
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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™ in order to minimize our capital requirements as we scale our business. Our
PTO is a proprietary subsystem and is assembled and tested at our facility. We believe this distributed manufacturing and
assembly approach enables us to focus on our core competencies and ensure a cost-effective product by leveraging a larger
more established supply base. We also continue to seek strategic partnerships with regard to servicing of our PB3 PowerBuoy™.
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PB3
cost reduction and PowerBuoy™ product development.
Our engineering efforts are focused on customer application development
for PB3 sales, cost reduction of our PB3 PowerBuoy™ and improving the energy output, reliability, maintenance interval
and expected operating life of our PowerBuoy™. We continue to optimize manufacturability of our designs with a focus
on cost competitiveness, and we believe we will be able to address new applications by developing new products that increase
energy output.
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Market
Opportunities
The
National Oceanographic and Atmospheric Administration (“NOAA”) Ocean Enterprise Report for 2016 estimated that the
annual market for what NOAA describes as the “Ocean Enterprise” is $8.5 billion. The report addressed for-profit and
not-for-profit businesses that support ocean measurement, observation and forecasting. Among the market sectors included in the
report are oil and gas, science and research and security and defense sectors. We believe that this report addresses only a segment
of the potential market opportunities that we are targeting.
Oil
and Gas
We
believe the offshore oil and gas industry is undergoing a significant transformation as it continues to invest in new technologies
that enable cost savings and the digitization of operations. The industry encompasses more than 10,000 offshore sites, including
exploration, production, reservoir management, and sites pending decommissioning based on information from the U.S. Bureau of
Safety and Environmental Enforcement and industry organizations and publications. We believe that we have opportunities to implement
one or more PB3 PowerBuoys™ at a large number of these sites to provide power in applications that are not currently possible,
or to displace current power solutions.
Science
and Research
Science
and research provides environmental intelligence to the entire ocean enterprise, which supports ocean measurement, observation
and forecasting, and is an important provider of information to maritime commerce and the entire “blue economy.” Maritime
commerce and the scientific community depend on information from areas such as meteorology, climate change, ocean seismometry
currents, and biological processes in order to inform operations and development. These groups often require a power and communications
solution in remote offshore locations. According to NOAA’s 2016 Ocean Enterprise report, the total U.S. available ocean
observing market from 2017 through 2021 for ocean-based systems infrastructure is projected to be $2.0 billion.
Security
and Defense
We
believe that our PB3 PowerBuoy™ is uniquely positioned to be used to provide power and communications for multiple applications
within the security and defense market. The PB3’s ability to power multiple payloads may be an attractive feature for defense
and security, as their systems can be easily integrated into other PowerBuoy™ applications allowing their operation to be
concealed. An example application for domestic and international defense departments and defense contractors includes forward
deployed energy and communications outposts (which is a current U.S. Department of Defense program), both above and below sea
surface. Other example applications include early detection and warning systems, remote sensing stations, high frequency radar,
sonar, electro-optical and infrared sensors for maritime security, network communications systems, and unmanned underwater vehicle
docking stations. According to a 2014 Frost and Sullivan report, market expenditures for global security reached $29.0 billion
in 2012 and are projected to reach $56.5 billion in 2022. Maritime security expenditures were approximately 45% of the global
security market.
Communications
We
believe that opportunities also exist in other markets such as communications. The addition of near shore and offshore cellular
and Wi-Fi platforms with reliable and persistent power could open new market opportunities for telecommunications carriers by
displacing a portion of the maritime satellite communications market, while potentially decreasing communications costs for the
marine, offshore oil and gas, and airline industries. As an example, according to a 2015 Frost & Sullivan Oil & Gas Satellite
Communications market report, the estimated 2020 annual spend on satellite communications in the oil and gas market is projected
to be $459 million. According to an industry research paper titled “Prospects for Maritime Satellite Communications.”
in 2015 the global maritime satellite communications market has already reached close to 338,000 terminals, with $1.7 billion
in revenue at the satellite communications service provider level. The report also notes that the value of the maritime satellite
communications market is expected to continue to grow over the next decade, with a 10-year compound annual growth rate of 5% in
terminals and revenue, primarily due to the increasing need for maritime data communications.
Implementation
Strategy
We
have made significant progress in redesigning and validating our commercial-ready PB3 PowerBuoy™ for use in remote offshore
applications. Since 2015, we have brought the PB3 from initial concept to a full-scale design. We have performed multiple prototype
iterations. During this time, we have conducted a number of in-ocean tests in combination with our facility-based accelerated
life testing to validate our commercial-ready PB3 PowerBuoy™ and to prepare for low rate initial production. In 2017, we
relocated our corporate headquarters to Monroe Township, New Jersey. We believe that this will allow us to expand our manufacturing
capabilities and to move toward higher volume PowerBuoy™ production. In fiscal 2018 we have made progress in marketing
our PB3 PowerBuoy™, as evidenced by requests for proposals.
We are developing a new approach
from R&D to commercialization of SELL, BUILD, SHIP as our motto and we intend to build on our success by implementing processes
and solutions that cover the entire life cycle, from demand generation to closing the contract, and from channel strategies to
customer care.
Since
2015, we have had initial introductions or meetings with nearly 200 companies and organizations within our target markets. A large
proportion of these engagements (approximately 75%) were U.S.-based, while the remaining engagements occurred in Europe, Australia,
and parts of Asia including Japan. One-third of all engagements have transitioned from initial introductions to advanced, confidential
discussions around specific customer applications. Many of these discussions occur at the executive, decision-making level, as
well as the implementation level.
As
previously noted, several of these customer application discussions have resulted in requests for proposals. Many proposal requests
are for projects where our PB3 PowerBuoy™ is part of a larger solution demonstration, and typically include the potential
lease or sale of one or more PB3 PowerBuoys™, as well as required services and maintenance support. Demonstration projects
are a necessary step toward broad solution deployment and revenues associated with specific applications. A proposal phase typically
lasts from three months to more than one year. During the demonstration project specification, negotiation and evaluation period,
we are often subject to the prospective customer’s vendor qualification process, which entails substantial due diligence
of our company and capabilities and may include negotiation of standard terms and conditions. Many proposals contain provisions
which would mandate the sale or lease of the PB3 PowerBuoy™ upon successful conclusion of the demonstration project.
We
believe this is an accurate depiction of the overall sales cycle for new technology in each of our target markets, including the
PB3 PowerBuoy™. However, cycle times for each step of the sales cycle will vary depending on several customer factors, including,
but not limited to, technical evaluation, project priorities, the funding approval process, and alignment of new technology integration
with the customer’s broader operational strategy. We believe that the resulting evidence of potential demand, vis-à-vis
specific application proposal requests, are indicative of significant progress in our commercialization strategy. We believe that
we have the potential for growth as a result of our positioning for higher volume production of our PB3 PowerBuoy™ and the
initial indications of demand for our PB3 PowerBuoy™ in multiple customer applications.
Product
and Technologies
The
following is a summary of the development and history of our current PowerBuoy™ product and our technologies.
Wave
Energy
The
energy contained in ocean waves is a form of renewable energy that can be harnessed to generate electricity. The interaction between
the wind and the ocean surface causes energy to be exchanged. At first, small waves occur on the ocean surface. As this process
continues, the waves become larger and the distance between the top of the waves becomes longer. Wave size, and the amount of
kinetic wave energy, depends on wind speed, wind duration and the distance covered. The vertical motion of the waves moves the
float component of our PowerBuoy™, creating mechanical energy which our proprietary technologies convert into usable electricity.
We
believe that using wave energy for electricity generation has the following potential benefits, compared to existing incumbent
solutions.
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Scalability
within a small site area.
Due to the dense energy in ocean waves, we believe that multiple PowerBuoys™ may be aggregated
in an array that would occupy a reasonably small area to supply electricity to larger payloads. We believe the aggregation
of a larger number of PowerBuoys™ could offer end users a variety of advantages in availability, reliability and scalability.
To date, we have not deployed an array of PowerBuoys™ to test and validate our hypothesis, and we cannot assure that
a PowerBuoy™ array would generate the energy required to meet the needs of every prospective customer.
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Predictability.
The generation of power from wave energy can be forecasted several days in advance. Wave energy can be calculated with
a high degree of accuracy based on satellite images and meteorological data, even when the wave is hundreds of miles away
and days from reaching a PowerBuoy™. Therefore, we believe end-users relying on PowerBuoys™ for power may be able
to plan their logistics, payload scheduling and other operational activities based on such data and proactively, although
actual testing has not yet been conducted.
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Constant
source of energy.
The annual flow of waves at certain specific sites can be relatively constant and defined with relatively
high accuracy. Based on our studies and analyses of various sites of interest, we believe that we will be able to deploy our
PowerBuoys™ in locations where the waves could produce usable electricity for the majority of all hours during a year.
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Methods
for generating electricity from wave energy can be divided into two general categories: onshore systems and offshore systems.
Our PowerBuoys™ are the offshore type. Many offshore systems, including our PowerBuoy™, utilize a flotation device
to harness wave energy. The heaving or pitching of the flotation device due to the force of the waves creates mechanical energy,
which is converted into electricity by various technologies. Onshore and near shore systems are often located on a shore cliff
or a breakwater, or a short distance at sea from the shore line, and typically must concentrate the wave energy before using it
to drive an electrical generator. Although maintenance costs of onshore systems may be less than those associated with offshore
systems, we believe there are a variety of disadvantages to the former. As waves approach the shore, their energy decreases, therefore,
onshore and near shore wave power stations are not capable of exploiting the same amount of energy produced by waves in deeper
water. In addition, suitable sites for onshore and near shore systems are limited and potential environmental and aesthetic issues
may impede development of these systems due to wave power station size and proximity to communities.
Our
principal product is our PB3 PowerBuoy™, which is designed to generate power for use independent of the power grid in remote
offshore locations. It consists of a main hull structure surrounded by a floating buoy-like device. The hull is loosely moored
to the seabed so that floating buoy can freely move up and down in response to the rising and falling of the waves. The PTO device
that includes an electrical generator, a power electronics system, our control system, and our ESS are sealed within the hull.
As ocean waves pass the PowerBuoy™, the mechanical stroke action created by the rising and falling of the waves is converted
into rotational mechanical energy by the PTO, which in turn, drives the electrical generator. The power electronics system then
conditions the electrical output which is collected within an ESS. The operation of the PowerBuoy™ is controlled by our
customized, proprietary control system.
The
control system uses sensors and an onboard computer to continuously monitor the PowerBuoy™ subsystems as well as the characteristics
of the waves which interact with the PowerBuoy™. The control system collects data from the sensors and the payloads, and
uses proprietary algorithms to electronically adjust the performance of the PowerBuoy™. We believe that this ability to
optimize and manage the electric power output of the PowerBuoy™ is a significant advantage of our technology.
In
the event of large storm waves, the control system automatically locks the PowerBuoy™ and electricity generation is suspended.
However, the load center (either the on-board payload or one in the vicinity of the PowerBuoy™) may continue to receive
power from the on-board ESS. When wave heights return to normal operating conditions, the control system automatically unlocks
the PowerBuoy™ and electricity generation and ESS replenishment recommences. This safety feature helps to prevent the PowerBuoy™
from being damaged by storms.
In
March 2016, we announced a rebranding of our PowerBuoy™ systems as part of our commercialization efforts and to closely
align our PowerBuoy™ products with the perceived best practices of analogous industries based on power generation and on-board
energy storage capabilities. Under our new naming conventions, our current PowerBuoy™ is referred to as the “PB3,”
corresponding to “PowerBuoy™ with a nominal name-plated capacity rating of three kilowatts.” References to the
“APB350” on our website, and in our SEC filings including this Annual Report refers to earlier prototype PowerBuoys™
containing earlier generation PTOs and other earlier technologies.
The
PB3 has undergone design iterations focused on improving its reliability and survivability in the anticipated operating ocean
environment, and will continue to undergo further enhancements through customary product life cycle management. The PB3-A1 was
an initial prototype that has now undergone in-ocean and accelerated life testing, and we believe that the PB3 achieved a maturity
level for use by early adopters in fiscal 2017. We continue the process of commercialization of our product and we cannot assure
you that we will be successful in our efforts to do so. We believe that the PB3 will generate and store sufficient power to address
some application requirements in our target markets. Our engineering efforts are focused, in part, on increasing the energy output
and efficiency of our PowerBuoys™ and, if we are able to do so, we believe the PowerBuoy™ would be useful for additional
applications where cost savings and additional power are required by our potential customers. We continue to explore opportunities
in these target markets, and we have not yet developed any integrated solutions and product offerings in these potential markets.
We believe that by increasing the energy output of our PowerBuoys™ we may be able to address larger segments of our target
markets. By improving our design and manufacturing, we also seek to reduce the cost of our PowerBuoys™ through further design
iterations and manufacturing ramp-up. In so doing, we seek to improve customer value, displace more incumbent solutions, and become
a viable power source for additional applications in our target market segments.
Research
and Development
Our
team has a broad range of experience in mechanical engineering, electrical engineering, hydrodynamics and systems engineering.
We have engaged in extensive efforts to develop the PowerBuoy™, improve PowerBuoy™ efficiency, reliability and power
output, and improve manufacturability while reducing cost and complexity. Our recent efforts have been focused on optimizing the
size of our PowerBuoys™ in order to balance customer cost (both capital and operating expenses) with power output of our
PowerBuoys™. Such efforts include reducing overall product size and weight by considering the use of materials other than
steel for the external structure of our PowerBuoys™. Other recent efforts included the development of scalable, higher efficiency,
lower cost, higher reliability and less customized PTO systems, and the use of higher energy density and lower weight energy storage
technologies. We continue to seek to increase the capabilities of our PowerBuoy™ systems by designing flexible interfaces
and rendering them sensor and payload agnostic.
We
have also focused on the development and implementation of accelerated testing regimens and techniques known as accelerated life
testing. Such methods accelerate failures in a laboratory environment, as compared to more lengthy and expensive full-scale ocean
deployments during normal use and extreme conditions. This testing allows us to quantify the life characteristics of critical
components and subsystems which would normally require several years of operation in ocean conditions to achieve similar levels
of wear and tear. Accelerated life testing is used successfully in other industries such as automotive and aerospace and is a
critical enabler for rapid product and technology development and maturation. We believe that the combination of laboratory and
ocean test regimens coupled with carefully planned PowerBuoy™ ocean tests will help us to improve our effectiveness in commercializing
our products.
It
is our intent to fund the majority of our future research and development expenses with sources of external funding, including
cost sharing obligations under customer contracts. However, we cannot assure you that we will be successful in our efforts to
secure additional contracts. If we are unable to obtain external funding, we may curtail our research and development expenses
or reduce the scope of our operations as necessary to lower our operating costs.
Deployments
We
continue to receive important feedback from in-ocean trial deployments of our PowerBuoys™, as is customary in the marine
industry for new vessels and products prior to final acceptance by their customers. If we are able to increase PowerBuoy™
production, we anticipate that the need for in-ocean trials of our mature products will diminish. Deployment sites are selected
based on minimum ocean depth, appropriate wave activity for power generation requirements of associated deployment payloads, and
proximity to end-user operations. The PB3 can be transported over land to the deployment port using conventional transportation
methods. Once at port, the PB3 can be lifted into the water or onboard a vessel using a readily available crane of appropriate
capacity. The PB3 may then be towed to site using a standard vessel (if the location is within an appropriate distance from the
port), or the PB3 may be carried aboard a vessel to its offshore location, and craned into the water at site. The PB3 is then
attached to the mooring system, which is installed during a separate operation, after which a brief commissioning process places
the PB3 into operation. Recent deployments include the PB3-A1 in August and October of 2015, and again in June and July of 2016
which was the final validation of the PB3 prior to the MES deployment in Japan.
Product
Insurance.
We currently have a property loss and liability insurance policy underwritten by Lloyd’s Underwriters that
covers the deployment and storage of our PowerBuoys™.
Site
Approval.
In the U.S., federal agencies regulate the siting of long-term renewable energy projects and related-uses located
on the outer continental shelf (“OCS”), which is generally more than three miles offshore. OCS projects longer than
one-year in duration are regulated by the U.S. Bureau of Ocean Energy Management (“BOEM”). For projects located within
three miles of the U.S. shore regardless of duration, the adjacent state would be responsible for issuing a lease and other required
authorizations for the location of the project. In either case, an assessment of the potential environmental impact of the project
would be conducted in addition to other requirements. Generally, the same process applies to foreign sites where site approval
is contingent on meeting both national and local regulatory and environmental requirements. In connection with issuing permits
or leases enabling project use, the respective government agency often requires site restoration or other activities at the conclusion
of the permit or lease period.
Environmental
Approval and Compliance.
We are subject to various foreign, federal, state and local environmental protection and health and
safety laws and regulations governing, among other things: the generation, storage, handling, use and transportation of hazardous
materials; the emission and discharge of hazardous materials into the ground, air or water; and the health and safety of our employees.
In addition, in the U.S., the construction and operation of PowerBuoys™ offshore would require permits and approvals from
the U.S. Coast Guard, the U.S. Army Corps of Engineers and other governmental authorities. These required permits and approvals
evaluate, among other things, whether a project is in the public interest and ensure that the project would not create a hazard
to navigation. Other foreign and international laws may require similar approvals. We provide you with additional information
under “Regulation” below.
Customers
Commercial
Activities
We
continue to seek new strategic relationships, and further develop our existing partnerships, with other companies that have developed
or are developing in-ocean applications requiring a persistent source of power that is also capable of real time data collection,
processing and communication, to address potential customer needs.
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In
June 2018, we entered into a contract with PMO for the lease of a PB3 PowerBuoy™ to be deployed in one of PMO’s
offshore fields in the North Sea. Under the agreement, the PowerBuoy™ will provide communications and remote monitoring
services for PMO assets and will demonstrate its ability to monitor and alert vessels in the area after the Floating Production,
Storage and Offloading vessel is removed. The initial trial phase shall last for three months, and if successful, PMO may
elect to extend for a second six-month trial phase and a third three-month trial phase. We will be paid a flat fee specified
in the contract for each phase of the lease. At the end of the twelve months, PMO will have the option to extend the lease
on a month-to-month basis as well as to purchase the PowerBuoy™. If PMO elects to purchase the unit, the parties will
negotiate mutually agreeable terms. We have agreed to assist PMO in deployment and commissioning of the unit, as well as related
data collection and assessment of performance. PMO is responsible for all costs associated with deployment and installation.
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In
March 2018, we entered into an agreement with Eni that provides for a minimum 24-month
contract that includes an 18-month PB3 PowerBuoy™ lease and associated project
management. The PB3 PowerBuoy™ will be deployed in the Adriatic Sea to advance
Eni’s Clean Sea technology for marine environmental monitoring and offshore asset
inspection using AUV’s. The PB3 PowerBuoy™ will be used to demonstrate subsea
battery charging, and eventually may be used to provide a stand-alone charging station
and communications platform that would enable the long-term remote operation of AUVs.
At the end of June 2018, the buoy build is 90% complete and system level factory
acceptance test is completed. OPT plans to ship the PB3 to Eni in August 2018.
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In
January 2018, we entered into a 3-month agreement totaling approximately $0.1 million
with PMO to study the feasibility of using the PB3 PowerBuoy™ for decommissioning
operations in the North Sea. The contract outlines work that will determine the viability
of using the PB3 for monitoring and guarding remaining wells and subsea equipment after
removal of a floating production, storage and offloading vessel and prior to subsea decommissioning
and/or well plugging and abandonment operations. During the study, we are working closely
with PMO’s other subsea equipment suppliers to produce a design to integrate their
equipment into the PB3. The feasibility study was completed and submitted to PMO
for review and final approval. In June 2018, we entered into a contract with PMO for
the lease of a PB3 PowerBuoy™ to be deployed in one of PMO’s offshore fields
in the North Sea.
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In
February 2017, we entered into a Joint Application Development and Marketing Agreement with HAI Technologies to pursue mutual
opportunities. The initial focus of the agreement is on offshore oil and gas subsea chemical injection systems where persistent
power and real-time data communications are critical.
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In
December 2016, we entered into a Joint Marketing Agreement with Sonalysts, Inc. to explore and pursue mutual opportunities
in defense and oil and gas applications. The agreement includes the exploration and assessment of the use of the PB3 as a
platform to provide power and communications for these markets.
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In
September 2016, we entered into a contract with ONR totaling approximately $0.2 million to carry out the first phase of a
project which focuses on the initial concept design and development of a mass-on-spring PTO-based PowerBuoy™ leveraging
a number of OPT patents covering such a technology. If successful, this device is expected to be able to respond to the unique
set of requirements expected in various military marine applications. We completed the Phase 2 BASE Effort work under the
contract which focused on the initial concept design and development of a mass-on-spring PTO-based PowerBuoy™. The Company
is waiting for ONR funding of Phase 2, Option 1 to be approved.
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We
have worked with MES (from 2010 to current) to develop several PowerBuoy™ projects in Japan. Historically, our agreements
with MES have provided for MES to reimburse us for specific costs associated with research, development and deployment of
our PowerBuoy™ product. In March 2016, we entered into a letter of intent with MES to conduct funded pre-work tasks
and to negotiate a definitive agreement that would allow for the lease of the PB3 PowerBuoy™ for a project off the coast
of Kozushima Island, Japan following a planned stage gate review. Stage-gate reviews are used in product development to gather
key information needed to advance the project to the next gate or decision point. This process is a generally accepted industry
practice and has been utilized by other customers such as the DOE. A final contract totaling nearly $1.0 million was negotiated
and finalized with MES in May 2016 that included engineering and logistics support, and the lease of our PB3 PowerBuoy™
for a 7-month period, its ocean deployment, associated data collection and monitoring of its performance. Upon the completion
of the engineering pre-work and a successful stage gate review, the PB3 was shipped to Japan and was deployed off Kozushima
Island from April to September 2017. The MES lease concluded in September 2017 and the PB3 was shipped back to New Jersey.
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In
May 2016, we entered into a Memorandum of Agreement (“MOA”) with WCS to explore the use of our PowerBuoys™
in conjunction with ocean life monitoring sensors to collect ocean mammal migration data. The MOA includes the exploration
and assessment of the use of the PB3 as an integration platform to provide power and communications to sensors that monitor
marine life migrations. An initial effort consisting of a battery powered sensor mounted to the PB3-A1 was deployed off of
the coast of New Jersey which sought to establish a baseline acoustic survey. The deployment proceeded for approximately three
months and met all project objectives. The deployment proceeded for approximately three months and met all project objectives.
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In
2016, we entered into a cooperative research and development agreement (“CRADA”) with the NDBC to conduct ocean
demonstrations of its innovative Self-Contained Ocean Observing Payload (“SCOOP”) monitoring system integrated
into our PB3-A1 PowerBuoy™ . NDBC operates a large network of buoys and stations which provide critical meteorological
and oceanic observations that are utilized by government, industry, and academia throughout the world. Under the CRADA, an
initial ocean demonstration was to be conducted off the coast of New Jersey. We integrated the SCOOP onto our PB3 PowerBuoy™
and in June 2016 we deployed the system off of the coast of New Jersey. Site-specific measurements of meteorological and ocean
conditions, as well as system performance and maintenance data collection, were carried out. The SCOOP was powered by the
PB3, and provided metocean data to OPT and to NDBC. The deployment proceeded for approximately three months and met all project
objectives.
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Current
Customers
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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2018
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2017
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Eni
S.p.A.
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33
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%
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0
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%
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Mitsui
Engineering & Shipbuilding
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43
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%
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80
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%
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Premier
Oil UK Limited
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10
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%
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0
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%
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U.S.
Department of Defense Office of Naval Research
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14
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%
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20
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%
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100
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%
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100
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%
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In
order to achieve success in commercializing our products, we must expand our customer base and obtain commercial contracts to
lease or sell our PowerBuoy™ and related services to customers. Our potential customer base for our PowerBuoys™ includes
various public and private entities, and agencies that require remote offshore power. To date, substantially all of our revenue
producing contracts have been with a small number of customers under contracts to fund a portion of the costs of our operational
efforts to develop and improve our technology, validate our product through ocean and laboratory testing, and business development
activities with potential commercial customers. Our goal in the future is that an increased portion of our revenues will be from
the lease or sale of our products and related maintenance and other services.
Historic
Projects
Our
relationships and projects during recent years include, but are not limited to, the following:
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The
U.S. Navy and Department of Homeland Security.
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From
2009 to 2011, we ocean-tested our utility-scale PowerBuoy™ at the U.S. Marine Corps Base, Hawaii at Kaneohe Bay. The
PowerBuoy™ was launched under our program with the U.S. Navy for ocean testing and demonstration of a prior iteration
of our PowerBuoy™, including connection to the Oahu power grid.
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From
2007 to 2013, we worked on two separate contracts to fabricate and deploy two autonomous PowerBuoys™, which were subsequently
deemed obsolete, as an alternate power source for the U.S. Navy’s Deep Water Active Detection System (“DWADS”).
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o
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In
2009 and 2010, we were awarded $2.4 million and $2.75 million, respectively, from the U.S. Navy to develop a Littoral Expeditionary
Autonomous PowerBuoy™ (“LEAP”) prototype. The LEAP contract was developed to enhance the U.S. Navy’s
territorial protection capability by providing potential persistent power at sea for port maritime surveillance in the near
coast, harbor, piers and offshore areas. During the LEAP contract, we designed, built and deployed in 2011 a PowerBuoy™
structure incorporating a new PTO system. The system was deployed by a U.S. Coast Guard vessel and was ocean-tested approximately
20 miles off of the coast of New Jersey. It was integrated with a Rutgers University-operated land-based radar network that
provided ocean current mapping data for the National Oceanographic and Atmospheric Administration (“NOAA”) and
U.S. Coast Guard Search and Rescue (“SAR”) operations. The ocean test of the LEAP vessel detection system demonstrated
dual-use capability of the radar network and helped to verify our technology as a potential persistent power source for systems
requiring remote power at sea. During the ocean testing under these contracts, our PowerBuoy™ withstood the high storm
waves of Hurricane Irene which occurred in August 2011.
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o
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In
2012, we executed a CRADA with the U.S. Department of Homeland Security to collaborate and demonstrate persistent maritime
vessel detection. The vessel detection ocean demonstration in 2013 utilized the same PowerBuoy™ under the LEAP contract
with additional sensors. This additional deployment provided critical data which informed our next design iteration, and which
incorporated major modifications to address critical operations and reliability improvements. This project concluded in 2013.
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Lockheed
Martin
. From 2004 to 2014, we had several project teaming agreements and license agreements with Lockheed Martin.
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Australia.
In 2008, we announced a Joint Development Agreement with Leighton Contractors Pty. Ltd. (“Leighton”) for the
development of wave power projects off the coast of Australia. In 2009, Leighton formed Victorian Wave Partners Pty Ltd (“VWP”),
a special purpose company for the development of a wave power project off the coast of Victoria, Australia. In 2010, VWP and
the Commonwealth of Australia entered into an Energy Demonstration Program Funding Deed (“Funding Deed”), wherein
VWP was awarded an A$66.5 million (approximately US$62 million) grant for the wave power project. However, receipt of funds
under the grant was subject to certain terms, including achievement of future significant external funding milestones. The
grant was expected to be used towards the A$232 million proposed cost of building and deploying a wave power station off the
coast of Australia (the “Project”). In March 2012, our Australian subsidiary Ocean Power Technologies (Australasia)
Pty. Ltd acquired 100% ownership of VWP from Leighton. In January 2014, VWP signed a Deed of Variation with the Australian
Renewable Energy Agency (“ARENA”) that amended the Funding Deed, and, in March 2014, received the initial portion
of the grant from ARENA in the amount of approximately A$5.6 million (approximately US$5.2 million) (the “Initial Funding”).
The Initial Funding was subject to claw-back provisions if certain contractual requirements, including performance criteria,
were not satisfied. In light of the claw-back provisions, we determined to classify the Initial Funding as an advance payment,
hold the funds as restricted cash and defer recognition of the funds as revenue. In July 2014, the VWP Board of Directors
determined that the project contemplated by the Funding Deed was no longer commercially viable and terminated the Funding
Deed. The Initial Funding was returned to ARENA. We do not currently have any projects in Australia.
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Japan.
In fiscal years 2014-2016, we worked with MES under several contracts to enhance our PowerBuoy™ technology for Japanese
sea conditions for both utility scale and autonomous applications. Under these contracts and leveraging prior work with MES,
we analyzed methods to maximize buoy power capture, performed modeling and wave tank testing, evaluated novel mooring strategies
and conducted design reviews. Currently, the utility scale effort with MES has been suspended and our current efforts with
MES are focused on autonomous applications. We billed and were paid for all eligible costs incurred under the previous utility
scale project with MES in fiscal 2015. Our revenue recorded in fiscal 2016 and 2017 reflect the total amount paid on these
MES contracts. See above under “Current Customers” for a description of our current contract with MES.
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Reedsport,
Oregon Project.
We obtained a permit in 2007 from the Federal Regulatory Commission (“FERC”) for a multi-stage
wave power project off the coast of Reedsport, Oregon. In addition, we received two cost-sharing contracts with the DOE for
approximately $4.4 million to construct and deploy a single PowerBuoy™ off the coast of Reedsport. We subsequently obtained
a license from FERC in August 2012 that authorized installation and operation of a 10-buoy grid connected wave energy array
(the “License”). Due to the complexity of the FERC regulations for the single buoy, higher than anticipated project
costs, unanticipated technical risks, and uncertainty surrounding permitting, we made the decision not to proceed with the
project. Accordingly, we announced in March 2014 our surrender of the permit for one phase of the project and announced in
April 2014 that we were taking the steps necessary to close out this project with the DOE. In May 2014, we filed an application
to surrender the FERC permit for the remaining phases. In August 2014, in cooperation with the State of Oregon Department
of State Lands, we removed anchoring and mooring equipment from the seabed off of the coast of Oregon. In fiscal 2016, we
dispositioned the PowerBuoy™. In late fiscal 2016 and early fiscal 2017, we disposed of the remaining anchoring and
mooring equipment through a local entity and by June 2017 the project was closed out.
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The
EU WavePort Project.
In 2010, we were awarded €2.2 million under the European Commission’s Seventh Framework
Programme (“FP7”) by the European Commission’s Directorate (“EC”) responsible for new and renewable
sources of energy, energy efficiency and innovation. This grant was part of a total award of €4.5 million to a consortium
of companies, including us, to deliver a PowerBuoy™ wave energy device, referred to as the PB40 (a legacy utility scale
buoy), under a project entitled WavePort. We commenced work under this grant in fiscal 2012, and this cost-sharing contract
expired on July 31, 2014. Due to a variety of factors, in October 2014, we shipped the PB40 back to New Jersey in order to
undertake to deploy it off of the coast of New Jersey using our own funding. The legacy utility scale buoy was deployed in
July 2015 and retrieved in August 2015, due to failure of a component part. We do not intend to redeploy the PB40. Following
a project audit, final payment under the WavePort Project was received and recognized as revenue in fiscal 2016. Subsequently,
the Company proceeded with the deployment site remediation to meet the terms of its deployment permit requirements. The site
remediation was completed on May 18, 2017.
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PowerBuoy™
Development Projects.
In April 2010, we received a $1.5 million award from the DOE for a feasibility study of a PowerBuoy™
with the ability to produce up to 500kW of power (referred to as the “PB500”). In fiscal 2011, we received additional
awards totaling $4.7 million for the PB500 structure and PTO optimization study, $2.3 million from the U.K. Government’s
Technology Strategy Board and $2.4 million from the DOE. In fiscal 2014, upon completion of the concept design and associated
trade studies that included detailed mechanical analyses, manufacturability and overall projected performance, the study concluded
that a PB500 would not be technically feasible or economically viable. In March 2015, we successfully completed a stage gate
review and a review of project deliverables with the DOE where advancements related to PTO design aspects such as reliability,
cost take out, manufacturability and scalability were reviewed. Following a stage gate review, the project was successfully
completed in fiscal 2016.
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Manufacturing
We
engage in two types of manufacturing activities: 1) the manufacturing of the high value-added PTO components for systems control,
power generation and conversion, and energy storage for each PowerBuoy™; and 2) contracting with outside companies for the
fabrication of the buoy structure, mooring system, and cabling.
Our
core in-house manufacturing activity is the assembly, final systems integration and testing of the PTO and its components, which
is conducted at our New Jersey facility. The power generation system consists of electro-mechanical components, and the control
modules include the critical electrical and electronic systems that convert the mechanical energy into usable electricity. The
sensors and control systems use sophisticated technology to optimize the performance of the PowerBuoy™ in response to changing
operating conditions and payload power demand. We maintain a portfolio of patents, including those that cover our power generation,
power conversion and control technologies.
We
purchase the remaining components and materials for each PowerBuoy™ from various vendors. We provide specifications to each
vendor, and they are responsible for performing quality analysis and quality control over the course of construction, subject
to our review of the quality and test procedure results. After the vendor completes the testing of the buoy structure, it is transported
to our facility for final integration of the PTO. After each vendor completes testing of the remaining components, they are transported
ready-to-install to the project site. We do not believe that we are dependent on any single vendor for manufacturing the components
of and materials for our PowerBuoy™, and we believe that there are many available manufacturers for our component parts
if a particular manufacturing partner should become unavailable or expensive. However, we have only manufactured our PowerBuoys™
in limited quantities for use in development and testing and have limited commercial manufacturing experience, and our work with
our vendors has not included work on multiple orders on time-critical deadlines. Moreover, we do not have long-term contracts
with our third-party manufacturers or vendors. In order to be successful in our efforts to commercialize our PowerBuoys™,
we will need to secure stable relationships with a variety of manufacturers and vendors that can supply component parts and materials
for our PowerBuoy™ products.
In
December 2017, we relocated our corporate headquarters and manufacturing operations from Pennington, New Jersey to Monroe, New
Jersey. Our new facility offers approximately 56,000 square feet of manufacturing and office space, which is more than double
the size of our prior facility. This larger space supports our increased operational needs, and also allows for our anticipated
growth over the next several years. We believe this new facility will enable us to implement world class assembly and testing
processes, emphasizing product quality and employee safety, while significantly improving our ability to increase product throughput.
We believe that our decision to relocate our operations is integral to our overall business growth strategy.
Marketing
and Sales
We
continue to enhance our marketing capabilities across our target markets and we have begun actively marketing our PowerBuoys™.
We currently use a direct sales force consisting of employees and industry expert consultants. Because our PowerBuoys™ use
technology which is not yet considered mature by our target markets, we expect that the customer decision process could require
us to spend substantial time educating end-users and stakeholders, which may result in a lengthy sales cycle.
We
attend and display our products at tradeshows and conferences that represent our pursued markets. In 2018, we highlighted our
Anchorless PowerBuoy™ at the Navy Forum for SBIR/STTR Transition in National Harbor, Maryland. In May 2018, we displayed
our full-size PowerBuoy™ PB3 at the Offshore Technology Conference in Houston, Texas.
We
market our PowerBuoys™ to companies and entities requiring remote offshore power and communications; for example, oil and
gas companies for potential applications such as remote sensing, trace heating, or autonomous site monitoring, power and communications
for remotely operated vehicles or autonomous underwater vehicle charging stations. We also see opportunities for security and
defense applications using active sensors such as high frequency radar and acoustic systems with significant processing and communications
requirements.
Additionally,
we continue to seek to enter into strategic relationships to develop application solutions with commercial and military sensor
and equipment manufacturers, where we might grant licenses to manufacture, market or operate PowerBuoys™ or PowerBuoy™
subsystems.
Backlog
As
of April 30, 2018, our backlog was $0.7 million. This backlog includes amounts remaining to be paid under the Eni and Premier
contracts. Our backlog can include both funded amounts, which are unfilled firm orders for our products and services for which
funding has been both authorized and appropriated by the customer (U.S. Congress, in the case of U.S. Government agencies), and
unfunded amounts, which are unfilled firm orders for which funding has not been appropriated. If any of our contracts were to
be terminated, our backlog would be reduced by the expected value of the remaining terms of such contract.
The
amount of contract backlog is not necessarily indicative of future revenue because modifications to or terminations of present
contracts and production delays can provide additional revenue or reduce anticipated revenue. A substantial portion of our revenue
is recognized using the percentage-of-completion method, and changes in estimates from time to time may have a significant effect
on revenue and backlog. Our backlog is also typically subject to large variations from time to time due to the timing of new awards.
Competition
We
expect to compete with other providers of in-ocean autonomous power sources, primarily consisting of subsea batteries, solar and
fossil-fuel power sources, where many of the providers are substantially larger than OPT and may have access to greater financial
resources. Incumbent sources of in-ocean power may also represent established and reliable power sources and may have already
gained customer acceptance. Our ability to compete successfully for business from applications seeking in-ocean power will depend
on our ability to produce and store energy reliably and at a total cost that is competitive with or lower than that of other sources,
and on the on-going reliability of our product and customer perception of our company. Our ability to compete effectively may
be adversely affected by our current need for additional financing and our future customers’ concerns about our long-term
viability.
We
also may eventually compete against other renewable wave generated power providers. As of June 2018, there were more than nearly
260 companies, some with institutional funding, listed in the DOE’s Marine and Hydrokinetic (“MHK”) Technology
Database. This DOE database provides up-to-date information on marine and hydrokinetic renewable energy technologies and companies,
both in the U.S. and around the world. Many of these companies are located in the U.K., continental Europe, Japan, Israel, the
U.S. and Australia, and many of those companies are pursuing the utility, grid-connected energy market. The MHK industry is both
highly competitive and continually evolving as participants strive to differentiate themselves by promoting their specific technology
focusing on cost and efficiency. The companies are subdivided by implementation: wave power, current power, tidal and ocean thermal
energy conversion. Within wave power, the technologies are classified as point absorber, oscillating wave column, overtopping
device, attenuator and oscillating wave surge converter. Our PowerBuoy™ wave energy converter is classified as a point absorber.
The
vast majority of the companies in the DOE’s database are small, start-up type companies with a small number of employees
and in early stage development that do not have our in-ocean validation experience. Only a few of these companies have conducted
testing similar to us, such as accelerated life testing and extensive wave tank testing on reduced scale models of their devices.
We believe our in-ocean experience is critical in proving the reliability, survivability and performance of any wave energy system,
which we believe our future customers will require before adopting any wave generated energy solution. We believe our experience
gained through full scale in-ocean deployments, coupled with other types of factory and laboratory testing, and our resulting
understanding of risks and failure modes provides us with an advantage compared to potential wave energy competitors.
Our
analysis of the DOE database indicates that approximately 20 wave energy technologies were selected for further evaluation by
the DOE, primarily based on company financial capability, type of system and potential to compete in autonomous (non-grid connected)
markets. Of these, there are three companies that we believe may have the technical capability and financial viability to compete
in the offshore autonomous power market; however, their technologies are still in early stage development with limited ocean testing.
We believe that none of these technologies are at the maturity level of our current PB3 PowerBuoy™, and because of this
we believe that we continue to maintain a first mover advantage.
Intellectual
Property
We
believe that our technology differentiates us from other providers of wave energy conversion technologies. As a result, our success
depends in part on our ability to obtain and maintain proprietary protection for our products, technology and know-how, to operate
without infringing upon the proprietary rights of others and to prevent others from infringing upon our proprietary rights. Our
policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related
to our proprietary technology, inventions and improvements that are important to the development of our business. We also rely
on trade secrets, know-how, and continuing technological innovation and may rely on licensing opportunities to develop and maintain
our proprietary position.
As
of June 2018, we have been issued 65 U.S. patents, of which 50 are active and 15 have expired. Outside of the U.S. we have been
issued 200 patents across 13 countries with 33 of the active U.S. patents having at least one corresponding issued foreign patent.
We have filed for 3 additional U.S. patents and 1 of the U.S. patents applications have corresponding foreign patent applications.
Our patent portfolio includes patents and patent applications with claims directed to:
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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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wave
farm architecture.
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The
expiration dates for our issued U.S. patents range from 2018 to 2032. We do not consider any single patent or patent application
that we hold to be material to our business. The patent positions of companies like ours are generally uncertain and involve complex
legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our
success in continuing to obtain effective patent claims and enforcing those claims once granted. In addition, certain technologies
that we developed with U.S. federal government funding are subject to certain government rights as described in “Risk Factors
— Risks Related to Intellectual Property.”
We
use trademarks on nearly all of our products and believe that having distinctive marks is an important factor in marketing our
products. We have registered our PB-Vue
®
, OPTMicrobuoy
®
, CellBuoy
®
, PowerTower
®
,
Making Waves in Power
®
, Talk on Water
®
and
®
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, Environmental Approval and Compliance
We
present additional information regarding the regulatory requirements relating to our in-ocean deployments above, under “Product
and Technologies – Deployments.”
Subsidies
and Incentives
Renewable
energy subsidies and incentives are generally applicable only to electric generation and supply to the utility grid. However,
our autonomous applications may permit a customer to reduce its carbon emissions, which our potential customers may be able to
publicize in their environmental stewardship reports.
Employees
As
of April 30, 2018, we had 35 full-time employees. Of these employees, 34 are located in the United States and one is located in
the United Kingdom. We believe that our future success will depend in part on our continued ability to attract, hire and retain
qualified personnel. None of our employees are represented by a labor union, and we believe our employee relations are good.
ITEM
1A.
RISK
FACTORS
You
should carefully consider the following risk factors together with the other information contained in this Annual Report on Form
10-K, and in prior reports pursuant to the Securities Exchange Act of 1934, as amended. If any of the following risks actually
occur, they may materially harm our business and our financial condition and results of operations. In this event, the market
price of our common stock could decline and your investment could be lost.
Risks
Related to Our Financial Condition
Our
auditors have raised substantial doubts as to our ability to continue as a going concern.
Our
financial statements have been prepared assuming we will continue as a going concern. We have experienced substantial and recurring
losses from operations, which losses have caused an accumulated deficit of $197.5 million at April 30, 2018. We generated revenues
of only $0.5 million in fiscal 2018, and $0.8 million in fiscal 2017. At April 30, 2018, we had approximately $11.5 million in
cash on hand. Based on the Company’s cash and cash equivalents and marketable securities balances as of April 30, 2018,
the Company believes that it will be able to finance its capital requirements and operations into the quarter ending April 30,
2019, including $0.6 million of payments due by August 30, 2018 as a return of an option fee due to ineligibility for certain
emission credits.
We
continue to experience operating losses and currently have two revenue producing contracts.
During
fiscal 2018, our net burn rate (cash used in operations less cash generated by operations) including product development spending
was approximately $0.9 million per month. Even if wave energy technology achieves broad commercial acceptance, our PowerBuoys™
may not prove to be a commercially viable technology for generating electricity from ocean waves.
We
have been funding our business principally through sales of our securities, and we expect to continue to fund our business with
sales of our securities and, to a limited extent, with our revenues until, if ever, we generate sufficient cash flow to internally
fund our business. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We anticipate
that our operating expenses will be approximately $14.5 million in fiscal 2019 including product development spending of more
than $6.3 million. However, we may choose to reduce our operating expenses through personnel reductions, and reductions in our
research and development and other operating costs during fiscal year 2019, if we are not successful in our efforts to raise additional
capital. We cannot assure our stockholders that we will be able to increase our revenues and cash flow to a level which would
support our operations and provide sufficient funds to pay our obligations for the foreseeable future. Further, we cannot assure
our stockholders that we will be able to secure additional financing or raise additional capital or, if we are successful in our
efforts to raise additional capital, of the terms and conditions upon which any such financing would be extended. If we are unable
to meet our obligations, we would be forced to cease operations, in which event investors would lose their entire investment in
our company.
We
may not be able to raise sufficient capital to continue to operate our business.
Historically,
we have funded our business operations through sales of equity securities. We do not know whether we will be able to secure additional
funding or, if secured, whether the terms will be favorable to us or our investors. Our ability to obtain additional funding will
be subject to a number of factors, including market conditions, our operating performance, pending litigation and investor sentiment.
These factors may make additional funding unavailability, or the timing, dollar amount, and terms and conditions of additional
funding unattractive.
If
we issue additional securities to raise capital, our existing stockholders could experience dilution or may be subordinated to
any rights, preferences or privileges granted to the new security holders. In particular, any new securities issued could have
rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Should
the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, our
business, operating results, financial condition and prospects could be materially and adversely affected and we may be unable
to continue our operations.
We
have a history of operating losses and may not achieve or maintain profitability and positive cash flow.
We
have incurred net losses since we began operations in 1994, including net losses of $10.2 million and $9.5 million in fiscal 2018
and 2017, respectively. As of April 30, 2018, we had an accumulated deficit of $197.5 million. To date, our activities have consisted
primarily of activities related to the development and testing of our technologies and our PowerBuoy™. Thus, our losses
to date have resulted primarily from costs incurred in our research and development programs and from our selling, general and
administrative costs. As we continue to develop our proprietary technologies, we expect to continue to have a net use of cash
from operating activities unless or until we achieve positive cash flow from the commercialization of our products and services.
We
do not know whether we will be able to successfully commercialize our PowerBuoys™, or whether we can achieve profitability.
There is significant uncertainty about our ability to successfully commercialize our PowerBuoys™ in our targeted markets.
Even if we do achieve commercialization of our PowerBuoy™ and become profitable, we may not be able to achieve or, if achieved,
sustain profitability on a quarterly or annual basis.
Our
financial results may fluctuate from quarter to quarter, which may make it difficult to predict our future performance.
Our
financial results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons,
comparing our financial results on a period-to-period basis may not be meaningful, and our past results should not be relied on
as an indication of our future performance. Our future quarterly and annual expenses as a percentage of our revenues may be significantly
different from those we have recorded in the past or which we expect for the future. Our financial results in some quarters may
fall below expectations. Any of these events could cause our stock price to fall. Each of the risk factors listed in this “Risk
Factors” section, including the following factors, may adversely affect our business, financial condition and results of
operations:
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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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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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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 we conduct our business and incur costs in the local currency of most countries in
which we operate. As a result, we are subject to currency translation risk. A large percentage of our revenues may be generated
outside the United States and denominated in foreign currencies in the future. Changes in exchange rates between foreign currencies
and the U.S. dollar could affect our revenues and cost of revenues, and could result in exchange losses. In addition, we incur
currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or sale transaction using a
different currency from our reporting currency. We cannot accurately predict the impact of future exchange rate fluctuations on
our results of operations. Currently, we do not engage in any exchange rate hedging activities and, as a result, any volatility
in currency exchange rates may have an immediate adverse effect on our business, results of operations and financial condition.
Risks
Related To Growth Of Our Business
We
depend on a limited number of customers for substantially all of our revenues. The loss of, or a significant reduction in revenues
from, any of these customers could significantly reduce our revenues and harm our operating results.
Historically,
a small number of customers have provided substantially all of our revenues and we expect that such concentration will continue
for the foreseeable future. In fiscal 2018 commercial contracts accounted for 86% of our revenues and governmental contracts accounted
for 14%. In fiscal 2017, revenues from commercial contacts accounted for 80% of our revenues and governmental contracts accounted
for 20%.
Generally,
we recognize revenue using the percentage-of-completion method based on the ratio of costs incurred to total estimated costs at
completion. In certain circumstances, revenue under contracts that have specified milestones or other performance criteria may
be recognized only when our customer acknowledges that such criteria have been satisfied. In addition, recognition of revenue
(and the related costs) may be deferred for fixed-price contracts until contract completion if we are unable to reasonably estimate
the total costs of the project prior to completion. Because we currently have a small number of customers and contracts, problems
with a single contract would adversely affect our business, financial condition and results of operations.
A
customer’s payment default, or the loss of a customer as a result of competition, creditworthiness, our failure to perform,
our inability to negotiate extensions or replacements of contracts, or otherwise, would adversely affect our business, financial
condition and results of operations. We cannot assure you that we will be successful in our efforts to secure additional commercial
customers, or additional revenue-generating contracts.
Wave
energy technology may not gain broad commercial acceptance and, therefore, our revenues may not increase and we may be unable
to achieve and, even if achieved, sustain profitability.
Wave
energy technology is at an early stage of development, and the extent to which wave energy power generation will be commercially
viable is uncertain. Many factors may affect the commercial acceptance of wave energy technology, including the following:
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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 PowerBuoy™ does not develop or takes longer to develop than we anticipate, our revenue generation
will be limited, and it is unlikely that we will be able to achieve and, if achieved, then sustain profitability.
Even
if wave energy technology achieves broad commercial acceptance, our PowerBuoys™ may not prove to be a commercially viable
technology for generating electricity from ocean waves. We have invested a significant portion of our time and financial resources
since our inception in the development of our PowerBuoys™, but have not yet achieved successful commercialization of our
PowerBuoys™. As we seek to manufacture, market, sell and deploy our PowerBuoys™ in greater quantities, we may encounter
unforeseen hurdles that would limit the commercial viability of our PowerBuoys™, including unanticipated manufacturing,
deployment, operating, maintenance and other costs. Our target customers and we may also encounter technical obstacles to deploying,
operating and maintaining PowerBuoys™.
If
demand for our PowerBuoys™ fails to develop sufficiently, it is unlikely that we will be able to grow our business or generate
sufficient revenues to achieve and then sustain profitability. In addition, demand for PowerBuoys™ in our presently targeted
markets, including coastal North America, Europe, Australia and Japan, may not develop or may develop to a lesser extent than
we anticipate.
If
we are not successful in commercializing our PowerBuoy™, or are significantly delayed in doing so, our business, financial
condition and results of operations will be adversely affected.
If
we are unable to attract and retain management and other qualified personnel, we may not be able to achieve our business objectives.
Our
success depends on the skills, experience and efforts of our senior management and other key product development, manufacturing,
and sales and marketing employees. We have limited financial resources and cannot be certain that we will be able to attract,
retain and motivate such employees. The loss of the services of one or more of these employees could have a material adverse effect
on our business. There is a risk that we will not be able to retain or replace these key employees. Implementation of our business
plans will be highly dependent upon our ability to hire and retain senior executives as well as talented staff in various fields
of expertise.
Changes
in senior management are inherently disruptive, and efforts to implement any new strategic or operating goals may not succeed
in the absence of a long-term management team. Changes to strategic or operating goals with the appointment of new executives
may themselves prove to be disruptive. Periods of transition in senior management leadership are often difficult as the new executives
gain detailed knowledge of our operations and due to cultural differences that may result from changes in strategy and style.
Without consistent and experienced leadership, customers, employees, creditors, stockholders and others may lose confidence in
us.
To
be successful, we need to retain key personnel. Qualified individuals, including engineers and project managers, are in high demand,
and we may incur significant costs to attract and retain them. With the exception of our President and Chief Executive Officer,
all of our officers and other employees are at-will employees, which means they can terminate their employment relationship with
us at any time, and their knowledge of our business and industry would be difficult to replace. If we lose the services of key
personnel, or do not hire or retain other personnel for key positions, our business, results of operations and stock price could
be adversely affected.
If
we are unable to effectively manage our growth, this could adversely affect our business and operations.
The
scope of our operations to date has been limited, and we do not have experience operating on the scale that we believe may be
necessary to achieve profitable operations. Our current personnel, facilities, systems and internal procedures and controls may
not be adequate to support future growth. This factor, when combined with the technical complexity of some of our development
efforts, may result in our inability to meet certain customer expectations or deadlines and could result in the amendment to,
or termination of, customer contracts or relationships. To realize our desired growth, we may need to add sales, marketing and
engineering offices in our existing and/or additional locations, which may include areas such as Australia, Japan, and continental
Europe, and which may result in additional organizational complexity.
To
manage the expansion of our operations, we may be required to improve our operational and financial systems, procedures and controls,
increase our manufacturing capacity and throughput and expand, train and manage our employee base, which may need to increase
significantly if we are to be able to fulfill our current manufacturing and growth plans. Our management may also be required
to maintain and expand our relationships with customers, suppliers and other third parties, as well as attract new customers and
suppliers. If we do not meet these challenges, we may be unable to take advantage of market opportunities, execute our business
strategies or respond to competitive pressures.
If
we are unable to successfully negotiate and enter into service contracts with our customers on terms that are acceptable to us,
our ability to diversify our revenue stream will be impaired.
An
important element of our business strategy is to enter into service contracts with our customers under which we would be paid
fees for services related to the maintenance and operation of the PowerBuoys™ purchased from us. In addition, we may offer
to lease PowerBuoys™, sell power generated by PowerBuoys™ or sell data gathered by sensors on our PowerBuoys™.
Even if customers purchase or lease our PowerBuoys™, they may not enter into service contracts with us. We may not be able
to negotiate service, power sale or other contracts that provide us with any additional profit opportunities. Even if we successfully
negotiate and enter into such service contracts, our customers may terminate them prematurely or they may not be profitable for
a variety of reasons, including the presence of unforeseen hurdles or costs. In addition, if we were unable to perform adequately
under such service contracts our efforts to successfully market the PowerBuoys™ could be impaired. Any one of these outcomes
could have a material adverse effect on our business, financial condition and results of operations.
Since
our PowerBuoys™ can only be deployed in certain geographic locations, our ability to grow our business could be adversely
affected.
Our
PowerBuoys™ are designed for use offshore, but not all offshore areas worldwide have appropriate natural resources for our
PowerBuoys™ to harness wave energy. Seasonal and local variations, water depth and the effect of particular locations of
islands and other geographical features may limit our ability to deploy our PowerBuoys™ in certain coastal areas. If we
are unable to identify and deploy PowerBuoys™ at sufficient sites with appropriate natural resources to permit our PowerBuoys™
to capture wave energy, our ability to grow our business could be adversely affected.
Failure
by third parties to supply or manufacture components of our products or to deploy our systems timely or properly could adversely
affect our business, financial condition and results of operations.
We
have been and expect to continue to be highly dependent on third parties to supply or manufacture components of our PowerBuoys™.
If, for any reason, our third-party manufacturers or vendors are not willing or able to provide us with components or supplies
in a timely fashion, or at all, our ability to manufacture and sell many of our products could be impaired.
We
do not have long-term contracts with our third-party manufacturers or vendors. If we do not develop ongoing relationships with
vendors located in different regions, we may not be successful at controlling unit costs as our manufacturing volume increases.
We may not be able to negotiate new arrangements with these third parties on acceptable terms, or at all.
In
addition, we rely on third parties, under our oversight, for the deployment and mooring of our PowerBuoys™. We have utilized
several different deployment methods, including towing the PowerBuoy™ to the deployment location and transporting the PowerBuoy™
to the deployment location by barge or ocean workboat. If these third parties do not properly deploy our systems, cannot effectively
deploy the PowerBuoy™ on a large, commercial scale, or otherwise do not perform adequately, or if we fail to recruit and
retain third parties to deploy our systems in particular geographic areas, our business, financial condition and results of operations
could be adversely affected.
Our
investments in joint ventures could be adversely affected by our lack of sole decision-making authority, our reliance on a co-venture’s
financial condition and disputes between us and our co-venture partners.
It
is part of our strategy that we may co-invest with third parties through joint ventures or by acquiring non-controlling interests
in special purpose entities. In these situations, we may not be in a position to exercise sole decision-making authority regarding
the joint venture. Our co-ventures may have economic or other business interests or goals that may not be consistent with our
own and may be in a position to take actions that are contrary to our policies or objectives. Additionally, investments in joint
ventures involve risks that would not be present were a third party not involved, including the possibility that our co-ventures
might become bankrupt or fail to fund their share of required capital contributions. Disputes between us and our co-venture partners
may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing
their time and effort on our business. In addition, we may not be able to identify appropriate strategic partners, or successfully
negotiate, finance or operate any joint ventures or other collaborative projects to advance this aspect of our strategy. Consequently,
both the entrance into a joint venture itself, or the failure to identify appropriate potential opportunities, could materially
and adversely affect our business, financial condition and results of operations.
Our
targeted markets are highly competitive. We compete against incumbent solutions already being utilized by our customers and potential
customers. If we are unable to compete effectively, we may be unable to increase our revenues and achieve or maintain profitability.
In
our targeted markets, which are highly competitive, we compete against incumbent power solutions already being utilized by our
customers and potential customers. If we are unable to demonstrate to our customers and our potential customers that our PowerBuoy™
is cost competitive to their existing alternative power solutions, or if it takes us longer to do so than we anticipate, we may
be unable to expand our business, maintain our competitive position, satisfy our contractual obligations, continue to commercialize
our PowerBuoy™, or become profitable. In addition, if the cost associated with these development efforts exceeds our projections,
our results of operations could be materially and adversely affected.
In
addition, competition may arise from other companies manufacturing similar products, developing different products that produce
energy more efficiently than our products, or making improvements to traditional energy-producing methods or technologies, any
of which could make our products less attractive or render them obsolete. If we are not successful in manufacturing systems that
generate competitively priced power, we may not be able to respond effectively to competitive pressures from other renewable energy
technologies or improvements to existing technologies.
If
we are unable to respond effectively to such competitive forces, our business, financial condition and results of operations could
be adversely affected. Our targeted markets are subject to their own inherent risks, and if those risks should materialize then
our business, financial condition and results of operations could be adversely affected.
We
market and plan to market our products in multiple international markets. If we are unable to manage our international operations
effectively, our business, financial condition and results of operations could be adversely affected.
We
market and plan to market our products in multiple global regions, including Europe, Australia, North America and parts of Asia,
and we are therefore subject to risks associated with having international operations. Revenues from customers who are based outside
of the U.S. accounted for 86% of our revenues in fiscal 2018 and 80% of our revenues in fiscal 2017. Risks inherent in international
operations include, but are not limited to, the following:
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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 PowerBuoys™ and make us less competitive in some countries;
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fluctuations
in exchange rates may affect demand for our PowerBuoys™ and may adversely affect our profitability in U.S. dollars to
the extent the price of our PowerBuoys™ and cost of raw materials and labor are denominated in a foreign currency;
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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 PowerBuoys™;
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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.
Risks
Related to Product Development and Commercialization
Our
product development costs are substantial and may increase in the future.
Our
product development costs primarily relate to our efforts to increase the output, durability and commercial viability of our PowerBuoy™.
Our product development costs were $4.3 million and $5.0 million in fiscal 2018 and 2017, respectively. It is our goal to fund
the majority of our product development expenses, including cost sharing obligations under some of our customer contracts, over
the next several years with sources of external funding, but we do not currently have any such committed sources of funding, and
we may not be able to secure any such funding in the future. If we are unable to obtain external funding, our operations may be
materially and adversely affected, and we may be required to curtail our product development expenses, among other consequences.
We
have only manufactured a limited number of PowerBuoys™ and to date we have not produced PowerBuoys™ in any significant
quantity or for commercial production. Our PowerBuoys™ have been used for testing and development and may not have a sufficient
operating history to confirm how they will perform over their estimated useful life.
We
began developing and testing wave energy technology over 15 years ago. However, to date, we have only manufactured a limited number
of PowerBuoys™ for use in ocean testing and development. The longest continuous in-ocean deployment of our PowerBuoy™
was from December 2009 to January 2012 and was an earlier iteration of our PowerBuoy™. As a result, our PowerBuoys™
may not have a sufficient operating history to confirm how they will perform over their estimated useful life. Our technology
may not yet have demonstrated that our engineering and test results can be duplicated in volume or in commercial production. We
have conducted and plan to continue to conduct practical testing of our PowerBuoy™. If our PowerBuoy™ is ultimately
proven ineffective or unfeasible, we may not be able to engage in commercial production of our products or we may become liable
to our customers for quantities we are obligated but are unable to produce. If our PowerBuoys™ perform below expectations,
we could lose customers and face substantial repair and replacement expenses which could in turn adversely affect our business,
financial condition and results of operations.
We
face numerous accident and safety risks and hazards, including extreme environmental hazards, which are inherent in offshore operations.
Portions
of our operations are subject to hazards and risks inherent in the building, testing, deploying and maintenance of our PowerBuoys™.
These hazards and risks could result in personal injuries, loss of life, liberation of a PowerBuoy™ from its mooring due
to extreme environmental conditions and damage caused by its drifting, and other damages which may include damage to our properties,
including our PowerBuoy™, and the properties of others and other consequential damages, and could lead to the suspension
of certain of our operations, large damage claims, damage to our safety reputation and a loss of business. Some of these risks
may be uninsurable and some claims may exceed our insurance coverage. Therefore, the occurrence of a significant accident or other
risk event or hazard that is not fully covered by insurance could materially and adversely affect our business and financial results
and, even if fully covered by insurance, could materially and adversely affect our business due to the impact on our reputation
for safety. In addition, the risks inherent in our business are such that we cannot assure that we will be able to maintain adequate
insurance in the future at reasonable rates.
Our
relationships with our strategic partners may not be successful, and we may not be successful in establishing additional relationships,
either of which could adversely affect our ability to commercialize our products and services.
An
important element of our business strategy is to enter into application development agreements and strategic alliances with companies
committed to providing products and services which require in-ocean energy sources. Generally, these types of relationships obligate
us to provide certain services or perform certain tasks in connection with the relationship with the alliance partner, and we
are generally responsible for paying the costs we incur relating to such services or tasks. These relationships generally are
not expected to provide us with any revenues or sources of financing. We currently have strategic arrangements with WCS and NDBC.
If we are unable to reach agreements with additional suitable alliance partners, we may fail to meet our business objectives for
the commercialization of our PowerBuoys™. We may face significant competition in seeking appropriate alliance partners.
Moreover, these development agreements and strategic alliances are complex to negotiate and time consuming to document. We may
not be successful in our efforts to establish additional strategic relationships or other alternative arrangements. The terms
of any additional strategic relationships or other arrangements that we establish may not be favorable to us. Furthermore, even
if we are able to find, negotiate and enter into these relationships, such arrangements may be conditional upon our receipt of
additional funding. There can be no assurance that we will receive such additional funding. In addition, strategic relationships
may not be successful, and we may be unable to sell and market our PowerBuoys™ to these companies, their affiliates and
customers in the future, or growth opportunities may not materialize. Any of which could adversely affect our business, financial
condition and results of operations.
We
have limited manufacturing experience. If we are unable to increase our manufacturing capacity in a cost-effective manner, our
business will be materially harmed.
We
plan to manufacture key components of our PowerBuoys™, including the PTO advanced control and generation systems, while
outsourcing the manufacturing for other components of our PowerBuoys™, including the structure itself. However, we have
only manufactured our PowerBuoys™ in limited quantities for use in development and testing and have limited commercial manufacturing
experience, and our work with our vendors has not included work on multiple orders on time-critical deadlines. Our future success
depends on our ability to significantly increase both our manufacturing capacity and production throughput in a cost-effective
and efficient manner, and to manage multiple vendors with several orders on specific deadlines. In order to meet our growth objectives,
we will need to increase our engineering, contract management, and manufacturing staff. There is intense competition for hiring
qualified technical and engineering personnel, and we have limited funding available to retain such additional staff. Therefore,
we may not be able to hire a sufficient number of qualified personnel to allow us to meet our growth objectives.
We
may be unable to develop efficient, low-cost manufacturing capabilities and processes that enable us to meet the quality, price,
engineering, design and production standards or production volumes necessary to successfully commercialize our PowerBuoys™.
If we cannot do so, we may be unable to expand our business, satisfy our contractual obligations or become profitable. Even if
we are successful in developing our manufacturing capabilities and processes, we may not be able to do so in time to meet our
commercialization schedule or satisfy the requirements of our customers.
Problems
with the quality or performance of our PowerBuoys™ would adversely affect our business, financial condition and results
of operations.
Our
agreements with customers will generally include guarantees with respect to the quality and performance of our PowerBuoys™.
Because of the limited operating history of our PowerBuoys™, we have been required to make analytical assumptions regarding
the durability, reliability and performance of the systems, and we may not be able to predict whether and to what extent we may
be required to perform under the guarantees that we expect to give our customers. Our assumptions could prove to be materially
different from the actual performance of our PowerBuoys™, causing us to incur substantial expense to repair or replace defective
systems in the future. We will bear the risk of claims long after we have sold our PowerBuoys™ and recognized revenue. Moreover,
any widespread product failures could adversely affect our business, financial condition and results of operations.
We
have not yet deployed a wave power array of two or more PowerBuoys™ in a single geographic location. If we are unable to
successfully deploy a multiple-system wave power array, our capability to generate revenues may be limited, and we may be unable
to achieve and then maintain profitability.
We
have not yet deployed a wave power array of two or more PowerBuoys™. Whether we are able to do so is contingent upon, among
other things, our ability to manufacture and produce multiple PowerBuoys™ in a short period of time, receipt of required
governmental permits, obtaining adequate financing, successful array design and implementation and, finally, successful deployment
and connection of the PowerBuoys™.
We
have not yet conducted ocean testing or otherwise installed in the ocean a multiple-system wave power array. In particular, unlike
single-system wave power arrays, multiple-system wave power arrays may require the use of an underwater substation to connect
the power transmission cables from, and collect the electricity generated by, each PowerBuoy™ in the array. We have not
yet deployed an underwater substation connected to multiple PowerBuoys™. In addition, unanticipated issues may arise with
the logistics and mechanics of deploying and maintaining multiple PowerBuoys™ at a single site and the additional equipment
associated with these multiple system wave power arrays.
The
development and deployment of an array of PowerBuoys™ could require us to incur significant expenses for preliminary engineering,
permitting and other expenses before we can determine whether a project is feasible, economically attractive or capable of being
financed. We may be unsuccessful in accomplishing any of these tasks or doing so on a timely basis.
Our
future success in our selected markets depends in part on our ability to achieve cost savings over existing and incumbent solutions.
If we are unable to achieve cost savings relating to our PowerBuoy™, the commercial prospects for our PowerBuoy™ may
be adversely affected.
Our
goal is to commercialize our PowerBuoy™. Our success in meeting this objective depends, in part, on our ability to provide
energy to our prospective customers at a cost savings over existing and incumbent power solutions already being utilized by our
customers and potential customers. We have experienced problems and delays in the development and deployment of our PowerBuoy™
in the past, and could experience similar delays or other difficulties in the future. If we are unable to demonstrate to our prospective
customers that our PowerBuoy™ is cost competitive with existing alternative power sources, or if it takes us longer to do
so than we anticipate, we may be unable to continue our business, achieve commercialization of our PowerBuoy™, achieve a
competitive position, satisfy our contractual obligations, or become profitable. In addition, if the costs associated with these
development efforts exceed our projections, our results of operations will be materially and adversely affected.
Risks
Related to Intellectual Property
If
we are unable to obtain or maintain intellectual property rights relating to our technology and products, the commercial value
of our technology and products may be adversely affected, which could in turn adversely affect our business, financial condition
and results of operations.
Our
success and ability to compete depends in part upon our ability to obtain protection in the U.S. and other countries for our products
by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We
own a variety of patents and patent applications in the U.S. and corresponding patents and patent applications in several foreign
jurisdictions. However, we have not obtained patent protection in each market in which we plan to compete. In addition, we do
not know how successful we would be should we choose to assert our patents against suspected infringers and we do not know what
the cost to do so would be. Our pending and future patent applications may not issue as patents or, if issued, may not issue in
a form that will be advantageous to us. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which
could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we
may have for our products. Changes in either patent laws or in interpretations of patent laws in the U.S. and other countries
may diminish the value of our intellectual property or narrow the scope of our patent protection, which could in turn adversely
affect our business, financial condition and results of operations.
If
we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products
could be adversely affected, which could in turn adversely affect our business, financial condition and results of operations.
In
addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how, particularly with respect
to our PowerBuoy™ control and electricity generating systems. We generally seek to protect this information in part by confidentiality
agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies
for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.
Foreign
laws may not afford us sufficient protections for our intellectual property, and we may not be able to obtain patent protection
outside of the United States.
Intellectual
property rights protection continues to present significant challenges to foreign businesses in many countries around the world.
The body of law is often relatively undeveloped compared to the commercial law in the United States and only limited protection
of intellectual property may be available in those jurisdictions. Although we have taken precautions to protect our intellectual
property, any local design or manufacture of products that we undertake in a foreign jurisdiction could subject us to an increased
risk that unauthorized parties will be able to copy or otherwise obtain or use our intellectual property, which could harm our
business. We may also have limited legal recourse in the event we encounter patent or trademark infringement. If we are unable
to manage our intellectual property rights, our business and operating results may be seriously harmed.
If
we infringe or are alleged to have infringed upon intellectual property rights of third parties, our business, financial condition
and results of operations could be adversely affected.
Our
products or use of our trademarks may infringe, or be claimed to infringe, upon patents, patent applications or trademarks under
which we do not hold licenses or other rights. Third parties may own or control these patents, patent applications or trademarks
in the United States and abroad. From time to time, we receive correspondence from third parties offering to license patents to
us. Correspondence of this nature might be used to establish that we received notice of certain patents in the event of subsequent
patent infringement litigation. Third parties could bring claims against us that would cause us to incur substantial expenses
and, if successfully asserted against us, could cause us to pay substantial damages. Further, if a patent or trademark infringement
suit were brought against us, we could be forced to stop or delay manufacturing or sales of the product or component that is the
subject of the suit.
As
a result of patent or trademark infringement claims, or in order to avoid potential claims, we may choose or be required to seek
a license from the third party and be required to pay license fees, royalties or both. These licenses may not be available on
acceptable terms, or at all. Even if we were able to obtain a license, the rights may be non-exclusive, which could result in
our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of our business
operations if, as a result of actual or threatened patent or trademark infringement claims, we are unable to enter into licenses
on acceptable terms. This could significantly and adversely affect our business, financial condition and results of operations.
In
addition to infringement claims against us, we may become a party to other types of patent or trademark litigation and other proceedings,
including proceedings declared by the U.S. Patent and Trademark Office and proceedings in the European Patent Office, regarding
intellectual property rights with respect to our products and technology. The cost to us of any patent or trademark litigation
or other proceeding, even if resolved in our favor, could be substantial. In addition, if we were to license our intellectual
property to others, we may be required to indemnify our licensee if the licensed intellectual property is found to be infringing
on a third party’s rights. Some of our competitors may be able to sustain the costs of such litigation or proceedings more
effectively than we can because of their greater financial resources.
Our
contracts with governmental entities could negatively affect our intellectual property rights, and our ability to commercialize
our products could be impaired.
Our
agreements with government agencies in large part fund the research and development of our PowerBuoy™. When new technologies
are developed with U.S. government funding, the government obtains certain rights in any resulting patents, technical data and
software, generally including, at a minimum, a non-exclusive license authorizing the government to use the invention, technical
data or software for non-commercial purposes. These rights may permit the government to disclose our confidential information
to third parties and to exercise “march-in” rights. March-in rights refer to the right of the U.S. government to require
us to grant a license to the technology to a responsible applicant or, if we refuse, the government may grant the license itself.
U.S. government-funded inventions must be reported to the government and U.S. government funding must be disclosed in any resulting
patent applications; our rights in such inventions will normally be subject to government license rights, periodic post-contract
utilization reporting, foreign manufacturing restrictions and march-in rights.
The
government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application
of the technology or because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations
or to give preference to U.S. industry. Our government-sponsored research contracts are subject to audit and require that we provide
regular written technical updates on a monthly, quarterly or annual basis, and, at the conclusion of the research contract, a
final report on the results of our technical research. Because these reports are generally available to the public, third parties
may obtain some aspects of our sensitive confidential information. Moreover, if we fail to provide these reports or to provide
accurate or complete reports, the government may obtain rights to any intellectual property arising from the related research.
Funding from government contracts also may limit when and how we can deploy our technology developed under those contracts. Foreign
governments with which we contract to provide funding for our research and development may seek similar rights.
Risks
Related to Regulatory and Compliance Matters
If
we are unable to obtain all necessary regulatory permits and approvals, it could be possible we will not be able to implement
our planned projects or business plan.
Offshore
deployment of our PowerBuoy™ is heavily regulated. Each of our deployments is subject to multiple permitting and approval
requirements. We are dependent on state, federal and regional government agencies for such permits and approvals. Due to the unique
nature of in-ocean power generation and the associated potential for environmental hazards of PowerBuoy™ deployment, we
expect our projects to receive close scrutiny by permitting agencies, approval authorities and the public, which could result
in substantial delay in the permitting process. Successful challenges by any parties opposed to our deployments could result in
increased costs, or in the denial of necessary permits and approvals.
If
we are unable to obtain necessary permits and approvals in connection with any or all of our projects, those projects would not
be implemented and our business, financial condition and results of operations would be adversely affected. Further, we cannot
assure you that we have been or will be at all times in complete compliance with all such permits and approvals. If we violate
or fail to comply with these permits and approvals, we could be fined or otherwise sanctioned by regulators.
In
the event we are unable to satisfy regulatory requirements relating to internal control over financial reporting, or if our internal
controls are not effective, our business and financial results may suffer.
Effective
internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively
prevent fraud. Pursuant to the Sarbanes-Oxley Act of 2002, we are required to furnish a report by management on internal control
over financial reporting, including management’s assessment of the effectiveness of such control. Internal control over
financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of
human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only
reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of
any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that
the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate. If we fail to maintain the adequacy of our internal controls, including any failure to implement new or improved
controls, or if we experience difficulties in their implementation, our business and operating results could be harmed, we could
fail to meet our reporting obligations, and there could also be a material adverse effect on our stock price.
Our
business could suffer as a result of the United Kingdom’s decision to end its membership in the European Union
The
decision of the United Kingdom (U.K.) to exit from the European Union (E.U.) (generally referred to as “BREXIT”) could
cause disruptions to and create uncertainty surrounding our business, including affecting our relationships with existing and
potential customers, suppliers and employees. The effects of BREXIT will depend on any agreements the U.K. makes to retain access
to E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt some of our target
markets and jurisdictions in which we operate, and adversely change tax benefits or liabilities in these or other jurisdictions.
In addition, BREXIT could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines
which E.U. laws to replace or replicate. BREXIT also may create global economic uncertainty, which may cause our customers and
potential customers to monitor their costs and reduce their budgets for our products and services. Any of these effects of BREXIT,
among others, could materially adversely affect our business, business opportunities, results of operations, financial condition
and cash flows.
Business
activities conducted by our third-party contractors and us involve the use of hazardous materials, which require compliance with
environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject
to significant fines, liabilities or other adverse consequences.
Our
manufacturing operations, particularly some of the activities undertaken by our third-party suppliers and manufacturers, involve
the controlled use of hazardous materials. Accordingly, our third-party contractors and we are subject to foreign, federal, state
and local laws governing the protection of the environment and human health and safety, including those relating to the use, handling
and disposal of these materials. We cannot completely eliminate the risk of accidental contamination or injury from these hazardous
materials. In the event of an accident or failure to comply with environmental or health and safety laws and regulations, we could
be held liable for resulting damages, including damages to natural resources, fines and penalties, and any such liability could
adversely affect our business, financial condition and results of operations.
Environmental
laws and regulations are complex, change frequently and have tended to become more stringent over time. While we have budgeted
for future capital and operating expenditures to maintain compliance, we cannot assure you that environmental laws and regulations
will not change or become more stringent in the future. Therefore, we cannot assure you that our costs of complying with current
and future environmental and health and safety laws, and any liabilities arising from past or future releases of, or exposure
to, hazardous substances will not adversely affect our business, financial condition or results of operations.
Risks
Related to Litigation
We
are the subject of pending litigation, which is costly and time-consuming to defend, and if decided against us, could require
us to pay substantial judgments or settlements. We may be the subject of future securities or other litigation, which could adversely
affect our company, our business and our liquidity.
We
are the subject of certain pending litigation. Any litigation is costly and time consuming to defend and may distract our
management from the daily operations of our business. We may be the subject of additional future litigation, which could adversely
affect our company, our business and our liquidity. Although we maintain directors’ and officers’ insurance coverage,
we cannot assure you that this insurance coverage will be sufficient to cover the substantial fees of lawyers and other professionals
advisors relating to these pending lawsuits or any future litigation, our obligations to indemnify our officers and directors
who may become parties to such pending and future actions, or the amount of any judgments or settlements that we may be obligated
to pay in connection with these lawsuits. In addition, these actions have caused our insurance premiums and retention amounts
to increase, and we may be subject to additional increases in the future or be subjected to other changes in our insurance coverages.
Further, given the volatility of the market price of our Common Stock, we may be subject to future class action securities
and other litigation. Accordingly, we have incurred and may continue to incur substantial legal expenses, judgments and/or settlements
relating to pending and future litigation and our management’s time and attention may be diverted from the operation of
our business, which could materially and adversely affect the Company.
We
may become the target of additional securities litigation, which is costly and time-consuming to defend.
In
the past, companies that experience significant volatility in the market price of their publicly-traded securities have become
subject to class action securities litigation. Our stock price has been volatile, and class action securities litigation
and derivative lawsuits have been filed against us and it is possible that additional lawsuits could be brought against us in
the future. The results of complex legal proceedings are difficult to predict. These lawsuits assert types of claims that, if
resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement of these lawsuits, or any
future lawsuits, could have a material adverse effect on our business, financial condition, results of operations and/or stock
price. Even if any future lawsuits, are not resolved against us, the costs of defending such lawsuits may be material to our business
and our operations. Moreover, these lawsuits may divert our management’s attention from the operation of our business. For
more information on our legal proceedings, see Item 3 “Legal Proceedings” of this Annual Report and Note 14 “Commitments
and Contingencies – Litigation” in the accompanying consolidated financial statements for the fiscal year ended April
30, 2018.
Risks
Related to Our Common Stock
If
we issue additional shares of our equity securities in the future, our stockholders may experience substantial dilution in the
value of their investment or their ownership interest.
Our
certificate of incorporation currently authorizes us to issue up to 50,000,000 shares of our Common Stock and to issue and designate
the rights of, without stockholder approval, up to 5,000,000 shares of preferred stock. In the future, in order to raise additional
capital, we may offer additional shares of our Common Stock or other securities convertible into or exchangeable for our Common
Stock at prices that may not be the same as the price per share paid by other investors, and dilution to our stockholders in the
value of their investment and their ownership and voting interest in the Company could result. We may sell shares or other securities
in any other offering at a price per share that is less than the price per share paid by existing investors, and investors purchasing
shares or other securities in the future could have rights superior to existing stockholders.
In
addition, we have a significant number of stock options and warrants outstanding. To the extent that outstanding stock options
or warrants have been or may be exercised or other shares issued, current stockholders and future investors who have purchased
our Common Stock will experience further dilution. In addition, we may choose to raise additional capital due to market conditions
or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent
that we issue new securities, or raise additional capital through the sale of equity or convertible debt securities, the issuance
of these securities could result in further dilution to our stockholders or result in downward pressure on the price of our Common
Stock.
Historically,
our stock price has been volatile and this is likely to continue; purchasers of our Common Stock could incur substantial losses
as a result.
Historically,
the market price of our Common Stock has fluctuated significantly, and we expect that this will continue. Purchasers of our Common
Stock could incur substantial losses relating to their investment in our stock as a result. For the fiscal year ended April 30,
2018, the 52-week high and low prices for our Common Stock was $1.02 and $2.54, respectively. Also, the stock market in general
has recently experienced volatility that has often been unrelated or disproportionate to the operating performance of particular
companies. These broad market fluctuations could result in fluctuations in the price of our Common Stock, which could cause purchasers
of our Common Stock to incur substantial losses. The market price for our Common Stock may be influenced by many factors, including:
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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.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
Not
applicable.
ITEM
2.
PROPERTIES
Our
corporate headquarters are currently located in Monroe Township, New Jersey, where we occupy approximately 56,000 square feet
under a lease expiring on October 31, 2024. We use this facility for administration, research and development, as well as assembly
and testing of the generators and control models for our PowerBuoy™ systems.
ITEM
3.
LEGAL
PROCEEDINGS
Shareholder
Litigation and Demands
The
Company and certain of its current and former directors and officers were defendants in a derivative lawsuit filed on March 18,
2015 in the United States District Court for the District of New Jersey captioned
Labare v. Dunleavy, et. al.,
Case No.
3:15-cv-01980-FLW-LHG. The derivative complaint alleged claims for breach of fiduciary duty, abuse of control, gross mismanagement
and unjust enrichment relating to the now terminated agreement between Victorian Wave Partners Pty. Ltd. (VWP) and the Australian
Renewable Energy Agency (ARENA) for the development of a wave power station. The derivative complaint sought unspecified monetary
damages and other relief.
On
July 10, 2015, a second derivative lawsuit, captioned
Rywolt v. Dunleavy, et al., Case No. 3:15-cv-05469
, was filed by
another shareholder against the same defendants in the United States District Court for the District of New Jersey alleging similar
claims for breach of fiduciary duty, gross mismanagement, abuse of control, and unjust enrichment relating to the now terminated
agreement between VWP and ARENA. The
Rywolt
complaint also sought unspecified monetary damages and other relief. On February
8, 2016, the Court issued an order consolidating the
Labare
and
Rywolt
actions, appointing co-lead plaintiffs and
lead counsel, and ordering a consolidated amended complaint to be filed within 30 days of the order. On March 9, 2016, the co-lead
plaintiffs filed an amended complaint consolidating their claims and seeking unspecified monetary damages and other relief.
On
April 21, 2016, a third derivative lawsuit, captioned
LaCalamito v. Dunleavy, et al.
, Case No. 3:16-cv-02249, was filed
by another shareholder against certain current and former directors and officers of the Company in the United States District
Court for the District of New Jersey alleging similar claims for breach of fiduciary duty relating to the now terminated agreement
between VWP and ARENA. The
LaCalamito
complaint sought unspecified monetary damages and other relief. The Company was not
formally served and did not respond to the complaint.
On
June 9, 2016, a fourth derivative lawsuit, captioned
Pucillo v. Dunleavy, et al.
, was filed by another shareholder against
certain current and former directors and officers of the Company in the United States District Court for the District of New Jersey
alleging similar claims for breach of fiduciary duty, unjust enrichment, and abuse of control relating to the now terminated agreement
between VWP and ARENA. The
Pucillo
complaint sought unspecified monetary damages and other relief. On August 2, 2016, the
parties in the
Pucillo
lawsuit filed a Stipulation and Proposed Order pursuant to which: (i) the defendants agreed to accept
service of the
Pucillo
complaint; (ii) the parties agreed to stay the
Pucillo
action pending the filing and resolution
of a motion to consolidate the
Pucillo
action with the
Labar
e and
Rywolt
actions; and (iii) the parties agreed
that the defendants shall not be required to respond to the
Pucillo
complaint during the pendency of the stay. The Court
approved the Stipulation on August 3, 2016.
On
October 25, 2016, the Court approved and entered a Stipulation and Order that, among other things, (i) consolidated the four derivative
actions; (ii) identified plaintiff
Pucillo
as the lead plaintiff in the consolidated actions; and (iii) stayed the consolidated
actions pending the November 14, 2016 settlement hearing in the now-settled securities class action and further order of the Court.
On
October 23, 2017, the parties entered into a Stipulation and Agreement of Settlement to resolve the four consolidated derivative
lawsuits. The settlement provided for, among other things, the Company to implement certain corporate governance changes,
a $350,000 payment to the plaintiffs’ attorneys for attorneys’ fees and costs that will be made by the Company’s
insurance carrier, dismissal of the derivative lawsuits, and certain releases. On November 21, 2017, the plaintiffs filed an unopposed
motion seeking preliminary approval of the settlement, which the Court granted on March 9, 2018. On May 14, 2018, the Court held
a final settlement approval hearing at which the Court stated that it was approving the settlement. On June 13, 2018, the Court
issued a Final Order and Judgement, approving the Stipulation and Agreement of Settlement. As of April 30, 2018, the Company
has accrued $350,000 related to this matter as a probable and reasonably estimable loss contingency with the offset to Statement
of Operations. The Company also recorded a receivable of $350,000 from its insurance carrier with the offset to the Statement
of Operations.
On
May 26, 2017, an attorney claiming to represent two stockholders sent the Company’s Board of Directors a Stockholder Litigation
Demand letter (“Stockholder Demand”). The Stockholder Demand alleges that the voting of shares for the 1-for-10 reverse
stock split at the 2015 annual meeting of stockholders held on October 22, 2015 was not properly counted, and further alleges
that, although the Company reported the reverse stock split as having been passed, if the vote was properly counted the reverse
stock split would not have been approved. The Stockholder Demand requests the Board of Directors either to deem the reverse stock
split as ineffective and disclose the same or to seek a proper and effective stockholder ratification of the reverse stock split.
In addition, the Stockholder Demand requests the Board of Directors to adopt and implement adequate internal controls and systems
to prevent the alleged improper voting from recurring.
On June 23, 2017,
the Company responded to the Stockholder Demand, explained the procedures that were followed for the 2015 annual meeting of stockholders
and provided the Oath of the Inspector of Elections and the Certificate of the Inspector of Elections that certified as accurate
the results of the voting at the meeting including voting on the reverse stock split proposal. On June 26, 2017, the attorney
representing the alleged stockholders replied to the Company’s response, further alleged that the proxy statement underlying
the 2015 annual meeting provided voting instructions that misled the stockholders regarding whether their brokers could vote on
the reverse stock split proposal and renewed their requests of the Board. O
n July 24,2017, the Company provided an additional
response to the Stockholder Demand, denied the allegations, and declined to take any of the actions requested.
On
June 13, 2018, Tiderunner Marine, Inc. filed a lawsuit in the United States District Court for the District of New Jersey captioned
Tiderunner Marine, Inc. v. Ocean Power Technologies, Inc.
, Case No. 1:18-cv-10496. The complaint names Ocean Power Technologies,
Inc. as defendant and alleges claims for breach of contract, unjust enrichment, conversion, and fraud, negligent and/or reckless
misrepresentation all as associated with the removal of an OPT mooring system off the coast of New Jersey that was completed in
May 2017. The complaint seeks damages in the amount of $2,825,130 together with interest, costs, attorney’s fees, punitive
damages and such other relief as may be appropriate under the circumstances. OPT has retained counsel, is investigating the claims,
and has not yet responded to the lawsuit.
Employment
Litigation
On
June 10, 2014, the Company announced that it had terminated Charles Dunleavy as its Chief Executive Officer and as an employee
of the Company for cause, effective June 9, 2014, and that Mr. Dunleavy had also been removed from his position as Chairman of
the Board of Directors. On June 17, 2014, Mr. Dunleavy wrote to the Company stating that he had retained counsel to represent
him in connection with an alleged wrongful termination of his employment. On July 28, 2014, Mr. Dunleavy resigned from the Board
and the boards of directors of the Company's subsidiaries. In 2014, the Company and Mr. Dunleavy have agreed to suspend
his alleged employment claims pending resolution of a class action shareholder litigation (resolved in May 2017) and
then agreed to continue to the suspension pending resolution of the derivative litigation described (resolved in June 2018.
As of the filing of this report, the claims are still suspended.
Except
for the Stipulation agreement noted previously, we have not established any provision for losses relating to these claims and
pending litigation. Due to the stages of these proceedings, and considering the inherent uncertainty of these claims and litigation,
at this time we are not able to predict or reasonably estimate whether we have any possible loss exposure or the ultimate outcome
of these claims.
Regulatory
Matters
SEC
Investigation
On
April 30, 2018, the Company received a letter from the SEC staff in the Philadelphia regional office announcing that the SEC had
concluded its investigation of the Company. The investigation began on February 4, 2015, when the Company received a subpoena
from the SEC requesting information related to the discontinued VWP Project in Australia. On July 12, 2016, the SEC issued second
subpoena requesting information related to the Company’s April 4, 2014 public offering. The Company provided information
to the SEC in response to both subpoenas and cooperated with the SEC throughout its investigation. In its letter of April 30,
2018, the SEC stated that it does not intend to recommend an enforcement action by the SEC against the Company.
Spain
IVA (sales tax)
In
June 2012, the Company received notice that the Spanish tax authorities are inquiring into its 2010 IVA (value-added tax) filing
for which the Company benefitted from the offset of approximately $0.3 million of input tax. The Company believed that the tax
credit was properly claimed and, therefore, no liability was recorded. The Company issued two letters of credit totaling €0.3
million ($0.3 million) at the request of the Spanish tax authorities. On January 31, 2017 the Company received $0.2 million from
the Spanish tax authorities as a result of the conclusion of the inquiry. In addition, during February 2017, the Spanish tax authorities
approved release of the two outstanding letters of credit.
Spain
Income Tax Audit
We
are currently undergoing an income tax audit in Spain for the period from 2008 to 2014, when our Spanish branch was closed. The
branch reported net operating losses for each of the years reported that the Spanish tax inspector claims should have been capitalized
on the balance sheet instead of charged as an expense in the Statement of Operations. As of April 30, 2017, we had recorded a
penalty of $132,000 to Selling, general and administrative costs in the Statement of Operations. The Spanish tax inspector has
recently closed its discussion relating to the capitalization of expenses and as of April 30, 2018 the Company reversed the penalty.
However, the Spanish tax inspector has now raised questions with respect to the Company’s recognition of funds received
in 2011 to 2014 from a governmental grant from the European Commission in connection with the Waveport project. It is anticipated
that we will be assessed a penalty relating to these tax years. We have estimated this penalty to be $177,000 as of April 30,
2018. We have recorded the penalty to Selling, general and administrative costs in the Statement of Operations.
Item
4.
MINE
SAFETY DISCLOSURES
None.
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Stock
Price Information and Stockholders
Our
common stock is listed on the NASDAQ Capital Market, under the symbol “OPTT.” As of June 29, 2018, there were 161
holders of record for shares of our common stock. Since a portion of our common stock is held in “street” or nominee
name, we are unable to determine the exact number of beneficial holders.
The
following table sets forth the high and the low sale prices of our common stock as quoted by the NASDAQ Stock Market for the period
indicated.
|
|
|
NASDAQ
Stock Market
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended April 30, 2018
|
|
|
|
|
|
|
|
|
|
First
quarter ended July 31, 2017
|
|
$
|
1.62
|
|
|
$
|
1.20
|
|
|
Second quarter
ended October 31, 2017
|
|
|
2.54
|
|
|
|
1.14
|
|
|
Third quarter
ended January 31, 2018
|
|
|
1.32
|
|
|
|
1.02
|
|
|
Fourth quarter
ended April 30, 2018
|
|
|
1.52
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended April 30, 2017
|
|
|
|
|
|
|
|
|
|
First quarter
ended July 31, 2016
|
|
$
|
15.65
|
|
|
$
|
1.37
|
|
|
Second quarter
ended October 31, 2016
|
|
|
10.48
|
|
|
|
2.29
|
|
|
Third quarter
ended January 31, 2017
|
|
|
5.89
|
|
|
|
2.00
|
|
|
Fourth quarter
ended April 30, 2017
|
|
|
3.67
|
|
|
|
1.33
|
|
Dividend
Policy
We
have never declared or paid any cash dividends on our common stock, and we do not currently anticipate declaring or paying cash
dividends on our common stock in the foreseeable future. We currently intend to retain all of our future earnings, if any, to
finance the growth and development of our business. Any future determination relating to our dividend policy will be made at the
discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements,
financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may
deem relevant.
Transfer
Agent Information
Our
transfer agent is Computershare Trust Company, N.A. Computershare is located at 250 Royall Street, Canton, MA 02021-1011. Its
contact information is: United States and Canada: (800) 662 – 7232, International (781) 575 – 4238 and its website
is located at
www.computershare.com
.
Purchases
of Equity Securities by the Issuer
The
following table details our share repurchases for the three months ended April 30, 2018:
|
Period
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
|
|
|
Approximate
Dollar
Value of Shares that May Yet Be Purchased Under the Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
1 - February 28
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
March 1 -
March 31
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
April 1 -
April 30
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Equity
Compensation Plan Information
See
“Part III, Item 12- Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters- Equity
Compensation Plan Information.”
Unregistered
Sales of Equity Securities and Use of Proceeds
There
have been no unregistered sales of equity securities or purchases of equity securities that are required to be disclosed.
ITEM
6.
SELECTED
FINANCIAL DATA
Not
Applicable.
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K.
Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including
information with respect to our plans and strategy for our business and related financing, includes forward-looking statements
that involve risks and uncertainties. You should review the “Risk Factors” section of this Annual Report, and elsewhere
in this report, for a discussion of important factors that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal year ends on April
30. References to fiscal 2018 are to the fiscal year ended April 30, 2018.
Overview
We
are commercializing proprietary systems that generate electricity by harnessing the renewable energy of ocean waves. Our PowerBuoy™
systems use proprietary technologies to convert the mechanical energy created by the rising and falling of ocean waves into electricity.
We currently have developed our PB3 PowerBuoy™ product. Since fiscal 2002, government agencies have accounted for a significant
portion of our revenues, which were largely for the support of our product development efforts. Our goal is that an increased
portion of our revenues will be from the sale of products and services, as compared to revenue from grants to support our product
development efforts. As we continue to advance our proprietary technologies, we expect to have a net use of cash in operating
activities unless or until we achieve positive cash flow from the commercialization of our products and services.
We
are marketing our PowerBuoy™, which is designed to generate power for use independent of the power grid, to customers that
require electricity in remote locations. We believe there are a variety of potential applications for our PowerBuoy™, within
markets such as oil and gas, ocean observing, security and defense and as well as other markets, which we refer to collectively
as autonomous application markets.
We
were incorporated in New Jersey in 1984, began business operations in 1994, and were re-incorporated in Delaware in 2007. We currently
have five wholly-owned subsidiaries: Ocean Power Technologies Ltd., organized under the laws of the United Kingdom, Reedsport
OPT Wave Park LLC, organized under the laws of Oregon, and Oregon Wave Energy Partners I, LLC, organized under the laws of Delaware,
Ocean Power Technologies (Australasia) Pty Ltd (“OPTA”), organized under the laws of Australia. OPTA owns 100% of
Victorian Wave Partners Pty. Ltd. (“VWP”), which is also organized under the laws of Australia.
Product
Development
The
development of our technology has been funded by revenue generating projects, capital we raised and by development engineering
contracts we received starting in fiscal 1995, including projects with the DOE, the U.S. Navy, the Department of Homeland Security
and MES. Please see Item 1 of this Annual Report– “Business – Customers” and “Historic Projects”
for more information.
Through
these historic projects, we also continued development of our PowerBuoy™ technologies. We are continuing to focus on marketing
and developing our PowerBuoy™ products and services for use in autonomous power applications.
During
fiscal 2018, we continued to focus on the commercialization of our PowerBuoy™ technology, while expanding the application
of our PB3 product in autonomous application markets. During fiscal 2018, we gained additional field experience with our PB3 by
completing the demonstration of the PowerBuoy™ in an ocean observing application with MES. In January 2018, we were awarded
a contract from Premier Oil
to study the feasibility of using the PB3 PowerBuoy™ for decommissioning
operations in the North Sea
. The work under this contract was completed in May 2018.
In March
2018, we entered into an agreement with Eni S.p.A. (“Eni”) that provides for a minimum 24-month contract that includes
an 18-month PB3 PowerBuoy™ lease and associated project management. The PB3 PowerBuoy™ will be deployed in the Adriatic
Sea to advance Eni’s Clean Sea technology for marine environmental monitoring and offshore asset inspection using AUVs.
Additionally,
we completed the Phase I work under the contract with the U.S. Department of Defense Office of Naval Research
(“ONR”), which focused on the initial concept design and development of a mass-on-spring PTO-based PowerBuoy™.
We are waiting for ONR funding of Phase II to be approved. Working closely with potential customers, we also continued to analyze
and further develop new applications for the PowerBuoy™ including subsea well monitoring for oil and gas, AUV charging,
and independent telecommunications platforms.
In
fiscal 2017, we completed our work under our DOE contract that focused on further optimization of our modular PTO technology and
delivered the project final report to the DOE in the prior year. In the prior year, we successfully completed the final stage
and associated review with the DOE of the contract deliverables during which the DOE reviewed advancements related to PTO design
aspects such as reliability, cost take out, manufacturability and scalability. As we continued to focus on the development and
validation of our PB3 PowerBuoy™ commercial product, our activities concentrated mainly on implementing all of our lessons
learned during our efforts in the prior fiscal year from our ocean deployments and accelerated life testing (“ALT”).
The resulting improved PB3 PowerBuoy™ was deployed off the coast of New Jersey in July of 2016 and was retrieved early December
2016 upon completing all intended testing and validation. Inspection and refurbishment of the PB3 PowerBuoy™ were completed
and this PB3 was shipped for delivery to MES in Japan where it was deployed off Kozushima Island in the Pacific Ocean from April
2017 and was retrieved in mid-September 2017 after successfully fulfilling the requirements of our lease with MES.
ALT
of the PB3 commercial PTO is ongoing with no failures to date. In addition to the deployment of the PB3 PowerBuoy™, the
prior generation pre-commercial PB3 (“PB3-A1”), was fitted with a sensor that collects tagged marine mammal migration
information as well as with a Self-Contained Ocean Observing Payload (“SCOOP”). The marine mammal migration detection
sensor was attached to the PB3-A1 PowerBuoy™ as part of an agreed scope of work with the Wildlife Conservation Society (“WCS”)
through a memorandum of agreement between WCS and OPT. The SCOOP payload was integrated into PB3-A1 to complete the Phase 1 work
scope of a Cooperative Research and Development Agreement (“CRADA”) between the National Data Buoy Center (“NDBC”)
and OPT. The PB3-A1, deployed off the coast of New Jersey in May 2016, was retrieved in October 2016
.
From July 2016 through
October 2016, both PB3-A1 and PB3 were concurrently deployed generating valuable performance validation data. Both the NDBC SCOOP
as well as the WCS tagged mammal migration detection sensor met all of their performance requirements. This pre-commercial PowerBuoy™,
referred to as “PB3-A1” has now undergone a full upgrade and has achieved full commercial status by retrofitting it
with the final commercial PTO including our modular energy storage system, and to make it available to support our on-going commercialization
efforts. In addition to the PB3 commercial product validation activities, a concerted effort has been underway which focuses on
proactively implementing additional features driven by extensive and direct discussions with potential users and customers in
our target markets. Such features include:
|
|
●
|
The
design, development and implementation of a versatile mooring interface that allows the PB3 to accommodate various types of
mooring configurations depending on the specifics and the needs of the customer, eliminating the need for a redesign to the
device.
|
|
|
●
|
The
design, development and implementation of a flexible power transmission system intended to support delivery of power and communication
capabilities to customer payloads which are external to the PowerBuoy™, and which may reside in the water column or
on the seabed.
|
Additionally,
and building upon our initial success in implementing an auto-ballast system in our commercial PB3, we further enhanced this feature
in order to achieve faster and more cost effective PB3 deployments and retrievals.
As
we are focusing all resources on enhancing and commercializing our PB3, we have curtailed the development of our PB15, the next
scale-up of our autonomous PowerBuoy™, which will provide higher peak power than our PB3. To date we completed the preliminary
design of our PB15 and are continuing to obtain market feedback on the value proposition of this design. While this scale-up leverages
every aspect of the product development and validation of the PB3, it may also strategically position the product to allow OPT
to respond to higher power needs as expressed by potential end-users and customers in our target markets.
As
previously stated, the PB3 has achieved commercial status through a series of design iterations which focused on improving its
reliability and survivability in the ocean environment. Though the PB3 will continue to undergo further enhancements through customary
product life cycle management, we believe the PB3 has achieved a maturity level for immediate commercial use. We believe that
the PB3 will generate and store sufficient power to address various application requirements in our target markets. Our product
development and engineering efforts are focused, in part, on increasing the energy output and efficiency of our PowerBuoys™
and, if we are able to do so, we believe the PowerBuoy™ would be useful for additional applications where cost savings and
additional power are required by our potential customers. We continue to explore opportunities in these target markets. We believe
that by demonstrating the capability of our PowerBuoy™ in oil & gas and telecommunications applications, we can advance
our technology and gain further adoption from our target markets. We continue to improve design and manufacturing of the PB3 to
enhance our ability to improve customer value, displace additional incumbent solutions, and become the preferred power source
for new and existing applications in our target markets.
We
are utilizing our experience with multiple commercial PB3 deployments globally to continually improve our product so that we have
higher energy efficiency, additional mooring capability, platform flexibility and higher reliability. For example, the redesigned
PB3 leverages our knowledge base from past designs to incorporate new design features which we believe will improve its reliability
and efficiency, including a redesigned PTO and a higher efficiency and higher voltage ESS. In July 2016, we deployed our first
commercial PB3 PowerBuoy™, off of the coast of New Jersey. This deployment was the final validation of the PB3 prior to
the March 2017 seven-month lease of the PB3 PowerBuoy™ under a previously announced customer agreement
.
In April
2017, our commercial PB3 was deployed off the coast of Kozushima Island in Japan as part of this lease, operated meeting all project
requirements. The MES lease concluded in September 2017 and the PB3 was shipped back to New Jersey.
Capital
Raises
On
June 2, 2016, we entered into a securities purchase agreement, which was amended on June 7, 2016 (as amended, the “Purchase
Agreement”) with certain institutional purchasers (the “Purchasers”). Pursuant to the terms of the Purchase
Agreement, we sold an aggregate of 417,000 shares of common stock together with warrants to purchase up to an aggregate of 145,952
shares of common stock. Each share of common stock was sold together with a warrant to purchase 0.35 of a share of common stock
at a combined purchase price of $4.60. The net proceeds from the offering to us were approximately $1.7 million, after deducting
placement agent fees and estimated offering expenses payable by us, but excluding the proceeds, if any, from the exercise of the
warrants issued in the offering. The warrants have an exercise price of $6.08 per share, will be exercisable on December 8, 2016,
and will expire five years following the date of issuance.
On
July 22, 2016, the Company entered into the Second Amendment to the Purchase Agreement (the “Second Amended Purchase Agreement”)
with certain purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended Purchase Agreement, the
Company sold an aggregate of 595,000 shares of Common Stock together with warrants to purchase up to an aggregate of 178,500 shares
of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.30 of a share of Common Stock at a
combined purchase price of $6.75. The net proceeds to the Company from the offering were approximately $3.6 million, after deducting
placement agent fees and estimated offering expenses payable by the Company, but excluding the proceeds, if any, from the exercise
of the warrants issued in the offering. The Warrants were exercisable immediately at an exercise price of $9.36 per share. The
Warrants will expire on the fifth (5th) anniversary of the initial date of issuance.
On
October 19, 2016, the Company sold 2,760,000 shares of common stock at a price of $2.75 per share, which includes the sale of
360,000 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-allotment
option by the underwriters in a public offering. The net proceeds to the Company from the offering were approximately $6.9 million,
after deducting placement agent fees and offering expenses payable by the Company.
On
May 2, 2017, the Company sold 6,192,750 shares of common stock at a price of $1.30 per share, which includes the sale of 807,750
shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-allotment option
by the underwriters in a public offering. The net proceeds to the Company from the offering were approximately $7.2 million, after
deducting placement agent fees and offering expenses payable by the Company.
On
October 23, 2017, the Company sold 5,739,437 shares of common stock at a price of $1.42 per share in a best efforts public offering.
The net proceeds to the Company from the offering were approximately $7.4 million, after deducting placement fees and offering
expenses payable by the Company.
The
sale of additional equity or convertible securities could result in dilution to our stockholders. If additional funds are raised
through the issuance of debt securities or preferred stock, these securities could have rights senior to those associated with
our common stock and could contain covenants that would restrict our operations. We do not have any committed sources of debt
or equity financing and we cannot assure you that financing will be available in amounts or on terms acceptable to us when needed,
or at all. If we are unable to obtain required financing when needed, we may be required to reduce the scope of our operations,
including our planned product development and marketing efforts, which could materially and adversely affect our financial condition
and operating results. If we are unable to secure additional financing, we may be forced to cease our operations.
Backlog
As
of April 30, 2018, our negotiated backlog was $0.7 million. As of April 30, 2017, our negotiated backlog was $0.3 million. Our
backlog can include both funded amounts, which are unfilled firm orders for our products and services for which funding has been
both authorized and appropriated by the customer (U.S. Congress, in the case of U.S. Government agencies), and unfunded amounts,
which are unfilled firm orders for which funding has not been appropriated. If any of our contracts were to be terminated, our
backlog would be reduced by the expected value of the remaining terms of such contract.
The
amount of contract backlog is not necessarily indicative of future revenue because modifications to, or terminations of present
contracts and production delays can provide additional revenue or reduce anticipated revenue. A substantial portion of our revenue
has been for the support of our product development efforts. These revenues are recognized using the percentage-of-completion
method, and changes in estimates from time to time may have a significant effect on revenue and backlog. Our backlog is also typically
subject to large variations from time to time due to the timing of new awards.
Going
Concern
Our
financial statements have been prepared assuming we will continue as a going concern. We have experienced substantial and recurring
losses from operations, which losses have caused an accumulated deficit of $197.5 million at April 30, 2018. Based on the Company’s
cash and cash equivalents and marketable securities balances as of April 30, 2018, the Company believes that it will be able to
finance its capital requirements and operations into the quarter ending April 30, 2019, including $0.6 million of payments due
by August 30, 2018 as a return of an option fee due to ineligibility for certain emission credits. The report of our independent
registered public accounting firm on our consolidated financial statements for the year ended April 30, 2018, contains an explanatory
paragraph regarding our ability to continue as a going concern, based on, among other factors, that our ability to continue as
a going concern is dependent upon our ability to raise additional external capital and increase revenues. These factors, among
others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty. We cannot assure you that we will be successful
in our efforts to generate revenues, become profitable, raise additional outside capital or to continue as a going concern. If
we are not successful in our efforts to raise additional capital sufficient to support our operations, we would be forced to cease
operations, in which event investors would lose their entire investment in our company.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations set forth below are based on our consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation
of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those described below.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We
believe the following accounting policies require significant judgment and estimates by us in the preparation of our consolidated
financial statements.
Legal
contingencies
As
discussed in Part I, Item 3 of this Annual Report under the heading “Legal Proceedings” and in Note 14, “Commitments
and Contingencies,” in Notes to the Consolidated Financial Statements, the Company is currently subject to various legal
proceedings and claims. The Company records a contingent liability when it is probable that a loss has been incurred and the amount
is reasonably estimable in accordance with SFAS No. 5, “Accounting for Contingencies”. There is a significant judgment
required in both the probability determination and as to whether an exposure can be reasonably estimated since the outcome of
legal proceedings and claims brought against the Company are subject to significant uncertainty. In management’s opinion,
any reasonable possible losses in addition to the amounts accrued for litigation would not, individually or in the aggregate,
have a material adverse effect on its financial condition or operating results. Should the Company fail to prevail in any of these
legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating
results of a particular reporting period could be materially adversely affected.
Revenue
recognition and unearned revenues
The
Company’s contracts are either cost plus or fixed price contracts and may include a lease component. Under cost plus contracts,
customers are billed for actual expenses incurred plus an agreed-upon fee. Under cost plus contracts, a profit or loss on a project
is recognized depending on whether actual costs are more or less than the agreed upon amount.
The
Company has two types of fixed price contracts, firm fixed price and cost-sharing. Under firm fixed price contracts, the Company
receives an agreed-upon amount for providing products and services specified in the contract, a profit or loss is recognized depending
on whether actual costs are more or less than the agreed upon amount. Under cost-sharing contracts, the fixed amount agreed upon
with the customer is only intended to fund a portion of the costs on a specific project. Under cost sharing contracts, an amount
corresponding to the revenue is recorded in cost of revenues, resulting in gross profit on these contracts of zero. The Company’s
share of the costs is recorded as product development expense.
Generally,
revenue under fixed price or cost-plus contracts is recognized using the cost to cost percentage-of-completion method, measured
by the ratio of costs incurred to total estimated costs at completion. In certain circumstances, revenue under contracts that
have specified milestones or other performance criteria may be recognized only when the customer acknowledges that such criteria
have been satisfied. If an arrangement involves multiple deliverables, the delivered items are considered separate units of accounting
if the items have value on a stand-alone basis. Amounts allocated to each element are based on its objectively determined fair
value, such as the sales price for the product or service when it is sold separately or competitor prices for similar products
or services.
In
addition, recognition of revenue (and the related costs) may be deferred for fixed price contracts until contract completion if
the Company is unable to reasonably estimate the total costs of the project prior to completion. These contracts are subject to
interpretation and management may make a judgment as to the amount of revenue earned and recorded. Because the Company has a small
number of contracts, revisions to the percentage-of-completion determination, management interpretation or delays in meeting performance
and contractual criteria or in completing projects may have a significant effect on revenue for the periods involved. Upon anticipating
a loss on a contract, the Company recognizes the full amount of the anticipated loss in the current period.
The
Company classifies leases as either operating or capital lease arrangements in accordance with the authoritative accounting guidance
contained within Accounting Standards Codification (“ASC”) Topic 840,
“Leases”.
At inception of
the contract, the Company evaluates the lease against the four lease classification criteria within ASC Topic 840. In general,
if one of the four criteria is met, then the lease is accounted for as a capital lease. All others are treated as an operating
lease. For operating leases, lessee payments are recorded to revenue on a straight-line basis over the term of the lease.
Unbilled
receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are normally
billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables, and to the
extent that such billings and cash collections exceed costs incurred plus applicable profit margin, they are recorded as unearned
revenues.
Warrant
liabilities
The
Company accounts for warrants issued in connection with its public offerings in June and July 2017 in accordance with the guidance
on “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which provides
that we classify the warrant instruments as a liability at its fair value. The warrant liabilities are subject to re-measurement
at each balance sheet date using the Black-Scholes option pricing model. The Company recognizes any change in fair value in its
consolidated statements of operations within “Gain due to the change in fair value of warrant liabilities”.
The Company will continue to adjust the carrying value of the warrants for changes in the estimated fair value until such time
as these instruments are exercised or expire. At that time, the liabilities will be reclassified to “Additional paid-in
capital”, a component of “Stockholders' equity” on the consolidated balance sheets.
Financial
Operations Overview
Over
the next several years, it is our goal to fund the majority of our product development efforts with sources from commercial relationships,
including cost-sharing agreements. If we are unable to obtain commercial relationships or cost-sharing arrangements, we may be
forced to curtail our development expenses and scope to reduce our overall expenses. We recently narrowed our development focus
to the PB3 to drive toward commercialization of that product and to reduce our overall expenses. In the future, we also may continue
to develop the PB15 if we determine that future relationships warrant incurring the costs associated with such product development.
The
following table provides information regarding the breakdown of our revenues by customer for fiscal years 2018 and 2017:
|
|
|
Twelve
months ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Eni
S.p.A.
|
|
$
|
171
|
|
|
$
|
-
|
|
|
Mitsui
Engineering & Shipbuilding
|
|
|
218
|
|
|
|
693
|
|
|
Premier
Oil UK Limited
|
|
|
51
|
|
|
|
-
|
|
|
U.S.
Department of Defense Office of Naval Research
|
|
|
71
|
|
|
|
178
|
|
|
U.S.
Department of Energy
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
|
$
|
511
|
|
|
$
|
843
|
|
We
currently focus our sales and marketing efforts on North America, Europe, Australia, Asia and South America. The
following table shows the percentage of our revenues by geographical location of our customers for fiscal 2018 and 2017:
|
|
|
Twelve
months ended April 30,
|
|
|
Customer
Location
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Asia
and Australia
|
|
|
43
|
%
|
|
|
80
|
%
|
|
Europe
|
|
|
43
|
%
|
|
|
0
|
%
|
|
United
States
|
|
|
14
|
%
|
|
|
20
|
%
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
Foreign
exchange loss
We
transact business in various countries and have exposure to fluctuations in foreign currency exchange rates. Foreign exchange
gains and losses arise in the translation of foreign-denominated assets and liabilities, which may result in realized and unrealized
gains or losses from exchange rate fluctuations. Since we conduct our business in US dollars and our functional currency is the
US dollar, our main foreign exchange exposure, if any, results from changes in the exchange rate between the US dollar and the
British pounds sterling, the Euro and the Australian dollar. Due to the macroeconomic pressures in certain European countries,
foreign exchange rates may become more volatile in the future.
We
maintain cash accounts that are denominated in British pounds sterling, Euros and Australian dollars. These foreign denominated
accounts had a balance of $1.0 million as of April 30, 2018 and $1.2 million as of April 30, 2017, compared to our total cash,
cash equivalents, restricted cash, and marketable securities balances of $12.3 million as of April 30, 2018 and $8.9 million as
of April 30, 2017. These foreign currency balances are translated at each month end to our functional currency, the US dollar,
and any resulting gain or loss is recognized in our results of operations.
In
addition, a portion of our operations is conducted through our subsidiaries in countries other than the United States, specifically
Ocean Power Technologies Ltd. in the United Kingdom, the functional currency of which is the British pound sterling, and Ocean
Power Technologies (Australasia) Pty Ltd. in Australia, the functional currency of which is the Australian dollar. Both of these
subsidiaries have foreign exchange exposure that results from changes in the exchange rate between their functional currency and
other foreign currencies in which they conduct business.
We
currently do not hedge our exchange rate exposure. However, we assess the anticipated foreign currency working capital requirements
and capital asset acquisitions of our foreign operations and attempt to maintain a portion of our cash and cash equivalents denominated
in foreign currencies sufficient to satisfy these anticipated requirements. We also assess the need and cost to utilize financial
instruments to hedge currency exposures on an ongoing basis and may hedge against exchange rate exposure in the future.
Results
of Operations
This
section should be read in conjunction with the discussion below under “Liquidity and Capital Resources.”
Fiscal
Years Ended April 30, 2018 and 2017
The
following table contains selected statement of operations information, which serves as the basis of the discussion of our results
of operations for the years ended April 30, 2018 and 2017:
|
|
|
|
|
|
%
change
|
|
|
|
|
Twelve
months ended April 30,
|
|
|
2018
period to
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
period
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
511
|
|
|
$
|
843
|
|
|
|
-39
|
%
|
|
Cost
of revenues
|
|
|
763
|
|
|
|
938
|
|
|
|
-19
|
%
|
|
Gross
loss
|
|
|
(252
|
)
|
|
|
(95
|
)
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
development costs
|
|
|
4,320
|
|
|
|
5,029
|
|
|
|
-14
|
%
|
|
Selling,
general and administrative costs
|
|
|
6,988
|
|
|
|
6,563
|
|
|
|
6
|
%
|
|
Total
operating expenses
|
|
|
11,308
|
|
|
|
11,592
|
|
|
|
|
|
|
Operating
loss
|
|
|
(11,560
|
)
|
|
|
(11,687
|
)
|
|
|
|
|
|
Change
in fair value of warrant liabilities
|
|
|
122
|
|
|
|
1,491
|
|
|
|
-92
|
%
|
|
Interest
income, net
|
|
|
83
|
|
|
|
28
|
|
|
|
196
|
%
|
|
Other
income
|
|
|
4
|
|
|
|
-
|
|
|
|
100
|
%
|
|
Foreign
exchange gain/(loss)
|
|
|
75
|
|
|
|
(16
|
)
|
|
|
-569
|
%
|
|
Loss
before income taxes
|
|
|
(11,276
|
)
|
|
|
(10,184
|
)
|
|
|
11
|
%
|
|
Income
tax benefit
|
|
|
1,119
|
|
|
|
698
|
|
|
|
60
|
%
|
|
Net
loss
|
|
$
|
(10,157
|
)
|
|
$
|
(9,486
|
)
|
|
|
7
|
%
|
Revenues
Revenues
for the fiscal years ended April 30, 2018 and 2017 were approximately $0.5 million and $0.8 million, respectively. The decrease
of approximately $0.3 million or 39% over 2017 was attributable
to the MES and ONR contracts being
completed in the second quarter of fiscal 2018 partly offset by the new Eni and Premier contracts.
Cost
of revenues
Cost
of revenues consists primarily of incurred material, labor and manufacturing overhead expenses, such as engineering expense, equipment
depreciation and maintenance and facility related expenses, and includes the cost of PowerBuoy™ parts and services supplied
by third-party suppliers. Cost of revenues also includes PowerBuoy™ system delivery and deployment expenses and may include
anticipated losses at completion on certain contracts.
Cost
of revenues for the fiscal years ended April 30, 2018 and 2017 were approximately $0.8 million and $0.9 million, respectively.
The decrease of approximately $0.1 million, or 19%, over 2017 was due to lower revenue in the current year as compared to the
prior year, partially offset by a higher reserve for future contract losses.
Product
development costs
Our
product development costs consist of salaries and other personnel-related costs and the costs of products, materials and outside
services used in our product development and unfunded research activities. Our product development costs relate primarily to our
efforts to increase the power output and reliability of our PowerBuoy™ system, and to development of new products, product
applications and complementary technologies. We expense all of our product development costs as incurred.
Product
development costs during the fiscal year ended April 30, 2018 were $4.3 million as compared to $5.0 million for fiscal year 2017.
The decrease of $0.7 million, or 14%, is primarily attributable to lower costs mainly related to redesigned commercial PB3 and
preliminary design of PB15 in fiscal 2017.
Selling,
general and administrative costs
Our
selling, general and administrative costs consist primarily of professional fees, salaries and other personnel-related costs for
employees and consultants engaged in sales and marketing and support of our PowerBuoy™ systems and costs for executive,
accounting and administrative personnel, professional fees and other general corporate expenses.
Selling,
general and administrative costs during the fiscal year months ended April 30, 2018 were $7.0 million as compared to $6.6 for
fiscal year 2017. The increase of $0.4 million, or 6%, is primarily attributable to higher employee costs of $0.7 million partly
offset by lower stock compensation expense of $0.4 million.
Gain
due to the c
hange
in fair value of warrant liabilities
The
change in fair value of warrant liabilities during the fiscal year ended April 30, 2018 was an unrealized gain of $122,000 versus
an unrealized gain of $1,491,000 for the fiscal months ended April 30, 2017. The change between periods is mainly due to a lower
stock price for the nine months ended April 30, 2018.
Interest
income, net
Interest
income consists of interest received on cash and cash equivalents, investments in commercial bank-issued certificates of deposit
and U.S. Treasury bills and notes and interest expense paid on certain obligations to third parties. Total cash, cash equivalents,
restricted cash, and marketable securities were $12.3 million as of April 30, 2018, compared to $8.9 million as of April 30, 2017.
Interest
income, net during the fiscal year 2018 was approximately $83,000 compared to $28,000 for fiscal 2017. The increase in interest
income year over year is due to higher cash balances from several capital raises completed in fiscal year 2018.
Foreign
exchange gain/(loss
)
Foreign
exchange gain was approximately $75,000 for fiscal year 2018 as compared to a foreign exchange loss of $16,000 for fiscal year
2017. The difference was attributable primarily to the relative change in value of the British pound sterling, Euro and Australian
dollar compared to the U.S. dollar during the two periods.
Income
tax benefit
During
the fiscal years ended April 30, 2018 and 2017, the Company sold New Jersey State net operating losses and research and development
credits in the amount of $11.5 million and $7.8 million, respectively, resulting in the recognition of income tax benefits of
$1.1 million and $0.7 million, respectively. The Company has a full valuation allowance against its deferred tax assets.
Liquidity
and Capital Resources
Since
our inception, the cash flows from customer revenues have not been sufficient to fund our operations and provide the capital resources
for our business. For the two years ended April 30, 2018, our aggregate revenues were $1.4 million, our aggregate net losses were
$19.6 million and our aggregate net cash used in operating activities was $20.7 million.
Net
cash used in operating activities
Net
cash flows used in operating activities during the fiscal year ended April 30, 2018 were $10.7 million, an increase of $0.7 million,
when compared to $10.0 million during the fiscal year ended April 30, 2017. The change was the result of an increase in net loss
of $0.7 million reduced by non-cash items of $0.4 million and an increase in cash used by the net change in operating assets and
liabilities of $0.8 million. Fiscal 2017 included a $0.5 million litigation settlement payment.
The
decrease in noncash operating items in fiscal year 2018 compared to fiscal year 2017 reflects a decrease in the change in fair
value of warrant liabilities and lower stock compensation expense.
The
increase in operating assets and liabilities in fiscal year 2018 compared to fiscal year 2017 is due to lower balances in accounts
payable and accrued expenses of $1.7 million offset by unbilled receivables of $0.5 million and other net changes in operating
assets and liabilities of $0.4 million.
Net
cash provided by (used in) investing activities
Net
cash used in investing activities was approximately $0.7 million for fiscal year 2018 versus net cash provided by investing activities
of approximately zero for fiscal 2017. The change was primarily the result of the Company’s spending on equipment and leasehold
improvements relating to its new facility in Monroe, New Jersey.
Net
cash provided by (used in) financing activities
Net
cash provided by financing activities was approximately $14.6 million in fiscal year 2018, and net cash provided by financing
activities was approximately $11.9 million for fiscal 2017. The net cash provided in fiscal 2018 and fiscal 2017 were primarily
from the sale of our common stock, net of issuance costs.
Effect
of exchange rates on cash and cash equivalents
The
effect of exchange rates on cash and cash equivalents was approximately $88,000 in fiscal year 2018, an increase of $130,000 from
fiscal 2017, respectively. The effect of exchange rates on cash and cash equivalents results primarily from gains or losses on
consolidation of foreign subsidiaries and foreign denominated cash and cash equivalents.
Liquidity
Outlook
Our
financial statements have been prepared assuming we will continue as a going concern. We have experienced substantial and recurring
losses from operations, which losses have caused an accumulated deficit of $197.5 million at April 30, 2018. We generated revenues
of only $0.5 million in fiscal year 2018, and $0.8 million in fiscal year 2017. Based on the Company’s cash and cash equivalents
and marketable securities balances as of April 30, 2018, the Company believes that it will be able to finance its capital requirements
and operations into the quarter ending April 30, 2019, including $0.6 million of payments due by August 30, 2018 as a return of
an option due to ineligibility for certain emission credits. These conditions raise substantial doubt about our ability to continue
as a going concern.
We
expect to devote substantial resources to continue our development efforts for our PowerBuoys™ and to expand our sales,
marketing and manufacturing programs associated with the planned commercialization of the PowerBuoys™. Our future capital
requirements will depend on a number of factors, including but not limited to:
|
|
●
|
our
ability to commercialize our PowerBuoys™, and achieve and sustain profitability;
|
|
|
|
|
|
|
●
|
our
continued development of our proprietary technologies, and expected continued use of cash from operating activities unless
or until we achieve positive cash flow from the commercialization of our products and services;
|
|
|
|
|
|
|
●
|
our
ability to obtain additional funding, as and if needed which will be subject to a number of factors, including market conditions,
and our operating performance;
|
|
|
|
|
|
|
●
|
our
estimates regarding expenses, future revenues and capital requirements;
|
|
|
|
|
|
|
●
|
the
adequacy of our cash balances and our need for additional financings;
|
|
|
|
|
|
|
●
|
our
ability to develop and manufacture a commercially viable PowerBuoy™ product;
|
|
|
|
|
|
|
●
|
that
we will be successful in our efforts to commercialize our PowerBuoy™ or the timetable upon which commercialization can
be achieved, if at all;
|
|
|
|
|
|
|
●
|
our
ability to identify and penetrate markets for our PowerBuoys™ and our wave energy technology;
|
|
|
|
|
|
|
●
|
our
ability to implement our commercialization strategy as planned, or at all;
|
|
|
|
|
|
|
●
|
our
ability to maintain the listing of our common stock on the NASDAQ Capital Market;
|
|
|
|
|
|
|
●
|
the
reliability of our technology and our PowerBuoys™;
|
|
|
|
|
|
|
●
|
our
ability to improve the power output, survivability and reliability of our PowerBuoys™;
|
|
|
|
|
|
|
●
|
the
impact of pending and threatened litigation on our business, financial condition and liquidity;
|
|
|
|
|
|
|
●
|
changes
in current legislation, regulations and economic conditions that affect the demand for renewable energy;
|
|
|
|
|
|
|
●
|
our
ability to compete effectively in our target markets;
|
|
|
|
|
|
|
●
|
our
limited operating history and history of operating losses;
|
|
|
|
|
|
|
●
|
our
sales and marketing capabilities and strategy in the United States and internationally; and
|
|
|
|
|
|
|
●
|
our
ability to protect our intellectual property portfolio.
|
Our
business is capital intensive and, to date, we have been funding our business principally through sales of our securities, and
we expect to continue to fund our business with sales of our securities and, to a limited extent, with our revenues until, if
ever, we generate sufficient cash flow to internally fund our business. This is largely a result of the high product development
costs associated with our product development. We may choose to reduce our operating expenses through personnel reductions, and
reductions in our research and development and other operating costs during the fiscal year 2019, if we are not successful in
our efforts to raise additional capital. We cannot assure you that we will be able to increase our revenues and cash flow to a
level which would support our operations and provide sufficient funds to pay our obligations for the foreseeable future. Further,
we cannot assure you that we will be able to secure additional financing or raise additional capital or, if we are successful
in our efforts to raise additional capital, of the terms and conditions upon which any such financing would be extended. If we
are unable to raise additional capital when needed or generate positive cash flow, it is unlikely that we will be able to continue
as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-Balance
Sheet Arrangements
Since
inception, we have not engaged in any off-balance sheet financing activities.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2014-09,
“
Revenue from Contracts with Customers (Topic 606).”
ASU 2014-09 outlines a new, single comprehensive model
for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining
when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or
services. The FASB subsequently issued additional clarifying standards to address issues arising from implementation of the new
revenue standard, including a one-year deferral of the effective date for the new revenue standard. Public companies should now
apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods within those
annual periods. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including
interim periods within that annual period. As such, the Company is required to adopt this standard effective in fiscal 2019, which
begins May 1, 2018. The Company will use the modified retrospective approach to adopt ASU 2014-09. The Company is completing
its final review and therefore has not yet determined the final impact on its consolidated financial statements and disclosures.
However, the preliminary view is that the impact will not be material to the consolidated financial statements disclosures. The
impact to the Company could be affected by the nature and terms of potential future contracts with customers, as those contracts
may have terms that differ from the company’s current contracts.
In
August 2014, the FASB issued ASU 2014-15,
“Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern”,
which describes how an entity should assess its ability to meet obligations and sets rules for how
this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used
along with existing auditing standards. The new standard applies to all entities for the first annual period ending after December
15, 2016, and interim periods thereafter. Early application is permitted. The Company adopted ASU 2014-15 for the fiscal year
2017. The Company’s addition of the standard did not have a material impact on disclosures. See Note (1) “Background,
Basis of Presentation and Liquidity” for discussion on the Company’s ability to continue as a going concern.
In
February 2016, the FASB issued ASU No. 2016-02,
“Leases (Topic 842).”
The new standard establishes a right-of-use
(ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including
interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, with certain practical expedients available. The Company is evaluating the effect ASU 2016-02
will have on its consolidated financial statements and disclosures and has not yet determined the effect of the standard on its
ongoing financial reporting at this time.
In
March 2016, the FASB issued ASU No. 2016-09,
“Compensation - Stock Compensation (Topic 718).”
The amendments
of ASU No. 2016-09 were issued as part of the FASB’s Simplification initiative focused on improving areas of GAAP for which
cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed within the financial
statements. The amendments focused on simplification specifically with regard to share-based payment transactions, including income
tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows. The guidance
in ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods.
The Company adopted ASU 2016-09 on May 1, 2017. Certain of the amendments are applied using a modified retrospective transition
method by means of a cumulative-effect adjustment to equity as of May 1, 2017, while other amendments are applied retrospectively,
prospectively or using either a prospective or a retrospective transition method. Upon adoption, the Company is beginning to account
for forfeitures as they occur rather than estimate a forfeiture rate and has recorded a cumulative-effect adjustment in equity
of approximately $11,000 on the date of initial adoption. In periods subsequent to adoption, a higher expense will be recognized
earlier during the respective vesting periods of stock-based awards that are not forfeited. As a result of the valuation allowance
against our deferred tax assets, there was no net adjustment to retained earnings for the change in accounting for unrecognized
windfall tax benefits.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”
, providing additional guidance on eight specific cash flow classification issues. The goal of the
ASU is to reduce diversity in practice of classifying certain items. The amendments in the ASU are effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company
evaluated the effect ASU 2016-13 will have on its consolidated financial statements and disclosures and has determined the standard
will have no impact on its ongoing financial reporting at this time.
In
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash”
, which amends
guidance and presentation related to restricted cash in the statement of cash flows, including stating that amounts generally
described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. An entity is required to provide
a disclosure indicating the reconciliation of all cash accounts. The amendments in the ASU are effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company has early
adopted ASU 2016-18 effective May 1, 2017. In connection with the adoption of the standard the Company has used a retrospective
transition method for each period presented in the statement of cash flows. The Company reclassified $300,000 of restricted cash
to cash, cash equivalents and restricted cash, beginning of period for the period April 30, 2017 and $488,000 of restricted cash
to cash, cash equivalents and restricted cash, ending of period for the period April 30, 2017 in the statement of cash flows.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and supplementary data required by this item are listed in Item 15 — “Exhibits and Financial
Statement Schedules” of this Annual Report.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A.
CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the” Exchange Act”) is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As
of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, as of April 30,
2018, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Internal
Control over Financial Reporting
The
annual report of management on the Company’s internal control over financial reporting is provided under “Reports
of Management” on page F-2, which is incorporated herein by reference as if fully set forth herein. As described therein,
management concluded that the Company’s internal control over financial reporting was effective as of April 30, 2018.
Changes
in Internal Control over Financial Reporting
No
change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the quarter ended April 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM
9B.
OTHER
INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
All
of the directors bring to our Board of Directors executive leadership experience from their service as executives and/or directors
of our Company and/or other entities. The biography of each director contains information regarding the person’s service
as a director, business experience, director positions held currently or at any time during the last five years, and the experiences,
qualifications, attributes and skills that caused the Nominating and Corporate Governance Committee and our Board of Directors
to determine that the person should serve as a director, given our business and structure.
|
Name
|
|
Age
|
|
Position(s)
with the Company
|
|
Served
as
Director
From
|
|
Terence
J. Cryan
|
|
56
|
|
Chairman
of the Board
|
|
2012
|
|
Dean
J. Glover
|
|
52
|
|
Vice
Chairman of the Board and Independent Director
|
|
2014
|
|
George
H. Kirby III
|
|
48
|
|
Chief
Executive Officer and Director
|
|
2015
|
|
Steven
M. Fludder
|
|
58
|
|
Independent
Director
|
|
2016
|
|
Robert
K. Winters
|
|
50
|
|
Independent
Director
|
|
2016
|
Terence
J. Cryan
has been a member of our Board of Directors since October 2012 and Chairman of the board since June 2014. Prior to
joining our Board, Mr. Cryan was a member of our Board of Advisors. Mr. Cryan was our lead independent director from October
2013 to June 2014 when he became Chairman of the Board. Since August 2016, Mr. Cryan has served as the Chairman of the Board of
Westwater Resources, Inc. Mr. Cryan has served on the boards of directors of a number of other publicly traded companies including
Uranium Resources, Inc. from 2006 to 2016; Global Power Equipment Group Inc. from 2008 to 2017; Superior Drilling Products from
May 2014 to 2016; Gryphon Gold Corporation from 2009 to 2012; and The Providence Service Corporation from 2009 to 2011. Mr. Cryan
previously served as President and Chief Executive Officer of Medical Acoustics, LLC from 2007 through 2010. From September 2012
until April 2013, Mr. Cryan also served as interim President and CEO of Uranium Resources, Inc., and was elected as Chairman of
the Board of Directors of Uranium Resources, Inc. in June 2014 and served until March 2016. Mr. Cryan served as President and
CEO of Global Power Equipment Group Inc., from March 2015 until July 2017. Mr. Cryan co-founded in 2001 Concert Energy
Partners, LLC, an investment and private equity firm based in New York with a focus on the traditional and alternative energy,
power and natural resources industries, and served as Managing Director until 2015. Between 1990 and 2001, Mr. Cryan was a Senior
Managing Director in the investment banking department at Bear Stearns & Co. Inc. in New York City and a Managing Director
at Paine Webber/Kidder Peabody in both New York City and London. Mr. Cryan earned his Bachelor of Arts degree from Tufts University
in 1983 and a Master of Science degree in Economics from The London School of Economics in 1984. In December 2014, Terence Cryan
was named a Board Leadership Fellow by the National Association of Corporate Directors. We believe Mr. Cryan's qualifications
to sit on our Board of Directors include his significant experience in financial matters, his prior board and executive experience
at other companies, his broad energy industry background and his extensive expertise in financings, mergers and acquisitions.
Dean
J. Glover
became a member of our Board of Directors in October 2014, replacing a director who retired, and was elected Vice
Chairman of our Board of Directors in July 2016. Since March 2018, Mr. Glover has served as a member of the Board of Directors
of ConXtech. Mr. Glover is currently the CEO of Techniks Tool Group. Prior to Techniks Tool Group from October 2014 until
2017, Mr. Glover served as MIRATECH President & CEO. Prior to this, he was Senior Vice President and President of the
Products Division of Global Power Equipment Group Inc. Mr. Glover joined Global Power in December 2005 as Chief Operating Officer
of Braden Manufacturing. Prior to joining Global Power, Mr. Glover led the global supply chain and manufacturing for Diebold Inc.
Prior to this Mr. Glover spent 13 years with General Electric (NYSE: GE) in various managerial and technical roles and is a certified
Six Sigma Master Black belt. Mr. Glover currently serves as a director of Oklahoma Scholastic Organization, a non-profit organization.
Mr. Glover holds a Bachelor’s degree in Mechanical Engineering from the University of Nebraska and an M.B.A. from the Kellogg
Graduate School of Management, Northwestern University. Mr. Glover has extensive international experience having lived in various
international locations for most of his career. Mr. Glover has over 25 years of commercial and technical experience in industry.
We believe Mr. Glover’s qualifications to sit on our Board of Directors include his significant managerial, commercial and
technical experience in the energy technology industry.
George
H. Kirby III
has served as our President, Chief Executive Office and a member of our Board of Directors since January 20,
2015, replacing Interim Chief Executive Officer David L. Keller. Prior to this, he joined AECOM Technology Corporation (NYSE:
ACM) a leading provider of engineering, procurement and construction (“EPC”) services in September 2013 as Senior
Vice President. In this role, he led their Energy Business Line for the north U.S. region providing services for utilities, power
transmission and generation developers, and large industrial energy efficiency end-users. Prior to AECOM, he joined SAIC Energy,
Environment, & Infrastructure (NYSE: SAIC) in January 2012 a global leader in solutions for national security, healthcare
and engineering, as Managing Director for their Asset Transactions group providing power generation investors and developers with
technical and market consulting and advisory services, and was promoted to Vice President in 2013 providing EPC services to Investor
Owned Utilities. In 2009, he joined American Superconductor (NASDAQ: AMSC) as Director of Global Sales and was promoted to Managing
Director of the Americas and Australia in 2011. From 2000 to 2009, Mr. Kirby held significant leadership roles at General Electric
in both GE Energy and GE Capital (NYSE: GE) in product development, global sales, quality and project finance. In June 2016, Mr.
Kirby was elected to the Board of Trustees of the Sea Research Foundation, a non-profit organization in Mystic, Connecticut. Mr.
Kirby previously served as a director of Blade Dynamics, LLC from April to December 2011, and Schooner, Inc. from June to October
2012. Mr. Kirby earned a Bachelor of Science degree in Aerospace Engineering from Syracuse University in 1992 and an M.B.A. from
Smeal College of Business at Pennsylvania State University in 2008. We believe Mr. Kirby’s significant leadership experience
in energy industries qualifies him to serve on our Board of Directors.
Steven
M. Fludder
became a member of the Board of Directors on May 5, 2016. Mr. Fludder brings more than 30 years of global executive
leadership in energy and infrastructure markets. Since November 2017, Mr. Fludder has served as the Chief Executive Officer for
NEC Energy Solutions. Prior to joining NEC Energy Solutions, Mr. Fludder was the Chief Executive Officer with alpha-En, a publicly
traded innovative clean technology company focused on enabling next generation battery technologies by developing high purity
lithium products. Prior to alpha-En, Mr. Fludder was Chief Executive of AECOM’s global Energy and Water practice. Prior
to AECOM, he was Senior Executive Vice President, Division General Manager and Samsung group officer where he was head of worldwide
sales and marketing for Samsung Engineering, a global engineering, procurement and construction (EPC) firm serving a broad range
of energy industries including power, oil & gas, petrochemicals, and metallurgy. He was subsequently President of Samsung
Techwin Power Systems Division. Prior to Samsung, Mr. Fludder served as a Vice President and General Electric corporate officer
where he led GE’s companywide environmental business initiative “ecomagination”. Earlier in his career at GE,
Mr. Fludder held executive leadership roles in the Water, Energy Services, Energy China, and Aircraft Engines divisions. He has
significant experience scaling and growing energy related technology businesses through start-ups, acquisitions and turnarounds.
Mr. Fludder holds a Master’s degree in Mechanical Engineering from the Massachusetts Institute of Technology, a bachelor’s
degree in Mechanical Engineering from Columbia University, and a second Bachelor of Science degree from Providence College. We
believe Mr. Fludder’s qualifications to serve on our Board of Directors include his wide experience in both the energy and
infrastructure markets, as well a variety of other industry segments related to our business.
Robert
K. Winters
became a member of the Board of Directors on May 5, 2016. Robert Winters has been an Executive Vice President and
G.M. of Alpha IR Group since September 2015. He established and is running the NYC office for Chicago-based firm, which specializes
in providing strategic counsel to small- and mid-cap U.S. companies across a broad range of industries. Prior to this, he was
a partner and portfolio manager at Zesiger Capital Group, LLC for 14 years; Zesiger Capital Group, LLC is an investment advisor
based in NYC, catering to both large institutional clients and high net-worth individuals. Zesiger’s investment strategy
during Mr. Winters’ tenure was to take concentrated, long-term investment positions in small-and mid-cap stocks in the U.S.,
as well as in select emerging and frontier markets. Additionally, Mr. Winters managed fixed income investments on behalf of clients
at Zesiger, as well as private investments; Mr. Winters sat on the boards of several private portfolio companies during his time
at Zesiger. Prior to his work at Zesiger Capital Group, LLC, Mr. Winters worked as a Managing Director and Senior Natural Resource
analyst for almost 10 years at Bear, Stearns & Co., Inc., where he focused on energy, metals and mining. Mr. Winters began
his finance career at CS First Boston following his work as an international trade analyst with Kilpatrick & Cody in Washington,
D.C. Mr. Winters served as a director of LRM Industries International from 2009 until 2014 Mr. Winters graduated from Georgetown
University in 1990 with a dual major in International Relations and History. We believe Mr. Winter’s qualifications to serve
on our Board of Directors include his extensive finance experience, as well his experience with small-cap and mid-cap public companies.
Executive
Officers
We
have two executive officers who are not also a director:
|
Name
|
|
Age
|
|
Position
with Ocean Power Technologies, Inc.
|
|
|
|
|
|
|
|
Matthew
T. Shafer
|
|
47
|
|
Vice
President
, Chief
Financial Officer and Treasurer
|
|
|
|
|
|
|
|
Christopher
Phebus
|
|
47
|
|
Vice
President
, Engineering
|
Matthew
T. Shafer
joined the Company in September
2016 as Chief Financial Officer and Treasurer of the
Company. Mr. Shafer previously served as a Vice President of Finance and Corporate Controller for CMF Associates from May 2015
to September 2016, where he led teams in providing finance solutions for small and middle-market high-growth organizations. Prior
to that, beginning in 2013 he served as a Business Unit Chief Financial Officer at Valeant Pharmaceuticals International (NYSE:
VRX), a large global publicly traded company that develops, manufactures, markets and sells specialty pharmaceuticals and medical
devices. He held this Finance Leadership role for the Valeant Dentistry, Generics and Neurology business units, and had worked
closely with commercial operations and corporate level teams on numerous product launches, sales force expansions, mergers and
acquisitions, financial systems integrations, and internal controls. Mr. Shafer has a foundation in Public Accounting working
at Arthur Andersen LLP at the beginning of his career, holds a Bachelor of Science in Accounting from The Stillman School of Business
at Seton Hall University, an MBA in Finance from Rutgers Business School in New Brunswick, N.J. and is a Certified Public Accountant.
Christopher
Phebus
joined the Company in January 2018 as Vice President, Engineering. Mr. Phebus was previously employed by General Electric
Company for 16 years in positions including the GM and Executive Engineering Director for GE Subsea Products and Projects in Norway
and the U.K., and the GM and Lean-Six Sigma Quality Leader for Global Engineering at GE Energy. Most recently he was the Head
of Global Engineering and Technology for the Flow and Process Technology and Reciprocating Compression division at GE Oil &
Gas. He began his career at Pratt & Whitney, where he worked as a systems engineer directly with the U.S. Air Force on the
F100 aircraft engine. Mr. Phebus holds a Bachelor of Science in Mechanical Engineering from Clemson University and a Master of
Science in Management from Embry-Riddle Aeronautical University.
Corporate
Governance
Our
Board of Directors believes that good corporate governance is important to ensure that the Company is managed for the long-term
benefit of our stockholders. This section describes key corporate governance guidelines and practices that our Board has adopted.
Complete copies of our corporate governance guidelines, committee charters and code of business conduct and ethics are available
on the corporate governance section of our website,
www.oceanpowertechnologies.com
. Alternatively, you can request a copy
of any of these documents by writing to our Secretary at 28 Engelhard Drive, Monroe Township, NJ 08831.
Corporate
Governance Guidelines
Our
Board has adopted corporate governance guidelines to assist in the exercise of its duties and responsibilities and to serve the
best interests of the Company and our stockholders. These guidelines, which provide a framework for the conduct of the Board’s
business, provide that:
|
|
●
|
the
Board’s principal responsibility is to oversee the management of the Company;
|
|
|
●
|
a
majority of the members of the Board shall be independent directors;
|
|
|
●
|
the
non-employee directors shall meet regularly in executive session;
|
|
|
●
|
directors
have full and free access to management and, as necessary and appropriate, independent advisors; and
|
|
|
●
|
at
least annually, the Board and its committees will conduct a self-evaluation to determine whether they are functioning effectively.
|
Audit
Committee
The
members of our Audit Committee are Dean J. Glover, Steven M. Fludder and Robert K. Winters. Effective September 8, 2016, Messrs.
Cryan and Burger rotated off the Audit Committee and Messrs. Fludder and Winters joined the Audit Committee. Mr. Glover is the
chair of the Audit Committee. The Board of Directors has determined that Mr. Glover is an “audit committee financial expert”
within the meaning of the regulations of the Securities and Exchange Commission (the “SEC”). The Audit Committee met
4 times in fiscal 2018. Our Board has also determined that all Audit Committee members meet the independence requirements contemplated
by Rule 5605(c) of the NASDAQ Stock Market and Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).
Our
Audit Committee assists our Board of Directors in its oversight of the integrity of our consolidated financial statements, our
independent registered public accounting firm’s qualifications, independence and performance.
Our
Audit Committee’s responsibilities include: appointing, approving the compensation of, and assessing the independence of,
our independent registered public accounting firm; overseeing the work of our independent registered public accounting firm, including
through the receipt and consideration of reports from our independent registered public accounting firm; reviewing and discussing
with management and our independent registered public accounting firm our annual and quarterly consolidated financial statements
and related disclosures; monitoring our internal control over financial reporting, disclosure controls and procedures and code
of business conduct and ethics; establishing procedures for the receipt and retention of accounting related complaints and concerns;
meeting independently with our independent registered public accounting firm and management; and preparing the Audit Committee
report required by SEC regulations.
Material
Changes in Director Nominations Process
There
have not been any material changes to the procedures by which shareholders may recommend nominees to our Board.
Code
of Ethics
We
have adopted a Code of Business Conduct and Ethics that applies to our employees, officers (including our principal executive
officer and principal financial officer) and directors. The Code of Business Conduct and Ethics is posted on our website at
www.oceanpowertechnologies.com
and can also be obtained free of charge by sending a request to our Secretary at 28 Engelhard Drive, Monroe Township, NJ 08831.
Any changes to or waivers under the Code of Business Conduct and Ethics as it relates to our chief executive officer, chief financial
officer, controller or persons performing similar functions must be approved by our Board of Directors and will be disclosed in
a Current Report on Form 8-K within four business days of the change or waiver.
Section
16(a) Beneficial Ownership Reporting Compliance
Pursuant
to Section 16(a) of the Exchange Act and the rules issued thereunder, our executive officers and directors are required to file
with the SEC reports of ownership and changes in ownership of Common Stock. Copies of such reports are required to be furnished
to us. Based solely on a review of the copies of such reports furnished to us, or written representations that no other reports
were required, we believe that all required reports were filed in fiscal 2018 in a timely manner.
ITEM
11. EXECUTIVE COMPENSATION
DIRECTOR
COMPENSATION
For
Board service year 2018, the Board of Directors approved, for each non-employee director, an annual payment of $45,000 and a choice
of either (a) an option worth $50,000, based on the Black-Scholes formula, to purchase shares of Common Stock or (b) Common Stock
worth $50,000, with such option award or stock award to vest, if at all, at the next annual meeting of stockholders. Directors
serving a portion of a year receive a pro-rata grant. Each non-employee director also receives a per annum supplement ranging
from $2,000 to $9,600 for each committee that they chair. In addition, the Chairman of the Board annually receives an additional
$38,000.
We
reimburse each non-employee director for out-of-pocket expenses incurred in connection with attending our Board and Board committee
meetings. Compensation for our directors, including cash and equity compensation, is determined, and remains subject to adjustment,
by our Board of Directors.
The
following table summarizes compensation paid to each of our non-employee directors who served during fiscal year 2018.
|
|
|
Fees
Earned or
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
|
|
Paid
in Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Total
|
|
|
Name
(1)
|
|
($)
(2)
|
|
|
($)
|
|
|
($)
(3)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terence
J. Cryan
|
|
|
85,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
J. Burger (4)
|
|
|
30,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dean
J. Glover
|
|
|
54,600
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
104,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
M. Fludder
|
|
|
49,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
K. Winters
|
|
|
45,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
95,000
|
|
|
(1)
|
George
H. Kirby III, the Company’s President and Chief Executive Officer is not included in this table as he is an employee
of the Company and thus receives no compensation for his services as a Director. The compensation received by Mr. Kirby as
an employee of the Company is shown in the Summary Compensation Table on page 56
.
|
|
|
|
|
(2)
|
Fees
earned or paid in cash reflect annual retainer and committee meeting fees.
|
|
|
|
|
(3)
|
Stock
options granted to directors vest fully on the date of the first annual shareholders meeting following the grant date. The
amounts in the “Option Awards” column reflect the aggregate grant date fair value of stock options granted during
the year computed in accordance with the provisions of Accounting Standards Codification (ASC) No. 718, “
Compensation-
Stock Compensation
.” The assumptions used in calculating these amounts are incorporated by reference to Note 2 to
the financial statements in this Annual Report.
|
|
|
|
|
(4)
|
Robert
J. Burger term ended on October 20, 2017 and Mr. Burger did not seek re-election at the 2017 Annual Meeting of Stockholders.
|
The
following table summarizes grants during fiscal year 2018.
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
Name
|
|
Awards
|
|
|
Awards
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terence
J. Cryan (1)
|
|
|
-
|
|
|
|
42,666
|
|
|
|
42,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
J. Burger (1), (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dean
J. Glover (1)
|
|
|
-
|
|
|
|
42,666
|
|
|
|
42,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
M. Fludder (1)
|
|
|
-
|
|
|
|
42,666
|
|
|
|
42,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
K. Winters (1)
|
|
|
-
|
|
|
|
42,666
|
|
|
|
42,666
|
|
|
(1)
|
During
fiscal year 2018 each board member was granted stock options exercisable for 42,666 shares of common stock for Board service
during the year ending October 31, 2018.
|
|
|
|
|
(2)
|
Robert
J. Burger term ended on October 20, 2017 and Mr. Burger did not seek re-election at the 2017 Annual Meeting of Stockholders.
|
EXECUTIVE
COMPENSATION
Overview
of Executive Compensation
Our
Compensation Committee is responsible for overseeing the compensation of all of our executive officers. In this capacity, the
Compensation Committee designs, implements, reviews and approves all compensation for our named executive officers. The goal of
the Compensation Committee is to ensure that our compensation programs are aligned with our business goals and objectives and
that the total compensation paid to each of our named executive officers is fair, reasonable and competitive.
Compensation
Objectives and Philosophy
Our
compensation programs are designed to attract and retain qualified and talented executives, motivating them to achieve our business
goals and rewarding them for superior short- and long-term performance. In particular, our compensation programs are intended
to reward the achievement of specified predetermined quantitative and qualitative goals and to align our executives’ interests
with those of our stockholders in order to attain the ultimate objective of increasing stockholder value.
Elements
of Total Compensation and Relationship to Performance
Key
elements of these programs include:
|
●
|
base
salary compensation designed to reward annual achievements, with consideration given to the executive’s qualifications,
scope of responsibility, leadership abilities and management experience and effectiveness;
|
|
●
|
cash
bonus awards designed to align executive compensation with business objectives and performance; and
|
|
●
|
equity-based
incentive compensation, primarily in the form of stock options and restricted stock, the value of which is dependent upon
the performance of our Common Stock, and which is subject to multi-year vesting that requires continued service and/or the
attainment of certain performance goals.
|
Determining
and Setting Executive Compensation
Our
management develops our compensation plans by utilizing publicly available compensation and on-line survey data for a broad selection
of national and regional companies, which we believe are generally comparable to the Company in terms of public ownership, organizational
structure, size and stage of development, and against which we believe we may compete for executive talent. The results of these
analyses are reviewed with and approved by the Compensation Committee annually. We believe that these compensation practices provide
us with appropriate compensation guidelines. The Compensation Committee generally targets compensation for our executives near
the median range of compensation paid to similarly situated executives in comparable companies covered by the on-line survey data.
Other considerations, including market factors, the unique nature of our business and the experience level of an executive, may
dictate variations to this general target.
Our
business is characterized by a long product development cycle, including a lengthy engineering and product-testing period and
regulatory approval and licensing. Because of this, many of the traditional benchmarking metrics, such as product sales, revenues
and profits are inappropriate for our Company. Instead, the specific factors the Compensation Committee considers when determining
our named executive officers’ compensation include:
|
●
|
key
product development initiatives;
|
|
●
|
technology
advancements;
|
|
●
|
achievement
of regulatory and other commercial milestones;
|
|
●
|
establishment
and maintenance of key strategic relationships;
|
|
●
|
implementation
of appropriate financing strategies; and
|
|
●
|
financial
and operating performance.
|
Summary
Compensation Table
The
following table sets forth the compensation paid or accrued during the fiscal years ended April 30, 2018 and April 30, 2017 to
our named executive officers.
|
Name
and
Principal
Position
|
|
Year
|
|
|
Salary
($) (1)
|
|
|
Bonus
($) (2)
|
|
|
Stock
Awards ($)(3)
|
|
|
Option
Awards ($)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George
H. Kirby III
|
|
2018
|
|
|
|
381,600
|
|
|
|
276,565
|
|
|
|
70,000
|
|
|
|
-
|
|
|
|
51,710
|
(4)
|
|
|
779,875
|
|
|
President
and
|
|
2017
|
|
|
|
381,600
|
|
|
|
235,829
|
|
|
|
86,350
|
|
|
|
-
|
|
|
|
37,468
|
(4)
|
|
|
741,247
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew
T. Shafer (5)
|
|
2018
|
|
|
|
236,042
|
|
|
|
118,750
|
|
|
|
20,418
|
|
|
|
-
|
|
|
|
-
|
|
|
|
375,210
|
|
|
Vice President
|
|
2017
|
|
|
|
143,400
|
|
|
|
53,900
|
|
|
|
49,788
|
|
|
|
-
|
|
|
|
-
|
|
|
|
247,088
|
|
|
Chief
Financial Officer and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
Phebus (6)
|
|
2018
|
|
|
|
79,784
|
|
|
|
37,406
|
|
|
|
108,000
|
|
|
|
-
|
|
|
|
17,815
|
(7)
|
|
|
243,005
|
|
|
Vice President, Engineering
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Mike M. Mekhiche (8)
|
|
2018
|
|
|
|
91,814
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,712
|
(9)
|
|
|
125,526
|
|
|
Former
Executive Vice President,
|
|
2017
|
|
|
|
336,328
|
|
|
|
123,600
|
|
|
|
53,380
|
|
|
|
-
|
|
|
|
20,086
|
(9)
|
|
|
533,394
|
|
|
Engineering
and Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Salary
represents actual salary earned during each fiscal year. The amounts in this column may be different from the amounts listed
below under description of employment agreements, due to increases in salary levels and payments for unused vacation during
each fiscal year.
|
|
|
|
|
(2)
|
This
amount represent bonuses earned by the named executive officers in fiscal year 2018 and 2017.
|
|
|
|
|
(3)
|
The
amounts in the “Stock Awards” column reflect the aggregate grant date fair value of stock options granted during
the year computed in accordance with the provisions of Accounting Standards Codification (ASC) No. 718, “
Compensation-
Stock Compensation
.” The assumptions used in calculating these amounts are incorporated by reference to Note 2 to
the financial statements in this Annual Report.
|
|
|
|
|
(4)
|
For
fiscal year 2018 the amount of $51,710 includes $42,710 for relocation expenses and $9,000 relates to the Company’s
matching contributions to the 401(K) plan. For fiscal year 2017 the amount of $37,468 includes $34,468 for relocation expenses
and $3,000 relates to the Company’s matching contributions to the 401(K) plan. In accordance with his employment agreement
Mr. Kirby is eligible for reimbursement of relocation expenses.
|
|
|
|
|
(5)
|
Mr.
Shafer joined the Company on September 7, 2016 to serve as the Company’s Chief Financial Officer and Treasurer.
|
|
|
|
|
(6)
|
Mr.
Phebus joined the Company on January 15, 2018 to serve as the Company’s Vice President of Engineering.
|
|
|
|
|
(7)
|
For
fiscal year 2018 the amount of $17,815 is relocation expenses in accordance with Mr. Phebus’ employment agreement.
|
|
|
|
|
(8)
|
Dr.
Mekhiche resigned from his position as Executive Vice President, Engineering and Operations effective August 8, 2017.
|
|
|
|
|
(9)
|
For
fiscal year 2018 the amount of $33,712 includes $31,612 payout for unused vacation and $2,100 relates to the Company’s
matching contributions to the 401(K) plan. For fiscal year 2017 the amount of $20,086 includes $12,886 payout for unused vacation
and $7,200 relates to the Company’s matching contributions to the 401(K) plan.
|
Employment
Agreements
George
H. Kirby III — President, Chief Executive Officer and Director
Under
an agreement entered into on December 29, 2014, Mr. Kirby was entitled to an initial annual base salary of $360,000 subject to
adjustment upon annual review by our Board of Directors, was subsequently increased to $381,600 on May 1, 2016 and to $391,140
on May 1, 2018. Mr. Kirby is also eligible to earn discretionary incentive bonuses and incentive compensation. The Company also
reimbursed Mr. Kirby for his eligible relocation costs.
Upon the termination of
his employment other than for cause, or if he terminates his employment for good reason (as such terms are defined in his employment
agreement), Mr. Kirby has the right to receive severance payments. If such termination occurs, Mr. Kirby will receive twelve
months of his base salary then in effect. Pursuant to this agreement, Mr. Kirby is prohibited from competing with us and soliciting
our customers, prospective customers or employees during the term of his employment and for a period of one year after the termination
or expiration of his employment.
Matthew
T. Shafer – Vice President, Chief Financial Officer and Treasurer
On
August 23, 2016, and in connection with his hiring by the Company, Mr. Shafer entered into an employment agreement with the Company,
to be effective on September 7, 2016 (the “Shafer Employment Agreement”). Under the Shafer Employment Agreement, Mr.
Shafer was entitled to an initial annual base salary of $220,000 subject to adjustment upon annual review by the Company’s
Board of Directors, was subsequently increased to $250,000 on October 18, 2017 and to $253,125 on May 1, 2018. Mr. Shafer is also
eligible to earn discretionary incentive bonuses and incentive compensation. He is also entitled to participate in all Company
employee benefit plans.
Upon
the termination of his employment other than for cause, or if he terminates his employment for good reason (as such terms are
defined in the Shafer Employment Agreement), Mr. Shafer has the right to receive severance payments. If such termination occurs
before the end of six months of service, he receives no severance. If such termination occurs after completing six months of service,
Mr. Shafer will receive six months of his base salary. Pursuant to this agreement, Mr. Shafer is also subject to covenants regarding
confidentiality, non-competition and non-solicitation during and after the term of his employment.
Christopher
Phebus- Vice President, Engineering
On
November 28, 2017, and in connection with his hiring by the Company, Mr. Phebus entered into an employment agreement with the
Company, to be effective on January 15, 2018 (the “Phebus Employment Agreement”). Under the Phebus Employment Agreement,
Mr. Phebus was entitled to an initial annual base salary of $270,000 subject to adjustment upon annual review by the Board of
Directors, which was subsequently increased to $271,969 on May 1, 2018. Mr. Phebus is also eligible to earn discretionary incentive
bonuses and incentive compensation. He is also entitled to participate in all Company employee benefit plans.
Upon
the termination of his employment other than for cause, or if he terminates his employment for good reason (as such terms are
defined in the Phebus Employment Agreement), Mr. Phebus has the right to receive severance payments. If such termination occurs
before the end of six months of service, he receives no severance. If such termination occurs after completing six months of service,
Mr. Phebus will receive six months of his base salary. Pursuant to this agreement, Mr. Phebus is also subject to covenants regarding
confidentiality, non-competition and non-solicitation during and after the term of his employment.
Stock
Option and Other Compensation Plans
2006
Stock Incentive Plan
Our
2006 Stock Incentive Plan was adopted by our Board of Directors on December 7, 2006, was approved by our stockholders on January
12, 2007 and became effective on April 24, 2007. The 2006 Stock Incentive Plan provides for the grant of incentive stock options,
non-statutory stock options, restricted stock awards and other stock-unit awards. On October 2, 2009, an amendment to the 2006
Stock Incentive Plan was approved, increasing the aggregate number of shares authorized for issuance by 850,000 shares to 1,653,215
shares. In 2010, our Board of Directors approved amending and restating the 2006 Stock Incentive Plan to make certain adjustments,
including imposing minimum performance periods for performance awards and minimum vesting periods for time-based awards, a requirement
that we obtain stockholder approval prior to certain option and stock appreciation right repricing actions, and limiting the situations
in which vesting periods may be waived or accelerated. This amendment and restatement did not require the approval of our stockholders.
On October 2, 2013, a further amendment to the 2006 Stock Incentive Plan was approved by our stockholders, increasing the aggregate
number of shares authorized for issuance by an additional 800,000 shares to 2,453,215.
Our
employees, officers, directors, consultants and advisors are eligible to receive awards under our 2006 Stock Incentive Plan; however,
incentive stock options may only be granted to our employees. The maximum number of shares of Common Stock with respect to which
awards may be granted to any participant under our 2006 Stock Incentive Plan is 200,000 per calendar year.
Our
2006 Stock Incentive Plan was administered by our Board of Directors. Pursuant to the terms of our 2006 Stock Incentive Plan,
and to the extent permitted by law, our Board of Directors could delegate authority to one or more committees or subcommittees
of the Board of Directors or to our officers. Our Board of Directors or any committee to whom the Board of Directors delegates
authority selected the recipients of awards and determined:
|
●
|
the
number of shares of Common Stock covered by options and the dates upon which the options become exercisable;
|
|
●
|
the
exercise price of options; provided, however, that the exercise price shall not be less than 100% of the fair market value
of the underlying Common Stock on the date the option is granted;
|
|
●
|
the
duration of the options; and
|
|
●
|
the
number of shares of Common Stock subject to any restricted stock or other stock-unit awards and the terms and conditions of
such awards, including conditions for repurchase, issue price and repurchase price.
|
If
our Board of Directors delegated authority to an officer, the officer had the power to make awards to all of our employees, except
to executive officers. Our Board of Directors fixed the terms of the awards to be granted by such officer, including the exercise
price of such awards, and the maximum number of shares subject to awards that such officer could make.
If
a merger or other reorganization event occurred, our Board of Directors could provide that all of our outstanding options are
to be assumed or substituted by the successor corporation. Our Board of Directors could also provide that, in the event the succeeding
corporation did not agree to assume, or substitute for, outstanding options, then all unexercised options would become exercisable
in full prior to the completion of the event and that these options would terminate immediately prior to the completion of the
merger or other reorganization event if not previously exercised. Our Board of Directors could also provide for cashing out the
value of any outstanding options.
No
awards could be granted under our 2006 Stock Incentive Plan after December 6, 2016, but the vesting and effectiveness of awards
granted before that date could extend beyond that date. Our Board of Directors could amend, suspend or terminate our 2006 Stock
Incentive Plan at any time, except that stockholder approval would be required for any revision that would materially increase
the number of shares reserved for issuance, expand the types of awards available under the plan, materially modify plan eligibility
requirements, extend the term of the plan or materially modify the method of determining the exercise price of options granted
under the plan, or otherwise as required to comply with applicable law or stock market requirements.
As
of April 30, 2018, options to purchase 46,116 shares of our Common Stock at a weighted average exercise price of $38.96 were outstanding
under our 2006 Stock Incentive Plan.
As
of April 30, 2018, we had granted 114,019 shares of restricted Common Stock under our 2006 Stock Incentive Plan, of which zero
remain outstanding as of April 30, 2018.
Once
the 2015 Omnibus Incentive Plan (discussed below) was approved by the stockholders on October 22, 2015, no further stock options
or other awards were awarded under the 2006 Stock Incentive Plan and it was terminated.
2015
Omnibus Incentive Plan
On
August 17, 2015, the Board of Directors approved, subject to the receipt of stockholder approval, the Ocean Power Technologies,
Inc. 2015 Omnibus Incentive Plan (the “2015 Plan”). On October 22, 2015, the stockholders approved the 2015 Plan and
the 2006 Stock Incentive Plan was terminated. Effective August 17, 2016, our Board approved and adopted an amendment to the 2015
Plan, subject to stockholder approval, to increase the number of shares available for grant under the 2015 Plan from 240,703 to
640,703 in order to assure that adequate shares will be available for future grants. On October 21, 2016, the stockholders approved
the amendment to the 2015 Plan.
Description
of 2015 Plan
The
following is a summary of the material provisions of the 2015 Plan, as amended, and is qualified in its entirety by reference
to the complete text of the 2015 Plan, a copy of which is filed as
Annex A
to our Proxy Statement on Schedule 14A filed
with the SEC on September 3, 2015.
Administration
The
2015 Plan is administered by a committee of the Board, which consists of not fewer than two directors of the Company designated
by the Board, each of whom is a “non-employee director” within the meaning of Rule 16b-3 promulgated under the Exchange
Act, an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code as amended (as now in
effect or later amended and any successor thereto, the “Code”) and, for so long as our Common Stock is listed on the
NASDAQ, an “independent director” within the meaning of the NASDAQ rules. Among other things, the committee administering
the 2015 Plan has full power and authority to take all actions and to make all determinations required or provided for under the
2015 Plan, any award under the 2015 Plan or any award agreement under the 2015 Plan, not inconsistent with the specific terms
and conditions of the 2015 Plan, which the committee deems to be necessary or appropriate to the administration of the 2015 Plan.
The committee administering the 2015 Plan, may amend, modify or supplement the terms of any outstanding award, provided that no
amendment, modification or supplement of the terms of any outstanding award shall impair a grantee’s rights under an award
without the consent of the grantee. The committee administering the 2015 Plan is also authorized to construe the award agreements,
and may prescribe rules relating to the 2015 Plan. Notwithstanding the foregoing, our full Board will conduct the general administration
of the 2015 Plan with respect to all awards granted to our non-employee directors. In addition, in its sole discretion, our Board
may at any time and from time to time exercise any and all rights and duties of the committee under the 2015 Plan except with
respect to matters which are required to be determined in the sole discretion of the committee under Rule 16b-3 of the Exchange
Act or Section 162(m) of the Code, or any regulations or rules issued thereunder.
Grant
of Awards; Shares Available for Awards; Award Limits; Eligible Grantees
The
2015 Plan provides for the grant of stock options, SARs, restricted stock awards, stock unit awards and unrestricted stock awards,
dividend equivalent rights, performance share awards or other performance-based awards, other equity-based awards or cash to eligible
employees, officers and non-employee directors of the Company or any affiliate of the Company, or any consultant or adviser to
the Company or an affiliate who is currently providing services to the Company or an affiliate, or to any other individual whose
participation in the 2015 Plan is determined to be in the best interests of the Company by the committee administering the 2015
Plan. We have reserved a total of 200,000 shares of Common Stock for issuance as or under awards to be made under the 2015 Plan,
plus (y) 40,703, which was the number of shares of Common Stock available for issuance under our 2006 Stock Incentive Plan as
of the effective date of the 2015 Plan, plus (z) the number of shares of our Common Stock related to awards under the 2006 Stock
Incentive Plan as of the effective date of the 2015 Plan which thereafter terminate by expiration, forfeiture, cancellation, or
otherwise without the issuance of such shares. With the amendment to the Plan approved by the stockholders on October 21, 2016,
the number of shares of Common Stock increased from 240,703 to 640,703. If any award expires, is cancelled, or terminates unexercised
or is forfeited, the number of shares subject thereto is again available for grant under the 2015 Plan. The maximum number of
shares of stock that can be granted under the 2015 Plan pursuant to incentive stock option awards is currently two hundred thousand
(200,000). The maximum number of shares of stock subject to awards that can be granted under the 2015 Plan in any one calendar
year to any person, other than a non-employee director, is seventy-five thousand (75,000). The maximum fair market value of shares
of stock that may be granted under the 2015 Plan in any one calendar year to any non-employee director is two-hundred thousand
dollars ($200,000). The limitation on the amount of shares of stock issuable under the 2015 Plan is subject to adjustment in the
event of certain changes in our capital stock, such as recapitalizations, reclassifications, stock splits, reverse stock splits,
spin-offs, combinations of our stock, exchanges of our stock and other increases or decreases in our stock without receipt of
consideration.
As
of April 30, 2018, options to purchase 342,413 shares of our Common Stock at a weighted average exercise price of $1.73 were outstanding
under our 2015 Omnibus Incentive Plan.
As
of April 30, 2018, we had granted 346,996 shares of Restricted Common Stock under our 2015 Omnibus Incentive Plan. 194,304 shares
vested and 52,925 shares were cancelled, with 99,767 shares remaining outstanding.
The
2015 Plan will terminate automatically on October 22, 2025, which is ten years after the date on which stockholders approve the
2015 Plan. As of April 30, 2018, there are 89,531 shares available for grant under the 2015 Omnibus Incentive Plan.
2018
Employment Inducement Incentive Award Plan
On
January 18, 2018, the Board adopted the Ocean Power Technologies, Inc. Employment Inducement Incentive Award Plan (the “Inducement
Plan”) and, subject to the adjustment provisions of the Inducement Plan, reserved 500,000 shares of the Company’s
common stock for issuance pursuant to equity awards granted under the Inducement Plan.
The
Inducement Plan was adopted without stockholder approval pursuant to Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing
Rules. The Inducement Plan provides for the grant of equity-based awards, including restricted stock units, restricted stock,
performance shares and performance units, and its terms are substantially similar to the Company’s 2015 Omnibus Incentive
Plan, including with respect to treatment of equity awards in the event of a “change in control” as defined under
the Inducement Plan, but with such other terms and conditions intended to comply with the NASDAQ inducement award exception.
In
accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be
made to individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona
fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with
the Company. An award is any right to receive the Company’s common stock pursuant to the 2018 Inducement Plan, consisting
of a performance share award, restricted stock award, a restricted stock unit award or a stock payment award. No Awards may be
granted or awarded during any period of suspension or after termination of the Plan, and in no event may any Award be granted
under the Plan after the tenth (10
th
) anniversary of the date of its adoption. Any Awards that are outstanding on the
Expiration Date, or the date of termination of the Plan (if earlier), shall remain in force according to the terms of the Plan
and the applicable Award Agreement. As of April 30, 2018, there were 97,297 shares outstanding and 402,703 shares available for
grant under the 2018 Inducement Plan.
2018
Outstanding Equity Awards at Fiscal Year End Table
The
following table contains certain information regarding equity awards held by the named executive officers as of April 30, 2018:
|
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
|
|
Numbers
of
|
|
|
Numbers
of
|
|
|
|
|
|
|
|
|
Number
of
|
|
Value
of
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
|
|
|
|
|
|
Shares
or
|
|
Shares
or
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Units
of
|
|
Units
of
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Stock
That
|
|
Stock
That
|
|
|
Name
and
|
|
Options
(#)
|
|
|
Options
(#)
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have
Not
|
|
Have
Not
|
|
|
Principal
Position
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
($)
|
|
|
Date
|
|
|
Vested
(#)
|
|
Vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George
H. Kirby III
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
50,000
|
(1)
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew
T. Shafer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
10,308
|
(2)
|
|
11,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,584
|
(3)
|
|
16,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
Phebus
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
97,297
|
(4)
|
|
107,027
|
|
|
(1)
|
Represent
shares of restricted stock granted on May 19, 2017 relating to an aggregate of 50,000 shares which vest after a two- year
period based on service requirements.
|
|
|
|
|
(2)
|
Represent
shares of restricted stock granted on October 21, 2016 relating to an aggregate of 15,462 shares which vest over a three-
year period based on service requirements; 5,154 shares vested on Sept 17, 2017.
|
|
|
|
|
(3)
|
Represent
shares of restricted stock granted on May 19, 2017 relating to an aggregate of 14,584 shares which vest after a two- year
period based on service requirements.
|
|
|
|
|
(4)
|
Represent
shares of restricted stock granted on January 18, 2018 relating to an aggregate of 97,297 shares which vest over a three-
year period based on service requirements.
|
Potential
Payments upon Termination of Employment or Change in Control
The
following information sets forth the terms of potential payments to each of our named executive officers in the event of a termination
of employment. We do not include information for Mr. Mekhiche since he is no longer employed by the Company.
Termination
by Company without Cause; Termination by Executive for Good Reason.
Our
employment agreement with Mr. Kirby provides for severance pay within 30 days in the event that employment is terminated by the
Company, other than for cause, upon Mr. Kirby’s disability or by the executive with good reason, in the amount of twelve
months of base salary. Mr. Kirby would also be entitled to receive any other payments owed such as a short-term bonus, long-term
compensation, benefits and expenses reimbursements to the degree such payments are owed for service provided up to the date of
termination. Finally, the expiration date of any other options held by Mr. Kirby would be extended to a date 90 days after the
date of termination of employment (but not longer than the original term of such options).
Our
employment agreement with Mr. Shafer provides, upon the termination of his employment other than for cause, or if Mr. Shafer terminates
his employment for good reason, that Mr. Shafer has the right to receive severance payments. If such termination occurs before
the end of six months of service, Mr. Shafer will receive no severance. If such termination occurs after completing six months
of service, Mr. Shafer will receive six months of his base salary.
Our
employment agreement with Mr. Phebus provides, upon the termination of his employment other than for cause, or if Mr. Phebus terminates
his employment for good reason, that Mr. Phebus has the right to receive severance payments. If such termination occurs before
the end of six months of service, Mr. Phebus will receive no severance. If such termination occurs after completing six months
of service, Mr. Phebus will receive six months of his base salary.
Termination
by Company for Cause; Termination by Executive without Good Reason.
Under our employment contracts with Mr. Kirby upon termination
for cause or at the executive’s election without good reason, the executive is entitled to the base salary and benefits
due and owing to the executive as of the date of termination. The employment agreements with Mr. Shafer and Mr. Phebus do not
contain provisions regarding severance in the event of a termination by the Company with or without cause or termination by the
executive without good reason.
Change
in Control.
Our employment agreement with Mr. Kirby provides for severance pay equal to one (1) year of base salary if a change
of control occurs and Mr. Kirby is terminated by the Company or Mr. Kirby terminates the agreement, each occurring within 90 days
of the change of control. Mr. Kirby would also be entitled to receive any other payments owed such as a short-term bonus, long-term
compensation, benefits and expenses reimbursements to the degree such payments are owed for service provided up to the date of
termination. Finally, the expiration date of any other options held by Mr. Kirby would be extended to a date 90 days after the
date of termination (but not longer than the original term of such options). In addition, to the extent that Mr. Kirby has not
previously vested in rights and interests held by Mr. Kirby under the Company’s stock and other equity plans (including
stock options, restricted stock, RSU’s, performance units or performance shares), such rights and interest would become
fully vested.
The
employment agreements for Mr. Shafer and Mr. Phebus do not contain change of control provisions; therefore, payments for cash
severance and continued healthcare benefits are the same as for termination without cause. The restricted stock agreement provides
for accelerated stock vesting upon a change in control.
Termination
upon Failure to Renew by the Company.
In the event that our employment agreement with Mr. Kirby terminates the end of the
term and is not renewed as a result of a decision by the Company not to renew, prior to a decision by Mr. Kirby not to renew,
the Company will pay Mr. Kirby a severance payment in the amount of one (1) year base salary in a lump sum within 30 days after
the termination date.
The
employment agreements for Mr. Shafer and Mr. Phebus do not contain similar provisions.
Qualifying
retirement.
Under our restricted stock agreements with the named executive officers, upon a Qualifying Retirement 50% of unvested
restricted shares will vest immediately. A “Qualifying Retirement” means retirement by the recipient after satisfaction
of the conditions in either clause (A) or clause (B): (A) the recipient has both (1) attained the age of 55 and (2) completed
at least ten years of employment with the Company; or (B) the sum of the recipient’s age plus the number of years he or
she has been employed by the Company equals or exceeds 75 years.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information regarding the beneficial ownership of Common Stock as of July 5, 2018 by
(a) each person known by us to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (b) each executive
officer (c) each director, and (d) all executive officers and directors as a group.
The
Percentage of Common Stock outstanding is based on 18,368,286 shares of our Common Stock outstanding as of July 5, 2018.
For purposes of the table below, and in accordance with the rules of the SEC, we deem shares of Common Stock subject to options
that are currently exercisable or exercisable within sixty days of July 5, 2018 to be outstanding and to be beneficially
owned by the person holding the options for the purpose of computing the percentage ownership of that person, but we do not treat
them as outstanding for the purpose of computing the percentage ownership of any other person. Except as otherwise noted, each
of the persons or entities in this table has sole voting and investing power with respect to all of the shares of Common Stock
beneficially owned by such person, subject to community property laws, where applicable. The street address of each beneficial
owner shown in the table below is c/o Ocean Power Technologies, Inc., 28 Engelhard Drive, Monroe Township, NJ 08831.
|
Name
of Beneficial Owner
|
|
Number
of Shares Beneficially Owned
|
|
|
Percentage
of Shares Beneficially Owned
|
|
|
|
|
|
|
|
|
|
|
Terence
J. Cryan (1)
|
|
|
49,476
|
|
|
|
*
|
|
|
George
H. Kirby III (2)
|
|
|
58,831
|
|
|
|
*
|
|
|
Matthew
T. Shafer (3)
|
|
|
3,471
|
|
|
|
*
|
|
|
Steven
Fludder (4)
|
|
|
28,759
|
|
|
|
*
|
|
|
Dean
J. Glover (5)
|
|
|
43,027
|
|
|
|
*
|
|
|
Christopher
Phebus (6)
|
|
|
-
|
|
|
|
*
|
|
|
Robert
Winters (7)
|
|
|
28,759
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (7 individuals)
|
|
|
212,323
|
|
|
|
1.1
|
%
|
*
Represents a beneficial ownership of less the one percent of our outstanding common stock
|
|
(1)
|
Beneficial
ownership includes 5,050 shares of our common stock and 44,426 shares issuable upon the exercise of options that are currently
exercisable or exercisable within sixty days of July 5, 2018.
|
|
|
|
|
|
|
(2)
|
Beneficial
ownership includes 58,831 shares of our common stock.
|
|
|
|
|
|
|
(3)
|
Beneficial
ownership includes 3,471 shares of our common stock.
|
|
|
|
|
|
|
(4)
|
Beneficial
ownership includes 28,759 shares issuable upon the exercise of options that are currently exercisable or exercisable within
sixty days of July 5, 2018.
|
|
|
|
|
|
|
(5)
|
Beneficial
ownership includes 4,950 shares of our common stock and 38,077 shares issuable upon the exercise of options that are currently
exercisable or exercisable within sixty days of July 5, 2018.
|
|
|
|
|
|
|
(6)
|
Mr.
Phebus joined the company on January 15, 2018 and does have any ownership of our common stock or options that are currently
exercisable or exercisable within sixty days of July 5, 2018.
|
|
|
|
|
|
|
(7)
|
Beneficial
ownership includes 28,759 shares issuable upon the exercise of options that are currently exercisable or exercisable within
sixty days of July 5, 2018.
|
Equity
Compensation Plan Information
The
following table sets forth the indicated information as of April 30, 2018 with respect to our equity compensation plans:
|
Plan
category
|
|
Number
of Shares
to
be Issued Upon
Exercise
of
Outstanding
Options
and Restricted
Stock
|
|
|
Weighted-Average
Exercise
Price of
Outstanding
Options
|
|
|
Number
of Shares
Remaining
Available for
Future
Issuance Under
Equity
Compensation
Plans
(Excluding Shares
Reflected
in First Column
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
388,529
|
|
|
$
|
6.15
|
|
|
|
89,531
|
(1)
|
|
Restricted
Stock
|
|
|
197,064
|
|
|
|
N/A
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Restricted
Stock
|
|
|
97,297
|
|
|
|
N/A
|
|
|
|
402,703
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
682,890
|
|
|
|
-
|
|
|
|
492,234
|
|
|
(1)
|
Consists
of shares of our common stock available for issuance under the 2015 Omnibus Incentive Plan.
|
|
|
|
|
(2)
|
Consists
of shares of our common stock available for issuance under the 2018 Employee Inducement Incentive Award Plan.
|
Our
equity compensation plans consist of 2006 Stock Incentive Plan and 2015 Omnibus Incentive Plan which were approved by our stockholders.
Once the 2015 Omnibus Incentive Plan was approved by the stockholders on October 22, 2015, no further stock options or other awards
were awarded under the 2006 Stock Incentive Plan and it was terminated. Shares that are forfeited under the 2006 Stock Incentive
Plan on or after October 22, 2015 will become available for issuance under the 2015 Omnibus Incentive Plan.
The
equity compensation plan that has not been approved by our shareholders is our 2018 Employee Inducement Incentive Award Plan.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Board
Determination of Independence
Under
applicable NASDAQ rules, a director will only qualify as an “independent director” if they are not an executive officer
or employee of the Company, and, in the opinion of our Board of Directors, that person does not have a relationship which would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Our
Board has determined that all of our current directors are “independent directors” within the meaning of the applicable
listing standards of the NASDAQ, except for George H. Kirby III who is our President and Chief Executive Officer.
Certain
Relationship and Related Person Transaction
Review
and Approval of Related Person Transactions
The
Audit Committee is charged with the responsibility of reviewing and approving all related person transactions (as defined in SEC
regulations), and periodically reassessing any related person transaction entered into by the Company to ensure continued appropriateness.
This responsibility is set forth in our Audit Committee charter. A related party transaction will only be approved if the members
of the Audit Committee determine that the transaction is in the best interests of the Company. If a director is involved in the
transaction, he or she will recuse himself or herself from all decisions regarding the transaction.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees
of Independent Registered Public Accounting Firm
The
following table summarizes the fees of KPMG LLP, our independent registered public accounting firm, billed to us for each of the
last two fiscal years.
|
|
|
Fiscal
Year 2018
|
|
|
Fiscal
Year 2017
|
|
|
|
|
|
|
|
|
|
|
Audit
Fees (1)
|
|
$
|
322,000
|
|
|
$
|
432,500
|
|
|
Audit-
Related Fees
|
|
|
-
|
|
|
|
-
|
|
|
Tax
Fees (2)
|
|
|
19,000
|
|
|
|
6,000
|
|
|
All
Other Fees (3)
|
|
|
1,780
|
|
|
|
150,339
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Fees
|
|
$
|
342,780
|
|
|
$
|
588,839
|
|
|
|
(1)
|
Audit
Fees consist of fees for the audit and quarterly reviews of our consolidated financial statements and other professional services
provided in connection with the statutory and regulatory filings or engagements. Fiscal year 2018 and 2017 audit fees include
fees for comfort letters and consents of $72,500 and $182,500, respectively, related to several equity offerings. Fiscal 2018
includes $4,500 for out of pocket fees.
|
|
|
|
|
|
|
(2)
|
Tax
Fees include fees for the tax return preparation assistance and review.
|
|
|
|
|
|
|
(3)
|
All
Other Fees for fiscal 2018 includes subscription fee for KPMG’s accounting research tool. Fiscal year 2017 include reimbursement
of costs related to response to SEC inquiry.
|
Pre-Approval
Policies and Procedures
The
Audit Committee’s policy is that all audit services and all non-audit services to be provided to us by our independent registered
public accounting firm must be approved in advance by our Audit Committee. The Audit Committee’s approval procedures include
the review and approval of a description of the services that documents the fees for all audit services and non-audit services,
primarily tax advice and tax return preparation and review.
All
audit services and all non-audit services in fiscal years 2018 and 2017 were pre-approved by the Audit Committee. The Audit Committee
has determined that the provision of the non-audit services for which these fees were rendered is compatible with maintaining
the independent auditor’s independence.
PART
IV
ITEM
15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) Financial Statements: See Index to Consolidated Financial Statements on page F-1.
(3)
Exhibits: See Exhibit Index on pages 69 to 70.
ITEM
16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
OCEAN
POWER TECHNOLOGIES, INC.
|
|
|
|
|
|
Date:
July 17, 2018
|
|
|
|
|
|
/s/
George H. Kirby III
|
|
|
By:
|
George
H. Kirby III
|
|
|
|
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
|
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
|
|
|
|
President
and Chief Executive Officer
|
|
July
17, 2018
|
|
George
H. Kirby III
|
|
(Principal
Executive Officer)
Director
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
July
17, 2018
|
|
Matthew
T. Shafer
|
|
and
Treasurer
(Principal
Financial Officer and
Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
Chairman
of the Board
Director
|
|
July
17, 2018
|
|
Terence
J. Cryan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
July
17, 2018
|
|
Dean
J. Glover
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
July
17, 2018
|
|
Steven
M. Fludder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
July
17, 2018
|
|
Robert
K. Winters
|
|
|
|
|
Exhibits
Index
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
3.1
|
|
Restated
Certificate of Incorporation of the registrant (incorporated by reference from Exhibit 3.1 to our Quarterly Report on Form
10-Q filed September 14, 2007).
|
|
3.2
|
|
Certificate
of Amendment of Certificate of Incorporation of Ocean Power Technologies, Inc. dated October 27, 2015 (incorporated by reference
from Exhibit 3.1 to Current Report on Form 8-K filed on October 28, 2015).
|
|
3.3
|
|
Amended
and Restated Bylaws of the registrant (incorporated by reference from Exhibit 3.2 to the Current Report on Form 8-K filed
June 23, 2016).
|
|
3.4
|
|
Certificate
of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of Delaware on
October 21, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October
21, 2016).
|
|
4.1
|
|
Specimen
certificate of Common Stock (incorporated by reference from Exhibit 4.1 to Form S-1/A filed March 19, 2007).
|
|
4.2
|
|
Form
of Warrant to Purchase Common Stock (incorporated by reference from Exhibit 4.1 to Current Report on Form 8-K/A filed on June
7, 2016).
|
|
10.1
|
|
Option
Agreement for Purchase of Emissions Credits, dated November 24, 2000 between Ocean Power Technologies, Inc. and its affiliates
and Woodside Sustainable Energy Solutions Pty. Ltd. (incorporated by reference from Exhibit 10.4 to Form S-1 filed November
13, 2006).
|
|
10.2
|
|
Amended
and Restated 2006 Stock Incentive Plan (incorporated by reference from Exhibit A to Proxy Statement filed August 28, 2013).*
|
|
10.3
|
|
Agreement
for Renewable Energy Economic Development Grants, dated November 3, 2003, between State of New Jersey Board of Public Utilities
and Ocean Power Technologies, Inc. (incorporated by reference from Exhibit 10.18 to Form S-1/A filed March 19, 2007).
|
|
10.4
|
|
Form
of Restricted Stock Agreement (incorporated by reference from Exhibit 10.1 to Form 10-Q filed March 14, 2011).*
|
|
10.5
|
|
Amended
Option Agreement for Purchase of Emissions Credits, dated December 4, 2012, between Ocean Power Technologies, Inc. and its
affiliates and Metasource Pty Ltd (formerly known as Woodside Sustainable Energy Solutions Pty Ltd) (incorporated by reference
from Exhibit 10.23 to Form 10-K filed July 12, 2013).
|
|
10.6
|
|
Employment
Agreement, dated December 29, 2014, between George H. Kirby and Ocean Power Technologies, Inc. (incorporated by reference
from Exhibit 10.1 to Form 10-Q filed March 11, 2015).*
|
|
10.7
|
|
Placement
Agency Agreement dated June 2, 2016, by and among Ocean Power Technologies, Inc., Roth Capital Partners, LLC and Rodman &
Renshaw, a unit of H.C. Wainwright & Co., LLC (incorporated by reference to Exhibit 99.2 to Current Report on Form 8-K
filed on June 2, 2016).
|
|
10.8
|
|
Form
of Securities Purchase Agreement dated June 2, 2016 (incorporated by reference to Exhibit 99.3 to Current Report on Form 8-K
filed on June 2, 2016).
|
|
10.9
|
|
Form
of Amendment No. 1 to Securities Purchase Agreement, dated June 7, 2016 (incorporated by reference to Exhibit 99.4 to the
Current Report on Form 8-K/A filed on June 7, 2016).
|
|
10.10
|
|
2015
Omnibus Incentive Plan* (incorporated by reference to Annex A to Proxy Statement filed on September 3, 2015).
|
|
10.11
|
|
Stipulation
and Agreement of Class Settlement dated as of May 5, 2016 (incorporated by reference to Exhibit 10.1 to Current Report on
Form 8-K filed on May 11, 2016).
|
|
10.12
|
|
Agreement
by and between Ocean Power Technologies, Inc. and Mitsui Engineering & Shipbuilding Co., Ltd dated May 31, 2016 (incorporated
by reference from Exhibit 10.1 to Current Report on Form 8-K/A filed on June 6, 2016).
|
|
10.13
|
|
Form
of Amendment No. 1 to the Securities Purchase Agreement, dated June 7, 2016 (incorporated by reference to Exhibit 99.4 to
the Current Report on Form 8-K filed on June 7, 2016).
|
|
10.14
|
|
Form
of Amendment No. 2, dated as of July 21, 2016, to the Securities Purchase Agreement, dated as of June 2, 2016, by and among
Ocean Power Technologies, Inc. and the investor’s signatory thereto, and (incorporated by reference from Exhibit 99.2
to the Current Report on Form 8-K filed July 21, 2016).
|
|
10.15
|
|
Form
of Placement Agency Agreement, dated July 22, 2016, between the Company and the Placement Agent (incorporated by reference
from Exhibit 1.1 to the Current Report on Form 8-K filed July 22, 2016).
|
|
10.16
|
|
Form
of Subscription Agreement, dated July 22, 2016 between the Company and the Purchasers thereto (incorporated by reference from
Exhibit 10.1 to the Current Report on Form 8-K filed July 22, 2016).
|
|
10.17
|
|
Employment
Letter between the Company and Matthew Shafer dated August 23, 2016, (incorporated by reference from Exhibit 10.1 to the Current
Report on Form 8-K filed August 29, 2016).
|
|
10.18
|
|
Letter
Agreement between the Company and Mark A. Featherstone dated August 25, 2016, (incorporated by reference from Exhibit 10.3
to the Current Report on Form 8-K filed August 29, 2016).
|
|
10.19
|
|
Employment
Letter between the Company and Mike Mekhiche dated September 12, 2016, (incorporated by reference from Exhibit 10.4 to the
Current Report on Form 8-K filed August 29, 2016).
|
|
10.20
|
|
Letter
Agreement between the Company and Mike Mekhiche dated June 19, 2014, (incorporated by reference from Exhibit 10.5 to the Current
Report on Form 8-K filed August 29, 2016).
|
|
10.21
|
|
Agreement
by and between the Company and the U.S. Office of Naval Research dated September 13, 2016 (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on September 14, 2016).
|
|
10.22
|
|
Agreement
by and between the Company and the U.S. Office of Naval Research dated September 13, 2016 (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on September 14, 2016).
|
|
10.23
|
|
Lease
Agreement, dated March 31, 2017 between Ocean Power Technologies, Inc. and PPH Industrial 28 Engelhard, LLC (incorporated
by reference from Exhibit 99.2 to the Current Report on Form 8-K filed April 6, 2017).
|
|
10.24
|
|
Ocean
Power Technologies, Inc. Employment Inducement Incentive Award Plan (incorporated by reference to Exhibit 10.1 to Form 8-K
filed with the SEC on January 19, 2018).*
|
|
10.25
|
|
Form
of Restricted Stock Agreement for Employment Inducement Incentive Award Plan (incorporated by reference to Exhibit 10.2 to
Form 8-K filed with the SEC on January 19, 2018).*
|
|
10.26
|
|
Contract
between eni SpA and the Company dated March 14, 2018 (incorporated by reference to Exhibit 10.1 to Form 8-K filed with the
SEC on March 19, 2018). +
|
|
10.27
|
|
Contract between Premier Oil UK Limited and the Company dated June 27, 2018.+
|
|
|
|
|
|
21.1
|
|
Subsidiaries
of the registrant
|
|
23.1
|
|
Consent
of KPMG LLP
|
|
31.1
|
|
Certification
of Chief Executive Officer
|
|
31.2
|
|
Certification
of Chief Financial Officer
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002**
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002**
|
|
101
|
|
The
following financial information from Ocean Power Technologies, Inc.’s Annual Report on Form 10-K for the annual period
ended April 30, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets –
as of April 30, 2018 and 2017, (ii) Consolidated Statements of Operations – for the years ended April 30, 2018 and 2017,
(iii) Consolidated Statements of Comprehensive Loss – for the years ended April 30, 2018 and 2017, (iv) Consolidated
Statements of Stockholders’ Equity – for the years ended April 30, 2018 and 2017 (v) Consolidated Statements of
Cash Flows – for the years ended April 30, 2018 and 2017, (vi) Notes to Consolidated Financial Statements.***
|
+
Indicates that confidential treatment has been requested for this exhibit.
*
Management contract or compensatory plan or arrangement.
**
As provided in Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed to be “filed” or part of a
registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and shall not
be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability
under those sections.
***
As provided in Rule 406T of Regulation S-T, this exhibit shall not be deemed “filed” or a part of a registration statement
or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and shall not be deemed “filed”
for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability under those sections.
OCEAN
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Index
to Consolidated Financial Statements
|
|
Page
|
|
|
|
|
Reports
of Management
|
F-2
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-3
|
|
Consolidated
Balance Sheets, April 30, 2018 and 2017
|
F-4
|
|
Consolidated
Statements of Operations, Years ended April 30, 2018 and 2017
|
F-5
|
|
Consolidated
Statements of Comprehensive Loss, Years ended April 30, 2018 and 2017
|
F-6
|
|
Consolidated
Statements of Stockholders’ Equity, Years ended April 30, 2018 and 2017
|
F-7
|
|
Consolidated
Statements of Cash Flows, Years ended April 30, 2018 and 2017
|
F-8
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
Reports
of Management
Management’s
Report on Consolidated Financial Statements
The
accompanying consolidated financial statements have been prepared by the management of Ocean Power Technologies, Inc. (the Company)
in conformity with generally accepted accounting principles to reflect the financial position of the Company and its operating
results. The financial information appearing throughout this Annual Report is consistent with the consolidated financial statements.
Management is responsible for the information and representations in such consolidated financial statements, including the estimates
and judgments required for their preparation. The consolidated financial statements have been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report, which appears herein.
The
Audit Committee of the Board of Directors, which is composed entirely of directors who are not officers or employees of the Company,
meets regularly with management and the independent registered public accounting firm. The independent registered public accounting
firm has had, and continues to have, direct access to the Audit Committee without the presence of other management personnel,
and have been directed to discuss the results of their audit work and any matters they believe should be brought to the Committee’s
attention. The independent registered public accounting firm reports directly to the Audit Committee.
Management’s
Annual Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles
in the United States. The Company’s internal control over financial reporting includes those policies and procedures that:
|
|
●
|
pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
|
|
|
●
|
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
|
|
|
●
|
provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial statements.
|
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The
Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of April
30, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in
Internal Control — Integrated Framework (2013
). Based on this assessment using those
criteria, management concluded that the Company’s internal control over financial reporting was effective as of April 30,
2018.
|
|
|
|
George
H. Kirby III
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
Matthew
T. Shafer
|
|
|
Chief
Financial Officer and Treasurer
|
|
Report
of Independent Registered Public Accounting Firm
To
the Stockholders and Board of Directors Ocean Power Technologies, Inc.:
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of Ocean Power Technologies, Inc. and subsidiaries (the Company) as
of April 30, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity,
and cash flows for each of the years in the two-year period ended April 30, 2018, and the related notes (collectively, the consolidated
financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Ocean Power Technologies, Inc. and subsidiaries as of April 30, 2018 and 2017, and the results of their operations
and their cash flows for each of the years in the two-year period ended April 30, 2018, in conformity with U.S. generally accepted
accounting principles.
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in note 1 (b) to the consolidated financial statements, as of April 30, 2018 the Company has cash and cash equivalents
of $11.5 million, and the Company has suffered recurring losses from operations and has an accumulated deficit. These factors
raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters
are described in note 1 (b). The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
KPMG LLP
We
have served as the Company’s auditor since 2004.
Philadelphia,
Pennsylvania
July
17, 2018
OCEAN
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(in
thousands, except share data)
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
11,499
|
|
|
$
|
8,421
|
|
|
Marketable
securities
|
|
|
25
|
|
|
|
25
|
|
|
Restricted
cash- short-term
|
|
|
572
|
|
|
|
334
|
|
|
Accounts
receivable
|
|
|
171
|
|
|
|
48
|
|
|
Unbilled
receivables
|
|
|
71
|
|
|
|
296
|
|
|
Litigation
receivable
|
|
|
350
|
|
|
|
-
|
|
|
Other
current assets
|
|
|
567
|
|
|
|
622
|
|
|
Total
current assets
|
|
|
13,255
|
|
|
|
9,746
|
|
|
Property
and equipment, net
|
|
|
712
|
|
|
|
170
|
|
|
Restricted
cash- long-term
|
|
|
154
|
|
|
|
154
|
|
|
Other
noncurrent assets
|
|
|
-
|
|
|
|
3
|
|
|
Total
assets
|
|
$
|
14,121
|
|
|
$
|
10,073
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
290
|
|
|
$
|
586
|
|
|
Accrued
expenses
|
|
|
2,261
|
|
|
|
3,059
|
|
|
Litigation
payable
|
|
|
350
|
|
|
|
-
|
|
|
Warrant
liabilities
|
|
|
201
|
|
|
|
323
|
|
|
Current
portion of capital lease obligations
|
|
|
23
|
|
|
|
35
|
|
|
Unearned
revenue
|
|
|
18
|
|
|
|
-
|
|
|
Deferred
credits payable current
|
|
|
600
|
|
|
|
600
|
|
|
Total
current liabilities
|
|
|
3,743
|
|
|
|
4,603
|
|
|
Long-term
portion of capital lease obligations
|
|
|
-
|
|
|
|
23
|
|
|
Deferred
rent
|
|
|
142
|
|
|
|
-
|
|
|
Total
liabilities
|
|
|
3,885
|
|
|
|
4,626
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Ocean
Power Technologies, Inc. stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; authorized 5,000,000 shares,
none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value; authorized 50,000,000 shares,
issued 18,424,939 and 6,313,996 shares, respectively
|
|
|
18
|
|
|
|
6
|
|
|
Treasury
stock, at cost; 74,012 and 48,065 shares, respectively
|
|
|
(300
|
)
|
|
|
(263
|
)
|
|
Additional
paid-in capital
|
|
|
208,216
|
|
|
|
193,234
|
|
|
Accumulated
deficit
|
|
|
(197,538
|
)
|
|
|
(187,370
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(160
|
)
|
|
|
(160
|
)
|
|
Total
stockholders’ equity
|
|
|
10,236
|
|
|
|
5,447
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
14,121
|
|
|
$
|
10,073
|
|
See
accompanying notes to consolidated financial statements.
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
(in
thousands, except per share data)
|
|
|
Twelve
months ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
511
|
|
|
$
|
843
|
|
|
Cost
of revenues
|
|
|
763
|
|
|
|
938
|
|
|
Gross
loss
|
|
|
(252
|
)
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Product
development costs
|
|
|
4,320
|
|
|
|
5,029
|
|
|
Selling,
general and administrative costs
|
|
|
6,988
|
|
|
|
6,563
|
|
|
Total
operating expenses
|
|
|
11,308
|
|
|
|
11,592
|
|
|
Operating
loss
|
|
|
(11,560
|
)
|
|
|
(11,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain
due to the change in fair value of warrant liabilities
|
|
|
122
|
|
|
|
1,491
|
|
|
Interest
income, net
|
|
|
83
|
|
|
|
28
|
|
|
Other
income
|
|
|
4
|
|
|
|
-
|
|
|
Foreign
exchange gain/(loss)
|
|
|
75
|
|
|
|
(16
|
)
|
|
Loss
before income taxes
|
|
|
(11,276
|
)
|
|
|
(10,184
|
)
|
|
Income
tax benefit
|
|
|
1,119
|
|
|
|
698
|
|
|
Net
loss
|
|
$
|
(10,157
|
)
|
|
$
|
(9,486
|
)
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.66
|
)
|
|
$
|
(2.23
|
)
|
|
Weighted
average shares used to compute
basic
and diluted net loss per share
|
|
|
15,346,602
|
|
|
|
4,259,172
|
|
See
accompanying notes to consolidated financial statements.
OCEAN
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Loss
(in
thousands)
|
|
|
Twelve
months ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,157
|
)
|
|
$
|
(9,486
|
)
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
(38
|
)
|
|
Total
comprehensive loss
|
|
$
|
(10,157
|
)
|
|
$
|
(9,524
|
)
|
See
accompanying notes to consolidated financial statements.
OCEAN
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Common
Shares
|
|
|
Treasury
Shares
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
April 30, 2016
|
|
|
2,352,100
|
|
|
$
|
2
|
|
|
|
(6,894
|
)
|
|
$
|
(138
|
)
|
|
$
|
181,670
|
|
|
$
|
(177,884
|
)
|
|
$
|
(122
|
)
|
|
$
|
3,528
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,486
|
)
|
|
|
|
|
|
|
(9,486
|
)
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
Issuance
of restricted stock, net
|
|
|
189,896
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
|
954
|
|
|
Sale of stock
|
|
|
3,772,000
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
10,332
|
|
|
|
|
|
|
|
|
|
|
|
10,336
|
|
|
Acquisition
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(41,171
|
)
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
(38
|
)
|
|
Balances,
April 30, 2017
|
|
|
6,313,996
|
|
|
$
|
6
|
|
|
|
(48,065
|
)
|
|
$
|
(263
|
)
|
|
$
|
193,234
|
|
|
$
|
(187,370
|
)
|
|
$
|
(160
|
)
|
|
$
|
5,447
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,157
|
)
|
|
|
|
|
|
|
(10,157
|
)
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
329
|
|
|
Issuance
of restricted stock, net
|
|
|
178,756
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Sale
of stock, net of financing costs
|
|
|
11,932,187
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
14,642
|
|
|
|
|
|
|
|
|
|
|
|
14,654
|
|
|
Acquisition
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(25,947
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
Adoption
of accounting standard update related to stock compensation accounting (ASU 2016-09)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
-
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Balances,
April 30, 2018
|
|
|
18,424,939
|
|
|
$
|
18
|
|
|
|
(74,012
|
)
|
|
$
|
(300
|
)
|
|
$
|
208,216
|
|
|
$
|
(197,538
|
)
|
|
$
|
(160
|
)
|
|
$
|
10,236
|
|
See
accompanying notes to consolidated financial statements
OCEAN
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(in
thousands)
|
|
|
Twelve
months ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,157
|
)
|
|
$
|
(9,486
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Foreign
exchange (gain)/loss
|
|
|
(75
|
)
|
|
|
16
|
|
|
Depreciation
|
|
|
122
|
|
|
|
140
|
|
|
Loss
on disposal of property, plant and equipment
|
|
|
5
|
|
|
|
-
|
|
|
Compensation
expense related to stock option grants and restricted stock
|
|
|
329
|
|
|
|
1,232
|
|
|
Change
in fair value of warrant liabilities
|
|
|
(122
|
)
|
|
|
(1,491
|
)
|
|
Payment
for litigation settlement
|
|
|
-
|
|
|
|
(500
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(123
|
)
|
|
|
(48
|
)
|
|
Unbilled
receivable
|
|
|
225
|
|
|
|
(258
|
)
|
|
Other
receivable
|
|
|
(166
|
)
|
|
|
-
|
|
|
Other
assets
|
|
|
360
|
|
|
|
(212
|
)
|
|
Accounts
payable
|
|
|
(296
|
)
|
|
|
213
|
|
|
Accrued
expenses
|
|
|
(821
|
)
|
|
|
395
|
|
|
Deferred
rent
|
|
|
5
|
|
|
|
-
|
|
|
Unearned
revenues
|
|
|
18
|
|
|
|
(39
|
)
|
|
Net
cash used in operating activities
|
|
|
(10,696
|
)
|
|
|
(10,038
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of marketable securities
|
|
|
(25
|
)
|
|
|
-
|
|
|
Maturities
of marketable securities
|
|
|
25
|
|
|
|
50
|
|
|
Leasehold
improvements and purchase of equipment
|
|
|
(658
|
)
|
|
|
(37
|
)
|
|
Net
cash (used in) provided by investing activities
|
|
|
(658
|
)
|
|
|
13
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock and related warrants, net of costs
|
|
|
14,654
|
|
|
|
12,150
|
|
|
Payment
of capital lease obligations
|
|
|
(35
|
)
|
|
|
(28
|
)
|
|
Payment
of debt
|
|
|
-
|
|
|
|
(50
|
)
|
|
Acquisition
of treasury stock
|
|
|
(37
|
)
|
|
|
(125
|
)
|
|
Net
cash provided by financing activities
|
|
|
14,582
|
|
|
|
11,947
|
|
|
Effect
of exchange rate changes on cash, cash equivalents and restricted cash
|
|
|
88
|
|
|
|
(43
|
)
|
|
Net
increase in cash, cash equivalents and restricted cash
|
|
|
3,316
|
|
|
|
1,879
|
|
|
Cash,
cash equivalents and restricted cash, beginning of period
|
|
|
8,909
|
|
|
|
7,030
|
|
|
Cash,
cash equivalents and restricted cash, end of period
|
|
$
|
12,225
|
|
|
$
|
8,909
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of cash flows information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
3
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisition
of equipment pursuant to capital leases
|
|
$
|
-
|
|
|
$
|
4
|
|
|
Acquisition
of leasehold improvements and equipment through accrued expenses
|
|
|
11
|
|
|
|
-
|
|
See
accompanying notes to the consolidated financial statements
OCEAN
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
(1)
|
Background
and Liquidity
|
(a)
Background
Ocean
Power Technologies, Inc. (the “Company”) was founded in 1984 in New Jersey, commenced business operations in 1994
and re-incorporated in Delaware in 2007. The Company is developing and commercializing its proprietary systems that generate electricity
by harnessing the renewable energy of ocean waves. The Company uses proprietary technologies that convert the mechanical energy
created by the heaving motion of ocean waves into electricity. The Company has designed and continues to develop the PowerBuoy™
product line which is based on modular, ocean-going buoys, which the Company has been periodically ocean testing since 1997. The
Company markets its PowerBuoys™ in the United States and internationally. Since fiscal 2002, government agencies have accounted
for a significant portion of the Company’s revenues. These revenues were largely for the support of product development
efforts. The Company’s goal is that an increased portion of its revenues be from the sale or lease of products and maintenance
services, as compared to revenue to support its product development efforts. As the Company continues to advance its proprietary
technologies, it expects to continue to have a net decrease in cash from operating activities unless and until it achieves positive
cash flow from the planned commercialization of its products and services.
(b)
Liquidity/Going Concern
Our
consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced
substantial and recurring losses from operations, which have contributed to an accumulated deficit of $197.5 million at April
30, 2018. At April 30, 2018, the Company had approximately $11.5 million in cash on hand. The Company generated revenues of only
$0.5 million and $0.8 million during the years ended April 30, 2018 and 2017, respectively. Based on the Company’s cash
and cash equivalents and marketable securities balances as of April 30, 2018, the Company believes that it will be able to finance
its capital requirements and operations into the quarter ending April 30, 2019, including $0.6 million of payments due by August
30, 2018 as a return of an option due to ineligibility for certain emission credits. The Company will require additional equity
and/or debt financing to continue its operations. The Company cannot provide assurances that it will be able to secure additional
funding when needed or at all, or, if secured, that such funding would be on favorable terms. These factors raise substantial
doubt about the Company’s ability to continue as a going concern.
The
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets amounts or the amounts and classification of liabilities
that might result from the outcome of this uncertainty.
Management
is evaluating different strategies to obtain the required additional funding for future operations. These strategies may include,
but are not limited to, additional funding from current or new investors, officers and directors; borrowings of debt; a public
offering of the Company’s equity or debt securities; partnerships and/or collaborations. There can be no assurance that
any of these future-funding efforts will be successful.
In
fiscal 2018 and 2017, the Company has continued to make investments in ongoing product development efforts in anticipation of
future growth. The Company’s future results of operations involve significant risks and uncertainties. Factors that could
affect the Company’s future operating results and cause actual results to vary materially from expectations include, but
are not limited to, risks from lack of available financing and insufficient capital, performance of PowerBuoys™, its inability
to market and commercialize its PowerBuoys™, technology development, scalability of technology and production, dependence
on skills of key personnel, concentration of customers and suppliers, deployment risks and laws, regulations and permitting In
order to continue to implement its business strategy, the Company requires additional equity and/or debt financing. The Company
closed five equity financing arrangements during the two year period ended April 30, 2018. The Company does not currently have
any committed sources of debt or equity financing, and the Company cannot assure that additional equity and/or debt financing
will be available to the Company as needed on acceptable terms, or at all. Historically, the Company has raised capital through
securities sales in the public capital markets. If sufficient additional financing is not obtained when needed, the Company may
be required to further curtail or limit operations, product development costs, and/or selling, general and administrative activities
in order to reduce its cash expenditures. This could cause the Company to be unable to execute its business plan, take advantage
of future opportunities and may cause it to scale back, delay or eliminate some or all of its product development activities and/or
reduce the scope of or cease its operations.
On
June 2, 2016, the Company entered into a securities purchase agreement, which was amended on June 7, 2016 (as amended, the “Purchase
Agreement”) with certain institutional purchasers (the “June Purchasers”). Pursuant to the terms of the Purchase
Agreement, the Company sold an aggregate of 417,000 shares of Common Stock together with warrants to purchase up to an aggregate
of 145,952 shares of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.35 of a share of
Common Stock at a combined purchase price of $4.60. The net proceeds to the Company from the offering were approximately $1.7
million, after deducting placement agent fees and estimated offering expenses payable by the Company, but excluding the proceeds,
if any, from the exercise of the warrants issued in the offering. The warrants have an exercise price of $6.08 per share, became
exercisable on December 3, 2016 (“Initial Exercise Date”), and will expire five years following the Initial Exercise
Date. The Company paid the placement agents approximately $0.1 million as placement agent fees in connection with the sale of
securities in the offering. The Company also reimbursed the placement agents $35 thousand for their out of pocket and legal expenses
in connection with the offering.
On
July 22, 2016, the Company entered into the Second Amendment to the Purchase Agreement (the “Second Amended Purchase Agreement”)
with certain purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended Purchase Agreement, the
Company sold an aggregate of 595,000 shares of Common Stock together with warrants to purchase up to an aggregate of 178,500 shares
of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.30 of a share of Common Stock at a
combined purchase price of $6.75. The net proceeds to the Company from the offering were approximately $3.6 million, after deducting
placement agent fees and estimated offering expenses payable by the Company, but excluding the proceeds, if any, from the exercise
of the warrants issued in the offering. The Warrants were exercisable immediately at an exercise price of $9.36 per share. The
Warrants will expire on the fifth (5th) anniversary of the initial date of issuance.
On
October 19, 2016, the Company sold 2,760,000 shares of common stock at a price of $2.75 per share, which includes the sale of
360,000 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-allotment
option by the underwriters in a public offering. The net proceeds to the Company from the offering were approximately $6.9 million,
after deducting underwriter fees and offering expenses payable by the Company.
On
May 2, 2017, the Company sold 6,192,750 shares of common stock at a price of $1.30 per share, which includes the sale of 807,750
shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-allotment option
by the underwriters in a public offering. The net proceeds to the Company from the offering were approximately $7.2 million, after
deducting underwriter fees and offering expenses payable by the Company.
On
October 23, 2017, the Company sold 5,739,437 shares of common stock at a price of $1.42 per share in a best efforts public offering.
The net proceeds to the Company from the offering were approximately $7.4 million, after deducting placement fees and offering
expenses payable by the Company.
The
sale of additional equity or convertible securities could result in dilution to stockholders. If additional funds are raised through
the issuance of debt securities, these securities could have rights senior to those associated with the Company’s Common
Stock and could contain covenants that would restrict its operations. Financing may not be available in amounts or on terms acceptable
to the Company, or at all. If the Company is unable to obtain required financing, it may be required to reduce the scope of its
operations, including its planned product development and marketing efforts, which could materially and adversely harm its financial
condition and operating results. If the Company is unable to secure additional financing, it may be forced to cease operations.
|
(2)
|
Summary
of Significant Accounting Policies
|
(a)
Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation. Participation of stockholders other than the Company
in the net assets and in the earnings or losses of a consolidated subsidiary is reflected as a non-controlling interest in the
Company’s Consolidated Balance Sheets and Statements of Operations, which adjusts the Company’s consolidated results
of operations to reflect only the Company’s share of the earnings or losses of the consolidated subsidiary
The
Company also periodically evaluates its relationships with other entities to identify whether they are variable interest entities,
and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary
beneficiary, then that entity is included in the consolidated financial statements. As of April 30, 2018, there were no such entities.
(b)
Use of Estimates
The
preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items
subject to such estimates and assumptions include fair value of warrant liabilities; estimated costs to complete projects and
percentage of completion of customer contracts for purposes of revenue recognition. Actual results could differ from those estimates.
The current economic environment, particularly the macroeconomic pressures in certain European countries, has increased the degree
of uncertainty inherent in those estimates and assumptions.
(c)
Revenue Recognition
The
Company’s contracts are either cost plus or fixed price contracts and may include a lease component. Under cost plus contracts,
customers are billed for actual expenses incurred plus an agreed-upon fee. Under cost plus contracts, a profit or loss on a project
is recognized depending on whether actual costs are more or less than the agreed upon amount.
The
Company has two types of fixed price contracts, firm fixed price and cost-sharing. Under firm fixed price contracts, the Company
receives an agreed-upon amount for providing products and services specified in the contract, a profit or loss is recognized depending
on whether actual costs are more or less than the agreed upon amount. Under cost-sharing contracts, the fixed amount agreed upon
with the customer is only intended to fund a portion of the costs on a specific project. Under cost sharing contracts, an amount
corresponding to the revenue is recorded in cost of revenues, resulting in gross profit on these contracts of zero. The Company’s
share of the costs is recorded as product development expense.
Generally,
revenue under fixed price or cost plus contracts is recognized using the cost to cost percentage-of-completion method, measured
by the ratio of costs incurred to total estimated costs at completion. In certain circumstances, revenue under contracts that
have specified milestones or other performance criteria may be recognized only when the customer acknowledges that such criteria
have been satisfied. If an arrangement involves multiple deliverables, the delivered items are considered separate units of accounting
if the items have value on a stand-alone basis. Amounts allocated to each element are based on its objectively determined fair
value, such as the sales price for the product or service when it is sold separately or competitor prices for similar products
or services.
In
addition, recognition of revenue (and the related costs) may be deferred for fixed price contracts until contract completion if
the Company is unable to reasonably estimate the total costs of the project prior to completion. These contracts are subject to
interpretation and management may make a judgment as to the amount of revenue earned and recorded. Because the Company has a small
number of contracts, revisions to the percentage-of-completion determination, management interpretation or delays in meeting performance
and contractual criteria or in completing projects may have a significant effect on revenue for the periods involved. Upon anticipating
a loss on a contract, the Company recognizes the full amount of the anticipated loss in the current period.
The
Company classifies leases as either operating or capital lease arrangements in accordance with the authoritative accounting guidance
contained within Accounting Standards Codification (“ASC”) Topic 840,
“Leases”.
At inception of
the contract, the Company evaluates the lease against the four lease classification criteria within ASC Topic 840. In general,
if one of the four criteria is met, then the lease is accounted for as a capital lease. All others are treated as an operating
lease. For operating leases, lessee payments are recorded to revenue on a straight-line basis over the term of the lease.
Unbilled
receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are normally
billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables, and to the
extent that such billings and cash collections exceed costs incurred plus applicable profit margin, they are recorded as unearned
revenues.
(d)
Cash and Cash Equivalents, Restricted Cash and Security Agreements
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
The Company invests excess cash in a money market account. The following table summarizes cash and cash equivalents for the years
ended April 30, 2018 and 2017:
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Checking
and savings accounts
|
|
$
|
1,332
|
|
|
$
|
4,241
|
|
|
Overnight
repurchase account
|
|
|
-
|
|
|
|
4,180
|
|
|
Money
market account
|
|
|
10,167
|
|
|
|
-
|
|
|
|
|
$
|
11,499
|
|
|
$
|
8,421
|
|
Restricted
Cash and Security Agreements
A
portion of the Company’s cash is restricted under the terms of three security agreements.
One
agreement is between the Company and Barclays Bank. Under this agreement, the cash is on deposit at Barclays Bank and serves as
security for letters of credit and bank guarantees that are expected to be issued by Barclays Bank on behalf of OPT LTD, one of
the Company’s subsidiaries, under a credit facility established by Barclays Bank for OPT LTD. The credit facility is approximately
€0.3 million ($0.4 million) and carries a fee of 1% per annum of the amount of any such obligations issued by Barclays Bank.
The credit facility does not have an expiration date but is cancelable at the discretion of the bank. As of April 30, 2018, there
was €0.3 million ($0.4 million) in letters of credit outstanding under this agreement.
The
other two agreements are between the Company and Santander Bank. Under the first agreement, the cash is on deposit at Santander
Bank and serves as security for letter of credit issued by Santander Bank for the lease of new warehouse/office space in Monroe
Township, New Jersey. The agreement cannot be extended beyond January 31, 2025, and is cancelable at the discretion of the bank.
Under the second the cash is on deposit at Santander Bank and serves as security for a performance bond issued by Santander Bank
as a requirement of the Eni contract. The following table summarizes restricted cash for the years ended April 30, 2018 and 2017:
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Barclay’s
Bank Agreement
|
|
$
|
372
|
|
|
$
|
334
|
|
|
Santander
Bank
|
|
|
354
|
|
|
|
154
|
|
|
|
|
$
|
726
|
|
|
$
|
488
|
|
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial
position that sum to the total of the same such amounts shown in the statement of cash flows for the years ended April 30, 2018
and 2017:
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
11,499
|
|
|
$
|
8,421
|
|
|
Restricted
cash- short term
|
|
|
572
|
|
|
|
334
|
|
|
Restricted
cash- long term
|
|
|
154
|
|
|
|
154
|
|
|
|
|
$
|
12,225
|
|
|
$
|
8,909
|
|
(e)
Marketable Securities
Marketable
securities with original maturities longer than three months but that mature in less than one year from the balance sheet date
are classified as current assets. Marketable securities that the Company has the intent and ability to hold to maturity are classified
as investments held-to-maturity and are reported at amortized cost. The difference between the acquisition cost and face values
of held-to-maturity investments is amortized over the remaining term of the investments and added to or subtracted from the acquisition
cost and interest income. As of April 30, 2018 and, 2017, all of the Company’s investments were classified as held-to-maturity.
(f)
Property and Equipment
Property
and equipment consists primarily of equipment, furnishings, fixtures, computer equipment and leasehold improvements and are recorded
at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets.
Expenses for maintenance and repairs are charged to operations as incurred. Property and equipment is also reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows,
then an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the
asset.
|
Description
|
|
Estimated
useful life
|
|
|
|
|
|
Equipment
|
|
5
- 7 years
|
|
Computer
equipment & software
|
|
3
years
|
|
Office
furniture & fixtures
|
|
3
- 7 years
|
|
Equipment
under capitalized lease
|
|
Over
the life of the lease
|
|
Leasehold
improvements
|
|
Shorter
of the estimated useful life or lease term
|
(g)
Foreign Exchange Gains and Losses
The
Company has invested in certain certificates of deposit and has maintained cash accounts that are denominated in British pounds
sterling, Euros and Australian dollars. These amounts are included in cash, cash equivalents, restricted cash and marketable securities
on the accompanying consolidated balance sheets. Such positions may result in realized and unrealized foreign exchange gains or
losses from exchange rate fluctuations, which are included in “foreign exchange gain (loss)” in the accompanying consolidated
statements of operations.
(h)
Patents
External
costs related to the filing of patents, including legal and filing fees, are capitalized if expenses related to the filing of
a patent are significant. The Company continually re-assesses the remaining useful lives of its long-lived assets and costs are
expensed when it is no longer probable that such technology will be utilized. Patents are also reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the patent may not be recoverable. Two new patents were
granted in fiscal year 2018 and no new patents were granted in fiscal year 2017. There was no amortization of patents recorded
during the years ended April 30, 2018 and 2017, as the patents are fully amortized.
(i)
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances, bank certificates
of deposit and trade receivables. The Company invests its excess cash in highly liquid investments (principally, short-term bank
deposits, Treasury bills, Treasury notes and money market funds) and does not believe that it is exposed to any significant risks
related to its cash accounts, money market funds or certificates of deposit.
The
table below shows the percentage of the Company’s revenues derived from customers whose revenues accounted for at least
10% of the Company’s consolidated revenues for at least one of the periods indicated:
|
|
|
Twelve
months ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Eni
S.p.A.
|
|
|
33
|
%
|
|
|
0
|
%
|
|
Mitsui
Engineering & Shipbuilding
|
|
|
43
|
%
|
|
|
80
|
%
|
|
Premier
Oil UK Limited
|
|
|
10
|
%
|
|
|
0
|
%
|
|
U.S.
Department of Defense Office of Naval Research
|
|
|
14
|
%
|
|
|
20
|
%
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
The
loss of, or a significant reduction in revenues from a current customer could significantly impact the Company’s financial
position or results of operations. The Company does not require its customers to maintain collateral.
(j)
Warrant Liabilities
The
Company’s warrants to purchase shares of its common stock are classified as warrant liabilities and are recorded at fair
value. The warrant liabilities are subject to re-measurement at each balance sheet date and the Company recognizes any change
in fair value in its consolidated statements of operations within “(Gain due to the change in fair value of warrant liabilities”.
The Company will continue to adjust the carrying value of the warrants for changes in the estimated fair value until such time
as these instruments are exercised or expire. At that time, the liabilities will be reclassified to “Additional paid-in
capital”, a component of “stockholders’ equity” on the consolidated balance sheets.
(k)
Net Loss per Common Share
Basic
and diluted net loss per share for all periods presented is computed by dividing net loss by the weighted average number of shares
of Common Stock outstanding during the period. Due to the Company’s net losses, potentially dilutive securities, consisting
of outstanding stock options and non-vested performance-based shares, were excluded from the diluted loss per share calculation
due to their anti-dilutive effect.
In
computing diluted net loss per share, options to purchase shares of common stock, warrants on common stock and non-vested restricted
stock issued to employees and non-employee directors, totaling 910,045 and 657,078 for the years ended April 30, 2018 and 2017,
respectively, were excluded from each of the computations as the effect would be anti-dilutive due to the Company’s losses.
(l)
Share-Based Compensation
Costs
resulting from all share-based payment transactions are recognized in the consolidated financial statements at their fair values.
The aggregate share-based compensation expense recorded in the consolidated statements of operations for the years ended April
30, 2018 and 2017 was approximately $0.3 million and $1.2 million, respectively. The following table summarizes share-based compensation
related to the Company’s share-based plans by expense category for the years ended April 30, 2018 and 2017:
|
|
|
Twelve
months ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Product
development
|
|
$
|
24
|
|
|
$
|
525
|
|
|
Selling,
general and administrative
|
|
|
305
|
|
|
|
707
|
|
|
Total
share-based compensation expense
|
|
$
|
329
|
|
|
$
|
1,232
|
|
Valuation
Assumptions for Restricted Stock and Options Granted During the Years Ended April 30, 2018 and 2017
Options
The
fair value of each stock option granted, for both service-based and performance-based vesting requirements during the year ended
April 30 2018, was estimated at the date of grant using the Black-Scholes option pricing model, assuming no dividends, and using
the weighted average valuation assumptions noted in the below table. The risk-free rate is based on the U.S. Treasury yield curve
in effect at the time of grant. The expected life (estimated period of time outstanding) of the stock options granted was estimated
using the “simplified” method as permitted by the SEC’s Staff Accounting Bulletin No. 110,
Share-Based Payment.
Expected volatility was based on the Company’s historical volatility during the twelve months ended April 30, 2018.
|
|
|
Twelve
months ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.1
|
%
|
|
|
1.3
|
%
|
|
Expected
dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
Expected
life (in years)
|
|
|
5.5
|
|
|
|
5.5
|
|
|
Expected
volatility
|
|
|
128.2
|
%
|
|
|
96.2
|
%
|
The
above assumptions were used to determine the weighted average per share fair value of $1.17 and 2.52 for stock options granted
during the years ended April 30, 2018 and 2017, respectively.
Restricted
Stock
Compensation
expense for non-vested restricted stock is recorded based on its market value on the date of grant and recognized ratably over
the associated service and performance period. If the vesting requirement of performance-based grants is tied to the Company’s
total shareholder return (TSR) relative to the total shareholder return of alternative energy Exchange Traded Funds as measured
over a specific performance period then the compensation expense for these awards with market-based vesting is calculated based
on the estimated fair value as of the grant date utilizing a Monte Carlo simulation model and is recognized over the service period
on a straight-line basis.
(m)
Deferred Rent
On
March 31, 2017, the Company signed a new 7-year lease for approximately 56,000 square feet in Monroe Township, New Jersey
that will be used as warehouse/production space and the Company’s principal offices and corporate headquarters. The
lease was classified as an operating lease. Rent payments relating to the Monroe premises are subject to annual increases.
The minimum monthly payments will vary over the 7-year term of the lease. The Company will record rent expense on a
straight-line basis over the 7-year term of the lease. The difference between rent expense and the monthly lease payment will
go to a deferred rent/prepaid rent account. The Landlord has provided the Company a tenant improvement allowance in an amount
up to, but not exceeding, $137,563 to be applied to the cost of tenant improvement work. The Company collected the full
amount of the tenant improvement allowance in May 2018. The Company recorded lease incentive liability to deferred rent. The
Company will release the lease incentive liability on a straight-line basis over the 7-year term to rent expense.
(n)
Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss
and tax credit carry forwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date.
The
Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained upon
examination. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records
interest related to unrecognized tax benefits in interest expense and penalties in selling, general, and administrative expenses,
to the extent incurred.
(o)
Accumulated Other Comprehensive Loss
The
functional currency for the Company’s foreign operations is the applicable local currency. The translation from the applicable
foreign currencies to U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at the balance sheet
date and for revenue and expense accounts using an average exchange rate during the period. The unrealized gains or losses resulting
from such translation are included in accumulated other comprehensive loss within stockholders’ equity.
(p)
Recently Issued Accounting Standards
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “
Revenue from Contracts with Customers (Topic 606).”
ASU 2014-09 outlines a new, single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in
determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those
goods or services. The FASB subsequently issued additional clarifying standards to address issues arising from implementation
of the new revenue standard, including a one-year deferral of the effective date for the new revenue standard. Public companies
should now apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods
within those annual periods. Earlier application is permitted only as of annual reporting periods beginning after December 15,
2016, including interim periods within that annual period. As such, the Company is required to adopt this standard effective in
fiscal 2019, which begins May 1, 2018. The Company will use the modified retrospective approach to adopt ASU 2014-09. The
Company is completing its final review and therefore has not determined the final impact on its consolidated financial statements
and disclosures. However, the preliminary view is that the impact will not be material to the consolidated financial statements
and disclosures. The impact to the Company could be affected by the nature and terms of potential future contracts with customers,
as those contracts may have terms that differ from the company’s current contracts.
In
August 2014, the FASB issued ASU 2014-15,
“Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern”,
which describes how an entity should assess its ability to meet obligations and sets rules for how
this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used
along with existing auditing standards. The new standard applies to all entities for the first annual period ending after December
15, 2016, and interim periods thereafter. Early application is permitted. The Company adopted ASU 2014-15 for the fiscal year
2017. The Company’s addition of the standard did not have a material impact on its disclosures. See section (b) “Liquidity/Going
Concern” within Note (1) “Background and Liquidity” of these financial statements for further discussion on
the Company’s ability to continue as a going concern.
In
February 2016, the FASB issued ASU No. 2016-02,
“Leases (Topic 842
).” The new standard establishes a right-of-use
(ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including
interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, with certain practical expedients available. The Company is evaluating the effect ASU 2016-02
will have on its consolidated financial statements and disclosures and has not yet determined the effect of the standard on its
ongoing financial reporting at this time.
In
March 2016, the FASB issued ASU No. 2016-09,
“Compensation - Stock Compensation (Topic 718).”
The amendments
of ASU No. 2016-09 were issued as part of the FASB’s Simplification initiative focused on improving areas of GAAP for which
cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed within the financial
statements. The amendments focused on simplification specifically with regard to share-based payment transactions, including income
tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows. The guidance
in ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods.
The Company adopted ASU 2016-09 on May 1, 2017. Certain of the amendments are applied using a modified retrospective transition
method by means of a cumulative-effect adjustment to equity as of May 1, 2017, while other amendments are applied retrospectively,
prospectively or using either a prospective or a retrospective transition method. Upon adoption, the Company is beginning to account
for forfeitures as they occur rather than estimate a forfeiture rate and has recorded a cumulative-effect adjustment in equity
of approximately $11,000 on the date of initial adoption. In periods subsequent to adoption, a higher expense will be recognized
earlier during the respective vesting periods of stock-based awards that are not forfeited. As a result of the valuation allowance
against our deferred tax assets, there was no net adjustment to retained earnings for the change in accounting for unrecognized
windfall tax benefits.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”,
providing additional guidance on eight specific cash flow classification issues. The goal of the
ASU is to reduce diversity in practice of classifying certain items. The amendments in the ASU are effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company
is evaluating the effect ASU 2016-13 will have on its consolidated financial statements and disclosures and has determined the
standard will have no impact on its ongoing financial reporting at this time.
In
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash”,
which amends
guidance and presentation related to restricted cash in the statement of cash flows, including stating that amounts generally
described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. An entity is required to provide
a disclosure indicating the reconciliation of all cash accounts. The amendments in the ASU are effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company has early
adopted ASU 2016-18 effective May 1, 2017. In connection with the adoption of the standard the Company has used a retrospective
transition method for each period presented in the statement of cash flows. The Company reclassified $300,000 of restricted cash
to cash, cash equivalents and restricted cash, beginning of period for the period April 30, 2017 and $488,000 of restricted cash
to cash, cash equivalents and restricted cash, ending of period for the period April 30, 2017 in the statement of cash flows.
(3)
Marketable Securities
Marketable
securities with initial maturities greater than three months but that mature within one year from the balance sheet date are classified
as current assets. For the period ended April 30, 2018 and April 30, 2017 the Company had $25,000 in certificates of deposit.
(4)
Property and Equipment
The
components of property and equipment as of April 30, 2018 and 2017 consisted of the following:
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
394
|
|
|
$
|
715
|
|
|
Computer
Equipment & Software
|
|
|
614
|
|
|
|
556
|
|
|
Office
Furniture & Equipment
|
|
|
338
|
|
|
|
250
|
|
|
Leasehold
improvements
|
|
|
473
|
|
|
|
182
|
|
|
Equipment
under capitalized lease
|
|
|
103
|
|
|
|
103
|
|
|
|
|
$
|
1,922
|
|
|
$
|
1,806
|
|
|
Less:
accumulated depreciation
|
|
|
(1,210
|
)
|
|
|
(1,636
|
)
|
|
|
|
$
|
712
|
|
|
$
|
170
|
|
Depreciation
expense was $0.1 million and $0.1 million for the years ended April 30, 2018 and 2017, respectively.
As
of April 30, 2018 and 2017, computer equipment and software under capital leases was $103 thousand and $103 thousand, respectively.
The terms of the leases are for 36 months. Future minimum lease payments under capital leases together with the present value
of the net minimum lease payments as of April 30, 2018 are as follows:
|
|
|
April
30, 2018
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Remaining
payments in Fiscal 2019
|
|
$
|
23
|
|
|
Total
net future minimum lease payments
|
|
$
|
23
|
|
|
Less:
Amount representing interest
|
|
|
-
|
|
|
Present
value of net minimum lease payments
|
|
$
|
23
|
|
(5)
Accrued Expenses
Accrued
expenses consist of the following at April 30, 2018 and April 30, 2017.
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Project
costs
|
|
$
|
57
|
|
|
$
|
898
|
|
|
Contract
loss reserve
|
|
|
395
|
|
|
|
238
|
|
|
Employee
incentive payments
|
|
|
761
|
|
|
|
643
|
|
|
Accrued
salary and benefits
|
|
|
442
|
|
|
|
484
|
|
|
Legal
and accounting fees
|
|
|
246
|
|
|
|
478
|
|
|
Accrued
taxes payable
|
|
|
179
|
|
|
|
132
|
|
|
Other
|
|
|
181
|
|
|
|
186
|
|
|
|
|
$
|
2,261
|
|
|
$
|
3,059
|
|
(6)
Deferred Credits Payable
During
the year ended April 30, 2001, in connection with the sale of Common Stock to an investor, the Company received $0.6 million from
the investor in exchange for an option to purchase up to 500,000 metric tons of carbon emissions credits generated by the Company
during the years 2008 through 2012, at a 30% discount from the then-prevailing market rate. If the Company received emission credits
under applicable laws and failed to sell to the investor the credits up to the full amount of emission credits covered by the
option, the investor was entitled to liquidated damages equal to 30% of the aggregate market value of the shortfall in emission
credits (subject to a limit on the market price of emission credits). Under the terms of the agreement, if the Company did not
become entitled under applicable laws to the full amount of emission credits covered by the option by December 31, 2012, the Company
was obligated to return the option fee of $0.6 million, less the aggregate discount on any emission credits sold to the investor
prior to such date. In December 2012, the Company and the investor agreed to extend the period for the sale of emission credits
until December 31, 2017. As of April 30, 2018, the Company has not generated any emissions credits eligible for purchase under
the agreement. The $0.6 million is reflected on the balance sheet within “Deferred credits payable current” as of
April 30, 2018 and 2017. The Company is currently in process of making payments to return the $0.6 million option fee and expects
to complete the payments by August 30, 2018.
(7)
Warrants
On
June 2, 2016, the Company entered into a securities purchase agreement, which was amended on June 7, 2016 (as amended, the “June
Purchase Agreement”) with certain institutional purchasers (the “June Purchasers”). Pursuant to the terms of
the June Purchase Agreement, the Company sold an aggregate of 417,000 shares of Common Stock together with warrants to purchase
up to an aggregate of 145,952 shares of Common Stock. Each share of Common Stock was sold together with a warrant to purchase
0.35 of a share of Common Stock at a combined purchase price of $4.60. The warrants have an exercise price of $6.08 per share,
became exercisable on December 3, 2016 (“Initial Exercise Date”), and will expire five years following the Initial
Exercise Date.
On
July 22, 2016, the Company entered into a Second Amendment to the Purchase Agreement (the “Second Amended Purchase Agreement”)
with certain institutional purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended Purchase
Agreement, the Company sold an aggregate of 595,000 shares of Common Stock together with warrants to purchase up to an aggregate
of 178,500 shares of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.30 of a share of
Common Stock at a combined purchase price of $6.75. The Warrants were exercisable immediately at an exercise price of $9.36 per
share. The Warrants will expire on the fifth (5th) anniversary of the initial date of issuance.
The
warrants contain a feature whereby they could require the transfer of assets and therefore are classified as a liability in accordance
with ASC 480. As such, the warrants with a value of $0.2 million at April 30, 2018 and $0.3 million at April 30, 2017 are reflected
within “Warrant liabilities” in the consolidated balance sheets.
An
unrealized gain of $0.1 million and $1.5 million, were included within “Gain due to change in fair value of warrant liabilities”
in the consolidated statements of operations for the year ended April 30, 2018 and 2017, respectively. The Company determined
the fair value using the Black-Scholes option pricing model with the following assumptions for the period ended April 30, 2018
and April 30, 2017:
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
|
|
|
|
|
|
Dividend
rate
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
Risk-free
rate
|
|
|
2.7%
- 2.8%
|
|
|
|
1.8%
|
|
|
Expected
life (years)
|
|
|
3.2
- 3.6
|
|
|
|
4.2
- 4.6
|
|
|
Expected
volatility
|
|
|
132.9%
- 142.7%
|
|
|
|
131.7%
- 141.3%
|
|
(8)
Preferred Stock
The
Company has authorized 5,000,000 shares of undesignated preferred stock with a par value of $0.001 per share. As of April 30,
2018, and 2017, no shares of preferred stock had been issued.
(9)
Common Stock
As
of April 30, 2018, the Company has 50,000,000 shares authorized with a par value of $0.001 per share and 18,424,939 shares issued.
On
June 2, 2016, the Company entered into a securities purchase agreement, which was amended on June 7, 2016 (as amended, the “Purchase
Agreement”) with certain institutional purchasers (the “June Purchasers”). Pursuant to the terms of the Purchase
Agreement, the Company sold an aggregate of 417,000 shares of Common Stock together with warrants to purchase up to an aggregate
of 145,952 shares of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.35 of a share of
Common Stock at a combined purchase price of $4.60. The net proceeds to the Company from the offering were approximately $1.7
million, after deducting placement agent fees and estimated offering expenses payable by the Company, but excluding the proceeds,
if any, from the exercise of the warrants issued in the offering. The warrants have an exercise price of $6.08 per share, became
exercisable on December 3, 2016 (“Initial Exercise Date”), and will expire five years following the Initial Exercise
Date. The Company paid the placement agents approximately $0.1 million as placement agent fees in connection with the sale of
securities in the offering. The Company also reimbursed the placement agents $35 thousand for their out of pocket and legal expenses
in connection with the offering.
On
July 22, 2016, the Company entered into the Second Amendment to the Purchase Agreement (the “Second Amended Purchase Agreement”)
with certain purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended Purchase Agreement, the
Company sold an aggregate of 595,000 shares of Common Stock together with warrants to purchase up to an aggregate of 178,500 shares
of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.30 of a share of Common Stock at a
combined purchase price of $6.75. The net proceeds to the Company from the offering were approximately $3.6 million, after deducting
placement agent fees and estimated offering expenses payable by the Company, but excluding the proceeds, if any, from the exercise
of the warrants issued in the offering. The Warrants were exercisable immediately at an exercise price of $9.36 per share. The
Warrants will expire on the fifth (5th) anniversary of the initial date of issuance.
On
October 19, 2016, the Company sold 2,760,000 shares of common stock at a price of $2.75 per share, which includes the sale of
360,000 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-allotment
option by the underwriters in a public offering. The net proceeds to the Company from the offering were approximately $6.9 million,
after deducting underwriter fees and offering expenses payable by the Company.
On
May 2, 2017, the Company sold 6,192,750 shares of common stock at a price of $1.30 per share, which includes the sale of 807,750
shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-allotment option
by the underwriters in a public offering. The net proceeds to the Company from the offering were approximately $7.2 million, after
deducting underwriter fees and offering expenses payable by the Company.
On
October 23, 2017, the Company sold 5,739,437 shares of common stock at a price of $1.42 per share in a best efforts public offering.
The net proceeds to the Company from the offering were approximately $7.4 million, after deducting placement fees and offering
expenses payable by the Company.
(10)
Treasury Shares
During
the years ended April 30, 2018 and 2017, 25,947 and 41,171 shares of Common Stock, respectively, were purchased by the Company
from employees to pay taxes related to the vesting of restricted stock.
(11)
Share-Based Compensation Plans
2006
Stock Incentive Plan
In
2007, the Company’s 2006 Stock Incentive Plan became effective. A total of 80,321 shares were authorized for issuance under
the 2006 Stock Incentive Plan. In 2009, an amendment to the 2006 Stock Incentive Plan was approved by the Company’s stockholders,
increasing the aggregate number of shares authorized for issuance by 85,000 shares to 165,321. On October 2, 2013, a further amendment
to the 2006 Stock Incentive Plan was approved by the Company’s stockholders, increasing the aggregate number of shares authorized
for issuance by an additional 80,000 shares to 245,321. The Company’s employees, officers, directors, consultants and advisors
were eligible to receive awards under the 2006 Stock Incentive Plan; however, incentive stock options may only be granted to employees.
The maximum number of shares of Common Stock with respect to which awards may be granted to any participant under the 2006 Stock
Incentive Plan was 20,000 per calendar year. Vesting provisions of stock options are determined by the board of directors. The
contractual term of these stock options is up to ten years. The 2006 Stock Incentive Plan was administered by the Company’s
board of directors, who were authorized to delegate authority to one or more committees or subcommittees of the board of directors
or to the Company’s officers. The 2006 Stock Incentive Plan was terminated in December 2015 and unused shares in that Plan
were transferred to the 2015 Omnibus Incentive Plan.
2015
Omnibus Incentive Plan
In
2015, upon approval by the Company’s stockholders, the Company’s 2015 Omnibus Incentive Plan (the “2015 Plan”)
became effective. A total of 240,703 shares were authorized for issuance under the 2015 Omnibus Incentive Plan, including shares
available for awards under the 2006 Stock Incentive Plan remaining at the time that plan terminated, or that were subject to awards
under the 2006 Stock Incentive Plan that thereafter terminated by reason of expiration, forfeiture, cancellation or otherwise.
On October 21, 2016 upon approval by the Company’s stockholders the Company increased the number of shares authorized for
issuance to 640,703. If any award under the 2006 Stock Incentive Plan or 2015 Plan expires, is cancelled, terminates unexercised
or is forfeited, those shares become again available for grant under the 2015 Plan. As of April 30, 2018, the Company has 89,531
shares available for future issuance under the 2015 plan.
The
2015 Plan provides for the grant of stock options, SARs, restricted stock awards, stock unit awards and unrestricted stock awards,
dividend equivalent rights, performance share awards or other performance-based awards, other equity-based awards or cash to eligible
employees, officers and non-employee directors of the Company or any affiliate of the Company, or any consultant or adviser to
the Company. The maximum number of shares of stock subject to Awards that can be granted under the 2015 Plan in any one calendar
year to any person, other than a non-employee director, is 75,000. However, incentive stock options may only be granted to employees.
The limitation on the amount of shares of stock issuable under the 2015 Plan is subject to adjustment in the event of certain
changes in the Company’s capital stock, such as recapitalizations, reclassifications, stock splits, reverse stock splits,
spin-offs, combinations of our stock, exchanges of the Company’s stock and other increases or decreases in the Company’s
stock without receipt of consideration.
The
2015 Plan will terminate ten years after its effective date, in October 2025, but is subject to earlier termination as provided
in the 2015 Plan.
A
dividend equivalent right is an award entitling the recipient to receive credits based on cash distributions that would have been
paid to the recipient on the shares of Common Stock specified in the dividend equivalent right if such shares had been issued
to and held by the recipient of the dividend equivalent right as of the record date. A dividend equivalent right may be granted
to any grantee under the 2015 Plan, but may not be granted in connection with or related to an award of options or SARs under
the 2015 Plan. The terms and conditions of any dividend equivalent right shall be as set forth in the award agreement relating
to such right. Unless the committee administering the 2015 Plan otherwise provides in an award agreement, a grantee’s rights
in all dividend equivalent rights will automatically terminate upon the grantee’s termination of service with the Company.
Performance-based
awards may be granted by the committee administering the 2015 Plan in such amounts and upon such terms as the committee administering
the 2015 Plan determines. Generally, performance-based awards will have an actual or target number of shares of Common Stock or
initial value that is set by the committee at the time of grant. The committee administering the 2015 Plan has the discretion
to set performance goals which, depending on the extent to which they are achieved, will determine the value and/or the number
of shares of Common stock subject to a performance-based award that will be paid out to the grantee. The right of a grantee to
exercise or receive a grant or settlement of any performance-based award, and the timing thereof, will be subject to the performance
conditions specified by the committee, and will entitle the grantee to receive cash or shares of our Common Stock upon the attainment
of the specified performance goals over a specified performance period.
Except
in connection with a corporate transaction in which the Company is involved, without obtaining stockholder approval, the 2015
Plan may not be amended to reduce the exercise price of such outstanding options or SARs, cancel outstanding options or SARs in
exchange for or in substitution of options or SARs with an exercise price that is less than the exercise price of the original
options or SARs, or cancel outstanding options or SARs with an exercise price above the current stock price in exchange for cash
or other securities.
2018
Employment Inducement Incentive Award Plan
On
January 18, 2018, the Company’s Board of Directors adopted the Company’s Employment Inducement Incentive Award Plan
(the “2018 Inducement Plan”) pursuant to which the Company reserved 500,000 shares of common stock for issuance under
the Inducement Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement
Plan may only be made to individuals not previously employees of the Company (or following such individuals’ bona fide period
of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the Company.
An award is any right to receive the Company’s common stock pursuant to the 2018 Inducement Plan, consisting of a performance
share award, restricted stock award, a restricted stock unit award or a stock payment award. As of April 30, 2018, there were
97,297 shares outstanding and 402,703 shares available for grant under the 2018 Inducement Plan.
(a)
Stock Options
A
summary of stock options under the plans described above is as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Term
|
|
|
|
|
Options
|
|
|
Price
|
|
|
(In
Years)
|
|
|
Outstanding
as of April 30, 2017
|
|
|
237,214
|
|
|
$
|
14.64
|
|
|
|
7.6
|
|
|
Granted
|
|
|
170,664
|
|
|
$
|
1.34
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(19,349
|
)
|
|
$
|
67.71
|
|
|
|
|
|
|
Outstanding
as of April 30, 2018
|
|
|
388,529
|
|
|
$
|
6.15
|
|
|
|
7.4
|
|
|
Exercisable
as of April 30, 2018
|
|
|
217,205
|
|
|
$
|
9.90
|
|
|
|
5.9
|
|
As
of April 30, 2018, the total intrinsic value of outstanding and exercisable options was approximately $1,745 and $1,745, respectively.
As of April 30, 2018, approximately 145,627 additional options were unvested, which options had no intrinsic value and a weighted-average
remaining contractual term of 9.5 years. There was approximately $0.2 million and $0.3 million of total recognized compensation
cost related to employees for stock options during the years ended April 30, 2018 and 2017, respectively. As of April 30, 2018,
there was approximately $0.1 million of total unrecognized compensation cost related to non-vested stock options granted under
the plans. This cost is expected to be recognized over a weighted-average period of 0.5 years. The Company typically issues newly
authorized but unissued shares to satisfy option exercises under these plans.
(b)
Restricted Stock
Compensation
expense for non- vested restricted stock is generally recorded based on its market value on the date of grant and recognized ratably
over the associated service and performance period. During fiscal 2018, the Company granted 211,881 shares subject to service-based
vesting requirements and no shares subject to performance-based vesting requirements. The achievement or vesting requirement of
the performance-based grants is tied to the Company’s total shareholder return (TSR) relative to the total shareholder return
of three alternative energy Exchange Traded Funds as measured over a specific performance period. No vesting of the relevant shares
will occur in instances where the Company’s TSR for the relevant period is below 80% of the peer group. However, additional
opportunities to vest some or all of a portion of the shares in a subsequent period may occur. Compensation expense for these
awards with market-based vesting is calculated based on the estimated fair value as of the grant date utilizing a Monte Carlo
simulation model and is recognized over the service period on a straight-line basis.
Restricted
stock issued and unvested at April 30, 2018 does not include any shares of unvested restricted stock subjected to performance-based
vesting requirements.
A
summary of unvested restricted stock under the plans described above is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
Average
Price
|
|
|
|
|
of
Shares
|
|
|
per
Share
|
|
|
|
|
|
|
|
|
|
|
Issued
and unvested at April 30, 2017
|
|
|
103,412
|
|
|
$
|
3.99
|
|
|
Granted
|
|
|
211,881
|
|
|
$
|
1.27
|
|
|
Vested
|
|
|
(85,104
|
)
|
|
$
|
4.67
|
|
|
Cancelled/forfeited
|
|
|
(33,125
|
)
|
|
$
|
2.00
|
|
|
Issued
and unvested at April 30, 2018
|
|
|
197,064
|
|
|
$
|
1.35
|
|
There
was approximately $0.1 million and $0.9 million of total recognized compensation cost relating to restricted stock granted to
employees during the years ended April 30, 2018 and 2017, respectively. As of April 30, 2018, there was $0.2 million of total
unrecognized compensation cost related to unvested restricted stock granted under the plans. This cost is expected to be recognized
over a weighted-average period of 2.0 years.
(12)
Fair Value Measurements
The
Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (exit price). GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value.
The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and
the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the
fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the
three hierarchy levels.
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency
and volume to provide pricing information on an ongoing basis.
|
|
|
|
|
Level
2
|
Quoted
prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the
full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets
and quoted prices for identical or similar assets or liabilities in inactive markets.
|
|
|
|
|
Level
3
|
Unobservable
inputs are not corroborated by market data. This category is comprised of financial and non-financial assets and liabilities
whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally
less readily observable from objective sources.
|
Transfers
into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were
no transfers between any levels during the year ended April 30, 2018 and 2017.
The
following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying
consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative
financial instruments, other than investment in affiliates.
Following
are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the
valuation models, key inputs to those models and significant assumptions utilized.
Warrant
Liabilities
The
fair value of the Company’s warrant liabilities (refer to Note 7) recorded in the Company’s financial statements is
determined using the Black-Scholes option pricing model and the quoted price of the Company’s common stock in an active
market, volatility and expected life, is a Level 3 measurement. Volatility is based on the actual market activity of the Company’s
stock. The expected life is based on the remaining contractual term of the warrants and the risk-free interest rate is based on
the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ expected life.
The
following table presents financial assets and liabilities measured at fair value on a recurring basis as of April 30, 2018:
|
|
|
Total
Carrying Value in Consolidated Balance Sheet
|
|
|
Quoted
prices in active marKets for identical assets or liabilities
(Level 1)
|
|
|
Significant
other observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liabilities
|
|
$
|
201
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
201
|
|
The
following table presents financial assets and liabilities measured at fair value on a recurring basis as of April 30, 2017:
|
|
|
Total
Carrying Value in Consolidated Balance Sheet
|
|
|
Quoted
prices in active marKets for identical assets or liabilities
(Level 1)
|
|
|
Significant
other observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liabilities
|
|
$
|
323
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
323
|
|
The
following table provides a summary of changes in the fair value of the warrant liabilities during the year ended April 30, 2018;
|
Fair
Value Measurement Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Warrant
|
|
|
|
|
Liability
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Fair value
– April 30, 2016
|
|
$
|
-
|
|
|
Issuance
|
|
|
1,814
|
|
|
Transfers
|
|
|
-
|
|
|
Change
in fair value
|
|
|
(1,491
|
)
|
|
Fair
value – April 30, 2017
|
|
$
|
323
|
|
|
|
|
|
|
|
|
Change
in fair value
|
|
|
(122
|
)
|
|
Fair
value – April 30, 2018
|
|
$
|
201
|
|
(13)
Income Taxes
Loss
before income taxes for the years ended April 30, 2018 and 2017 consisted of the following components:
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(11,004
|
)
|
|
$
|
(9,805
|
)
|
|
Foreign
|
|
|
(272
|
)
|
|
|
(379
|
)
|
|
Total
loss before income taxes
|
|
$
|
(11,276
|
)
|
|
$
|
(10,184
|
)
|
The
income tax benefit for the years ended April 30, 2018 and 2017 consist of state income tax benefits of $1.1 million and $0.7 million,
respectively, from the sale of New Jersey net operating losses and research and development credits.
Tax
Rate Reconciliation
The
effective income tax rate differed from the percentages computed by applying the US federal income tax for the periods ended April
30, 2018 and 2017 to loss before income taxes as a result of the following:
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
|
|
|
|
|
|
Computed
expected tax benefit
|
|
|
-29.7
|
%
|
|
|
-34.0
|
%
|
|
Increase(reduction)
in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
State
income taxes, net of federal benefit
|
|
|
3.0
|
%
|
|
|
2.3
|
%
|
|
Federal
research and development tax credits
|
|
|
-1.5
|
%
|
|
|
-1.7
|
%
|
|
Foreign
rate differential
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
Other
non-deductible expenses
|
|
|
0.4
|
%
|
|
|
0.1
|
%
|
|
Proceeds
of sale of New Jersey tax benefits
|
|
|
-9.9
|
%
|
|
|
-6.9
|
%
|
|
U.S.
tax reform effects
|
|
|
162.2
|
%
|
|
|
0.0
|
%
|
|
Other
|
|
|
5.1
|
%
|
|
|
11.7
|
%
|
|
Increase
in valuation allowance
|
|
|
-139.4
|
%
|
|
|
25.9
|
%
|
|
Income
tax benefit
|
|
|
-9.5
|
%
|
|
|
-2.3
|
%
|
Significant
Components of Deferred Taxes
The
tax effects of temporary differences and carry forwards that give rise to the Company’s deferred tax assets and deferred
tax liabilities are presented below.
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
Federal
net operating loss carryforwards
|
|
$
|
29,329
|
|
|
$
|
44,355
|
|
|
Foreign
net operating loss carryforwards
|
|
|
3,852
|
|
|
|
3,761
|
|
|
State
operating loss carryforwards
|
|
|
1,460
|
|
|
|
1,281
|
|
|
Federal
and New Jersey research and development tax credits
|
|
|
3,143
|
|
|
|
2,996
|
|
|
Stock
compensation
|
|
|
645
|
|
|
|
1,096
|
|
|
Unrealized
foreign exchange loss
|
|
|
12
|
|
|
|
17
|
|
|
Accrued
expenses
|
|
|
487
|
|
|
|
576
|
|
|
Other
|
|
|
330
|
|
|
|
627
|
|
|
Net
deferred tax assets before valuation allowance
|
|
|
39,258
|
|
|
|
54,709
|
|
|
Valuation
allowance
|
|
|
(39,258
|
)
|
|
|
(54,709
|
)
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences and carry forwards become deductible
or are utilized. As of April 30, 2018 and 2017, based upon the level of historical taxable losses, valuation allowances of $39.3
million and $54.7 million, respectively, were recorded to fully offset deferred tax assets. The valuation allowance decreased
$15.4 million during the year ended April 30, 2018 and increased $2.1 during the year ended 2017. respectively.
As
of April 30, 2018, the Company had net operating loss carry forwards for federal income tax purposes of approximately $139.7 million,
which begin to expire in fiscal 2019. The Company also had federal research and development tax credit carry forwards of approximately
$3.0 million as of April 30, 2018, which begins to expire in 2019. The Tax Reform Act of 1986 contains provisions that limit the
utilization of net operating loss and tax credit carry forwards if there has been an ownership change, as defined. The Company
has determined that such an ownership change, as described in Section 382 of the Internal Revenue Code, occurred in conjunction
with the Company’s U.S. initial public offering in April 2007. The Company’s annual Section 382 limitation is approximately
$3.3 million. The Section 382 limitation is cumulative from year to year, and thus, to the extent net operating loss or other
credit carry forwards are not utilized up to the amount of the available annual limitation, the limitation is carried forward
and added to the following year’s available limitation. Such limitation only applies to net operating losses incurred in
periods prior to the ownership change. The Company has not performed additional analysis on ownership changes that may have occurred
subsequently to further limit the ability to utilize net tax attributes. As of April 30, 2018, the Company had state net operating
loss carry forwards of approximately $20.5 million which begin to expire in 2019, which also may be limited to utilization limitations.
As of April 30, 2018, the Company had foreign net operating loss carry forwards of approximately $17.9 million. The ability to
utilize these carry forwards may also be limited in the event of a significant change to ownership.
New
Jersey Net Operating Loss
During
the years ended April 30, 2018 and 2017, the Company sold New Jersey State net operating losses and research and development credits
in the amount of $11.5 million and $7.8 million, respectively, resulting in the recognition of income tax benefits of $1.1 million
and $0.7 million, respectively, recorded in the Company’s Statement of Operations.
Recent
Tax Legislation
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law making significant changes to
the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease for the Company from 34% to
21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax
system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings
as of December 31, 2017.
The
TCJA reduced the U.S. federal statutory tax rate for the Company from 34% to 21% effective January 1, 2018. For fiscal year 2018,
our blended U.S. federal statutory tax rate is 29.7%. This is the result of using the tax rate of 34% for the number of days from
the start of the fiscal year until the date of rate change and the tax rate of 21% for the number of days from the date of rate
change until the end of the fiscal year. The Company completed the accounting for the income tax effects of certain elements of
the TCJA and determined the impact to its deferred tax assets to be a reduction of $17.6 million, primarily resulting from
the corporate rate reduction from 34% to 21%. Since the Company’s has historical losses, the Company continues to have a
full valuation allowance against all deferred tax assets and there is no impact to its consolidated financial statements.
We
remeasured our deferred taxes to reflect the reduced rate that will apply when these deferred taxes are settled or realized in
future periods. To calculate the remeasurement of deferred taxes, we estimated when the existing deferred taxes will be settled
or realized and which deferred taxes will be settled within the current year at the 34% tax rate and those that will reverse after
year end at the 21% tax rate. As of April 30, 2018, we have completed our accounting for the tax effects of the TCJA, however
there is no effect on the deferred tax provision since the company has a full valuation allowance.
Uncertain
Tax Positions
The
Company applies the guidance issued by the FASB for the accounting and reporting of uncertain tax positions. The guidance requires
the Company to recognize in its consolidated financial statements the impact of a tax position if that position is more likely
than not to be sustained upon examination, based on the technical merits of the position. We are currently undergoing an income
tax audit in Spain for the period from 2008 to 2014, when our Spanish branch was closed. The branch reported net operating losses
for each of the years reported that the Spanish tax inspector claims should have been capitalized on the balance sheet instead
of charged as an expense in the Statement of Operations. As of April 30, 2017, we had recorded a penalty of $132,000 to Selling,
general and administrative costs in the Statement of Operations. The Spanish tax inspector has recently closed its discussion
relating to the capitalization of expenses and as of April 30, 2018 the Company reversed the penalty. However, the Spanish tax
inspector has now raised questions with respect to the Company’s recognition of funds received in 2011 to 2014 from a governmental
grant from the European Commission in connection with the Waveport project. It is anticipated that we will be assessed a penalty
relating to these tax years. We have estimated this penalty to be $177,000 for the period ended April 30, 2018. We have recorded
the penalty to Selling, general and administrative costs in the Statement of Operations. At April 30, 2018 and 2017, the Company
had no other unrecognized tax positions. The Company does not expect any material increase or decrease in its income tax expense
in the next twelve months, related to examinations or uncertain tax positions. U.S. federal and state income tax returns were
audited through fiscal 2014 and fiscal 2010 respectively. Net operating loss and credit carry forwards since inception remain
open to examination by taxing authorities, and will continue to remain open for a period of time after utilization.
The
Company does not have any interest or penalties accrued related to uncertain tax positions as it does not have any unrecognized
tax benefits.
(14)
Commitments and Contingencies
(a)
Operating Lease Commitments
The
Company leases office, laboratory, manufacturing and other space in Monroe Township, New Jersey under an operating lease that
expires on October 31, 2024. The lease commencement date is November 1, 2017, with lease payments beginning the same month. The
lease expiration date is seven years from the rent commencement date. The Company provided a cash security deposit of approximately
$154,000. The Lease contains a tenant improvement allowance of up to $138,000 and annual escalations, as such, the Company accounts
for rent expense on a straight-line basis. Rent expense under operating leases was approximately $0.4 million and $0.3 million
for the years ended April 30, 2018 and 2017, respectively.
Future
minimum lease payments under operating leases as of April 30, 2018 are as follows:
|
|
|
April
30, 2018
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
2019
|
|
|
312
|
|
|
2020
|
|
|
322
|
|
|
2021
|
|
|
331
|
|
|
2022
|
|
|
341
|
|
|
2023
|
|
|
352
|
|
|
Thereafter
|
|
|
546
|
|
|
|
|
$
|
2,204
|
|
Shareholder
Litigation and Demands
The
Company and certain of its current and former directors and officers were defendants in a derivative lawsuit filed on March 18,
2015 in the United States District Court for the District of New Jersey captioned
Labare v. Dunleavy, et. al.,
Case No.
3:15-cv-01980-FLW-LHG. The derivative complaint alleged claims for breach of fiduciary duty, abuse of control, gross mismanagement
and unjust enrichment relating to the now terminated agreement between Victorian Wave Partners Pty. Ltd. (VWP) and the Australian
Renewable Energy Agency (ARENA) for the development of a wave power station. The derivative complaint sought unspecified monetary
damages and other relief.
On
July 10, 2015, a second derivative lawsuit, captioned
Rywolt v. Dunleavy, et al.,
Case No. 3:15-cv-05469, was filed by
another shareholder against the same defendants in the United States District Court for the District of New Jersey alleging similar
claims for breach of fiduciary duty, gross mismanagement, abuse of control, and unjust enrichment relating to the now terminated
agreement between VWP and ARENA. The Rywolt complaint also seeks unspecified monetary damages and other relief. On February 8,
2016, the Court issued an order consolidating the
Labare
and
Rywolt
actions, appointing co-lead plaintiffs and lead
counsel, and ordering a consolidated amended complaint to be filed within 30 days of the order. On March 9, 2016, the co-lead
plaintiffs filed an amended complaint consolidating their claims and sought unspecified monetary damages and other relief.
On
April 21, 2016, a third derivative lawsuit, captioned
LaCalamito v. Dunleavy, et al.
, Case No. 3:16-cv-02249, was filed
by another shareholder against certain current and former directors and officers of the Company in the United States District
Court for the District of New Jersey alleging similar claims for breach of fiduciary duty relating to the now terminated agreement
between VWP and ARENA. The
LaCalamito
complaint sought unspecified monetary damages and other relief. The Company was not
been formally served and did not yet responded to the complaint.
On
June 9, 2016, a fourth derivative lawsuit, captioned
Pucillo v. Dunleavy, et al.
, was filed by another shareholder against
certain current and former directors and officers of the Company in the United States District Court for the District of New Jersey
alleging similar claims for breach of fiduciary duty, unjust enrichment, and abuse of control relating to the now terminated agreement
between VWP and ARENA. The
Pucillo
complaint seeks unspecified monetary damages and other relief. On August 2, 2016, the
parties in the
Pucillo
lawsuit filed a Stipulation and Proposed Order pursuant to which: (i) the defendants agreed to accept
service of the
Pucillo
complaint; (ii) the parties agreed to stay the
Pucillo
action pending the filing and resolution
of a motion to consolidate the
Pucillo
action with the
Labar
e and
Rywolt
actions; and (iii) the parties agreed
that the defendants shall not be required to respond to the
Pucillo
complaint during the pendency of the stay. The Court
approved the Stipulation on August 3, 2016.
On
October 25, 2016, the Court approved and entered a Stipulation and Order that, among other things, (i) consolidated the four derivative
actions; (ii) identified plaintiff Pucillo as the lead plaintiff in the consolidated actions; and (iii) stayed the consolidated
actions pending the November 14, 2016 settlement hearing in the now-settled securities class action and further order of the Court.
On
October 23, 2017, the parties entered into a Stipulation and Agreement of Settlement to resolve the four consolidated derivative
lawsuits. The settlement provided for, among other things, the Company to implement certain corporate governance changes,
a $350,000 payment to the plaintiffs’ attorneys for attorneys’ fees and costs that will be made by the Company’s
insurance carrier, dismissal of the derivative lawsuits, and certain releases. On November 21, 2017, the plaintiffs filed an unopposed
motion seeking preliminary approval of the settlement, which the Court granted on March 9, 2018. On May14, 2018, the Court held
a final settlement approval hearing at which the Court stated that it was approving the settlement. On June 13, 2018, the Court
issued a Final Order and Judgement, approving the Stipulation and Agreement of Settlement. The Company has accrued $350,000
related to this matter as a probable and reasonably estimable loss contingency during the twelve months ended April 30, 2018.
The Company also recorded a receivable of $350,000 from its insurance carrier with the offset to the statement of operations.
On
May 26, 2017, an attorney claiming to represent two stockholders sent the Company’s Board of Directors a Stockholder Litigation
Demand letter (“Stockholder Demand”). The Stockholder Demand alleges that the voting of shares for the 1-for-10 reverse
stock split at the 2015 annual meeting of stockholders held on October 22, 2015 was not properly counted, and further alleges
that, although the Company reported the reverse stock split as having been passed, if the vote was properly counted the reverse
stock split would not have been approved. The Stockholder Demand requests the Board of Directors either to deem the reverse stock
split as ineffective and disclose the same or to seek a proper and effective stockholder ratification of the reverse stock split.
In addition, the Stockholder Demand requests the Board of Directors to adopt and implement adequate internal controls and systems
to prevent the alleged improper voting from recurring.
On June 23, 2017, the Company responded
to the Stockholder Demand, explained the procedures that were followed for the 2015 annual meeting of stockholders and provided
the Oath of the Inspector of Elections and the Certificate of the Inspector of Elections that certified as accurate the results
of the voting at the meeting including voting on the reverse stock split proposal. On June 26, 2017, the attorney representing
the alleged stockholders replied to the Company’s response, further alleged that the proxy statement underlying the 2015
annual meeting provided voting instructions that misled the stockholders regarding whether their brokers could vote on the reverse
stock split proposal and renewed their requests of the Board. On July 24, 2017, the Company provided an additional response to
the Stockholder Demand, denied the allegations, and declined to take any of the actions requested.
Employment
Litigation
On
June 10, 2014, the Company announced that it had terminated Charles Dunleavy as its Chief Executive Officer and as an employee
of the Company for cause, effective June 9, 2014, and that Mr. Dunleavy had also been removed from his position as Chairman of
the Board of Directors. On June 17, 2014, Mr. Dunleavy wrote to the Company stating that he had retained counsel to represent
him in connection with an alleged wrongful termination of his employment. On July 28, 2014, Mr. Dunleavy resigned from the Board
and the boards of directors of the Company's subsidiaries. In 2014, the Company and Mr. Dunleavy have agreed to suspend
his alleged employment claims pending resolution of a class action shareholder litigation (resolved in May 2017)
and then agreed to continue to the suspension pending resolution of the derivatives litigation (resolved in June 2018).
As of the filing of this report, the claims are still suspended.
Except
for the Stipulation agreement noted previously, we have not established any provision for losses relating to these claims and
pending litigation. Due to the stages of these proceedings, and considering the inherent uncertainty of these claims and litigation,
at this time we are not able to predict or reasonably estimate whether we have any possible loss exposure or the ultimate outcome
of these claims.
(b)
Regulatory Matters
SEC
Investigation
On
April 30, 2018, the Company received a letter from the SEC staff in the Philadelphia regional office announcing that the SEC had
concluded its investigation of the Company. The investigation began on February 4, 2015, when the Company received a subpoena
from the SEC requesting information related to the discontinued VWP Project in Australia. On July 12, 2016, the SEC issued second
subpoena requesting information related to the Company’s April 4, 2014 public offering. The Company provided information
to the SEC in response to both subpoenas and cooperated with the SEC throughout its investigation. In its letter of April 30,
2018, the SEC stated that it does not intend to recommend an enforcement action by the SEC against the Company.
Spain
IVA (sales tax)
In
June 2012, the Company received notice that the Spanish tax authorities are inquiring into its 2010 IVA (value-added tax) filing
for which the Company benefitted from the offset of approximately $0.3 million of input tax. The Company believed that the tax
credit was properly claimed and, therefore, no liability was recorded. The Company issued two letters of credit totaling €0.3
million ($0.3 million) at the request of the Spanish tax authorities. On January 31, 2017 the Company received $0.2 million from
the Spanish tax authorities as a result of the conclusion of the inquiry. In addition, during February 2017, the Spanish tax authorities
approved of the release of the two outstanding letters of credit.
Spain
Income Tax Audit
We
are currently undergoing an income tax audit in Spain for the period from 2008 to 2014, when our Spanish branch was closed. The
branch reported net operating losses for each of the years reported that the Spanish tax inspector claims should have been capitalized
on the balance sheet instead of charged as an expense in the Statement of Operations. As of April 30, 2017, we had recorded a
penalty of $132,000 to Selling, general and administrative costs in the Statement of Operations. The Spanish tax inspector has
recently closed its discussion relating to the capitalization of expenses and as of April 30, 2018 the Company reversed the penalty.
However, the Spanish tax inspector has now raised questions with respect to the Company’s recognition of funds received
in 2011 to 2014 from a governmental grant from the European Commission in connection with the Waveport project. It is anticipated
that we will be assessed a penalty relating to these tax year. We have estimated this penalty to be $177,000 for the period ended
April 30, 2018. We have recorded the penalty to Selling, general and administrative costs in the Statement of Operations.
(15)
Operating Segments and Geographic Information
The
Company’s business consists of one segment as this represents management’s view of the Company’s operations.
The Company operates on a worldwide basis with one operating company in the US and operating subsidiaries in the UK and in Australia.
Revenues and expenses are generally attributed to the operating unit that bills the customers. Geographic information is as follows:
|
|
|
Year
Ended April 30, 2018
|
|
|
|
|
North
|
|
|
|
|
|
Asia
and
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Australia
|
|
|
Total
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
511
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
511
|
|
|
Operating
loss
|
|
|
(11,282
|
)
|
|
|
(243
|
)
|
|
|
(35
|
)
|
|
|
(11,560
|
)
|
|
Long-lived
assets
|
|
|
712
|
|
|
|
-
|
|
|
|
-
|
|
|
|
712
|
|
|
Total
assets
|
|
|
13,762
|
|
|
|
22
|
|
|
|
337
|
|
|
|
14,121
|
|
|
|
|
Year
Ended April 30, 2017
|
|
|
|
|
North
|
|
|
|
|
|
Asia
and
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Australia
|
|
|
Total
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
843
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
843
|
|
|
Operating
loss
|
|
|
(11,270
|
)
|
|
|
(389
|
)
|
|
|
(28
|
)
|
|
|
(11,687
|
)
|
|
Long-lived
assets
|
|
|
170
|
|
|
|
-
|
|
|
|
-
|
|
|
|
170
|
|
|
Total
assets
|
|
|
9,498
|
|
|
|
209
|
|
|
|
366
|
|
|
|
10,073
|
|
(16)
Subsequent Events
On
June 13, 2018, Tiderunner Marine, Inc. filed a lawsuit in the United States District Court for the District of New Jersey captioned
Tiderunner Marine, Inc. v. Ocean Power Technologies, Inc.
, Case No. 1:18-cv-10496. The complaint names Ocean Power Technologies,
Inc. as defendant and alleges claims for breach of contract, unjust enrichment, conversion, and fraud, negligent and/or reckless
misrepresentation all as associated with the removal of an OPT mooring system off the coast of New Jersey that was completed in
May 2017. The complaint seeks damages in the amount of $2,825,130 together with interest, costs, attorney’s fees, punitive
damages and such other relief as may be appropriate under the circumstances. OPT has retained counsel, is investigating the claims,
and has not yet responded to the lawsuit. As of April 30, 2018. The Company has not accrued any provision related to this matter
since it cannot reasonably estimate the loss contingency.
On
June 27, 2018, Ocean Power Technologies, Inc. (the “Company”) entered into a contract with Premier Oil UK Limited
(“PMO”) for the lease of a PB3 PowerBuoy™ (the “PMO Agreement”) to be deployed in one of PMO’s
offshore fields in the North Sea. Under the agreement, the PowerBuoy™ will provide communications and remote monitoring
services for PMO assets and will demonstrate its ability to monitor and alert vessels in the area after the Floating Production,
Storage and Offloading vessel is removed. The initial trial phase shall last for three months, and if successful, PMO may elect
to extend for a second six-month trial phase and a third three-month trial phase. The Company will be paid a flat fee specified
in the contract for each phase of the lease. At the end of the twelve months, PMO will have the option to extend the lease on
a month-to-month basis as well as to purchase the PowerBuoy™. If PMO elects to purchase the unit, the parties will negotiate
mutually agreeable terms. The Company has agreed to assist PMO in deployment and commissioning of the unit, as well as related
data collection and assessment of performance. PMO is responsible for all costs associated with deployment and installation.
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