UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended April 30, 2018 | |
| or | |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to . |
Commission File Number 001-33417
Ocean Power Technologies, Inc.
Delaware (State or other jurisdiction of incorporation or organization) |
22-2535818 (I.R.S. Employer Identification No.) |
28 ENGELHARD DRIVE
MONROE TOWNSHIP, NJ 08831
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (609) 730-0400
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Exchange on Which Registered | |
| Common Stock, par value $0.001 | The Nasdaq Capital Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [X] |
(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.
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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.
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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™.
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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.
| ● | Numerous applications within multiple, major market segments. We have designed our PB3 PowerBuoy™ to address multiple offshore applications around the world. In particular, we are targeting customers with multiple applications within the oil and gas, defense and security, ocean observing, and communications markets. |
| ● | Considerable life-cycle cost savings over current solutions for many applications. Our PB3 PowerBuoy™ is designed to operate over extended intervals between required servicing, compared to several current solutions which we found to require more servicing using offshore vessels. We believe that our PB3 PowerBuoy™ reduces costs over multi-year operations compared with current solutions. These cost reductions are mostly due to reduced vessel and personnel servicing activities. |
| ● | Real-time data communications. Some current solutions with less available power than our PowerBuoy™ may have limited communication capabilities or may be able to communicate data only over shorter periods due to power limitations. Some current solutions may only make data accessible upon physical retrieval of the sensor. Our PowerBuoy™ can be equipped with a variety of communications equipment, such as 4G LTE, satellite (VSAT) and Wi-Fi, which enables the transmission of data on a more frequent basis. We believe that more frequent data communication could enable an end-user to more quickly and proactively make data-driven decisions which could result in economic advantages. |
| ● | Increased power and persistence compared to certain current solutions. We have found that our PowerBuoy™ may provide substantially increased power and persistence than certain existing battery and solar powered systems. We believe that this may allow additional sensors to be employed at the same site, a higher sensor data transmission rate to be achieved, extended operation and reduced downtime, and improved operational costs for the customer. Enabling these new capabilities may contribute to enhanced operations through real-time decision making and increased life-cycle cost savings. |
| ● | Standard transportation and deployment. Our PB3 PowerBuoy™ does not require special handling or transportation, and instead uses conventional transportation and handling methods that are economical and readily available in standard marine operations. This may result in lower global transportation and deployment costs than current solutions. Our PB3 PowerBuoy™ can be deployed using conventional vessels and conventional marine cranes and lifts. |
| ● | Modular and scalable designs. Our PB3 PowerBuoy™ is designed with a modular ESS which allows us to tailor its configuration to specific application requirements, including expansion of energy storage capacity, potentially allowing for a more customized solution and potential cost savings for our customers. We believe that our PowerBuoy™ is scalable to higher power levels, and multiple PowerBuoys™ may also be installed in an array in order to achieve higher levels of aggregate power, although we have not yet demonstrated a PowerBuoy™ array. |
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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. |
| ● | Environmentally benign and aesthetically non-intrusive system design. We believe that our PB3 PowerBuoy™ does not present significant risks to marine life, or emit significant levels of pollutants, and therefore has minimal environmental impact as compared to some other current solutions. We believe there is no significant audible impact and our system does not have a negative effect on marine life, as validated by the U.S. Navy and DOE. |
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Ocean and factory-tested technology. Our PB3 PowerBuoy™ is designed to be durable, with a three-year interval between required maintenance activities. The PB3 has survived hurricanes and tropical storms during harsh sea conditions. Since 1997 we have conducted ocean tests to demonstrate the viability of our technology. In 2011, we conducted multiple ocean tests of the predecessor PB3 PowerBuoy™ under a contract with the U.S. Navy. More recently, we conducted multiple ocean tests of our current generation PB3 PowerBuoy™, including our now commercial version. In 2015, we instituted factory-based PTO-accelerated life testing which simulates continuous operations under extremely harsh conditions. During the 2017 fiscal year, we also implemented additional features to accommodate the feedback received from potential customers and end-users in support of further simplifying ocean deployments and increasing product application versatility. Further, we also focused on standardizing manufacturing and production testing procedures and worked closely with our supply base in order to ensure production repeatability. To date, we have achieved over 67 million cumulative strokes across our fleet of power takeoffs with no material failures in our commercial PTO design. This is equivalent to more than four cumulative years of continuous typical ocean operation for the markets we are pursuing. |
| ● | Efficient design in harnessing wave energy. We have designed and validated our PB3 PowerBuoy™ for maximized power generation in average ocean wave conditions through optimized mechanical to electrical wave energy conversion. We have designed the onboard ESS to provide several days of continuous rated power during periods of low or no wave activity, depending on payload power consumption. The PB3 PowerBuoy™ is equipped with a variety of communication capabilities including satellite, cellular, and Wi-Fi that are capable of transmitting payload data in real time (e.g., sensors or equipment that require power and communications capabilities), subject to the limits of the service provider. |
| ● | Prior commercial relationships enabled the development of our technology. Our prior and existing relationships with the U.S. Navy, DOE, U.S. Department of Homeland Security and MES have allowed us to develop our PB3 PowerBuoy™ for a variety of needs in various industries. We believe these relationships have helped position us within the private sector in support of commercialization, which we believe enhances our market visibility and attractiveness to our prospective customers. For example, in 2011 our PowerBuoy™ provided persistent power to an integrated radar and sonar system, significantly extending the U.S. Navy’s surveillance range. We have also demonstrated persistent maritime vessel detection with the U.S. Department of Homeland Security by integrating a hydrophone onto our PowerBuoy™ and demonstrating enhanced maritime traffic detection. In each instance, the resulting data have informed our next design iterations to improve critical operations and reliability. |
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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:
| ● | Sell and/or lease the PB3 PowerBuoy™. We believe our PB3 PowerBuoy™ is well suited for many remote offshore applications. We have observed potential market demand for both PowerBuoy™ sales and leases within our selected markets, and we intend to sell and lease the PB3 PowerBuoy™ to these markets. Additionally, we intend to provide services associated with product sales and leases such as maintenance, remote monitoring and diagnostic, application engineering, planning, training, and logistics support required for the PB3 PowerBuoy™ life-cycle. We continue to increase our commercial capabilities through new hires in marketing, sales, and application support, and through engagement of expert market consultants in various geographies. | |
| ● | Concentrate sales and marketing efforts in specific geographic markets. We are currently focusing our marketing efforts in North America, Europe, Australia, and parts of Asia and South America. We believe that each of these areas has sizable end market opportunities, political and economic stability, and high levels of industrialization and economic development. | |
| ● | Expand our relationships in key market areas through strategic partnerships and collaborations. We believe that strategic partners are an important part of commercializing a new product. Partnerships and collaborations can be used to improve the development of overall integrated solutions, create new market channels, expand commercial know-how and geographic footprint, and bolster our product delivery capabilities. We believe that offering a turn-key solution, and not just power, is key to securing long term success. |
| Ø | 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. | |
| Ø | Outsourcing of fabrication, deployment and service support. We outsource all fabrication, anchoring, mooring, cabling supply, and in most cases deployment of our PowerBuoy™ in order to minimize our capital requirements as we scale our business. Our PTO is a proprietary subsystem and is assembled and tested at our facility. We believe this distributed manufacturing and assembly approach enables us to focus on our core competencies and ensure a cost-effective product by leveraging a larger more established supply base. We also continue to seek strategic partnerships with regard to servicing of our PB3 PowerBuoy™. |
| ● | PB3 cost reduction and PowerBuoy™ product development. Our engineering efforts are focused on customer application development for PB3 sales, cost reduction of our PB3 PowerBuoy™ and improving the energy output, reliability, maintenance interval and expected operating life of our PowerBuoy™. We continue to optimize manufacturability of our designs with a focus on cost competitiveness, and we believe we will be able to address new applications by developing new products that increase energy output. |
Market Opportunities
The National Oceanographic and Atmospheric Administration (“NOAA”) Ocean Enterprise Report for 2016 estimated that the annual market for what NOAA describes as the “Ocean Enterprise” is $8.5 billion. The report addressed for-profit and not-for-profit businesses that support ocean measurement, observation and forecasting. Among the market sectors included in the report are oil and gas, science and research and security and defense sectors. We believe that this report addresses only a segment of the potential market opportunities that we are targeting.
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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.
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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. | |
| ● | Predictability. The generation of power from wave energy can be forecasted several days in advance. Wave energy can be calculated with a high degree of accuracy based on satellite images and meteorological data, even when the wave is hundreds of miles away and days from reaching a PowerBuoy™. Therefore, we believe end-users relying on PowerBuoys™ for power may be able to plan their logistics, payload scheduling and other operational activities based on such data and proactively, although actual testing has not yet been conducted. | |
| ● | Constant source of energy. The annual flow of waves at certain specific sites can be relatively constant and defined with relatively high accuracy. Based on our studies and analyses of various sites of interest, we believe that we will be able to deploy our PowerBuoys™ in locations where the waves could produce usable electricity for the majority of all hours during a year. |
Methods for generating electricity from wave energy can be divided into two general categories: onshore systems and offshore systems. Our PowerBuoys™ are the offshore type. Many offshore systems, including our PowerBuoy™, utilize a flotation device to harness wave energy. The heaving or pitching of the flotation device due to the force of the waves creates mechanical energy, which is converted into electricity by various technologies. Onshore and near shore systems are often located on a shore cliff or a breakwater, or a short distance at sea from the shore line, and typically must concentrate the wave energy before using it to drive an electrical generator. Although maintenance costs of onshore systems may be less than those associated with offshore systems, we believe there are a variety of disadvantages to the former. As waves approach the shore, their energy decreases, therefore, onshore and near shore wave power stations are not capable of exploiting the same amount of energy produced by waves in deeper water. In addition, suitable sites for onshore and near shore systems are limited and potential environmental and aesthetic issues may impede development of these systems due to wave power station size and proximity to communities.
Our principal product is our PB3 PowerBuoy™, which is designed to generate power for use independent of the power grid in remote offshore locations. It consists of a main hull structure surrounded by a floating buoy-like device. The hull is loosely moored to the seabed so that floating buoy can freely move up and down in response to the rising and falling of the waves. The PTO device that includes an electrical generator, a power electronics system, our control system, and our ESS are sealed within the hull. As ocean waves pass the PowerBuoy™, the mechanical stroke action created by the rising and falling of the waves is converted into rotational mechanical energy by the PTO, which in turn, drives the electrical generator. The power electronics system then conditions the electrical output which is collected within an ESS. The operation of the PowerBuoy™ is controlled by our customized, proprietary control system.
The control system uses sensors and an onboard computer to continuously monitor the PowerBuoy™ subsystems as well as the characteristics of the waves which interact with the PowerBuoy™. The control system collects data from the sensors and the payloads, and uses proprietary algorithms to electronically adjust the performance of the PowerBuoy™. We believe that this ability to optimize and manage the electric power output of the PowerBuoy™ is a significant advantage of our technology.
In the event of large storm waves, the control system automatically locks the PowerBuoy™ and electricity generation is suspended. However, the load center (either the on-board payload or one in the vicinity of the PowerBuoy™) may continue to receive power from the on-board ESS. When wave heights return to normal operating conditions, the control system automatically unlocks the PowerBuoy™ and electricity generation and ESS replenishment recommences. This safety feature helps to prevent the PowerBuoy™ from being damaged by storms.
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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.
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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.
| ● | 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. | |
| ● | 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. | |
| ● | In February 2017, we entered into a Joint Application Development and Marketing Agreement with HAI Technologies to pursue mutual opportunities. The initial focus of the agreement is on offshore oil and gas subsea chemical injection systems where persistent power and real-time data communications are critical. | |
| ● | In December 2016, we entered into a Joint Marketing Agreement with Sonalysts, Inc. to explore and pursue mutual opportunities in defense and oil and gas applications. The agreement includes the exploration and assessment of the use of the PB3 as a platform to provide power and communications for these markets. | |
| ● | In September 2016, we entered into a contract with ONR totaling approximately $0.2 million to carry out the first phase of a project which focuses on the initial concept design and development of a mass-on-spring PTO-based PowerBuoy™ leveraging a number of OPT patents covering such a technology. If successful, this device is expected to be able to respond to the unique set of requirements expected in various military marine applications. We completed the Phase 2 BASE Effort work under the contract which focused on the initial concept design and development of a mass-on-spring PTO-based PowerBuoy™. The Company is waiting for ONR funding of Phase 2, Option 1 to be approved. | |
| ● | We have worked with MES (from 2010 to current) to develop several PowerBuoy™ projects in Japan. Historically, our agreements with MES have provided for MES to reimburse us for specific costs associated with research, development and deployment of our PowerBuoy™ product. In March 2016, we entered into a letter of intent with MES to conduct funded pre-work tasks and to negotiate a definitive agreement that would allow for the lease of the PB3 PowerBuoy™ for a project off the coast of Kozushima Island, Japan following a planned stage gate review. Stage-gate reviews are used in product development to gather key information needed to advance the project to the next gate or decision point. This process is a generally accepted industry practice and has been utilized by other customers such as the DOE. A final contract totaling nearly $1.0 million was negotiated and finalized with MES in May 2016 that included engineering and logistics support, and the lease of our PB3 PowerBuoy™ for a 7-month period, its ocean deployment, associated data collection and monitoring of its performance. Upon the completion of the engineering pre-work and a successful stage gate review, the PB3 was shipped to Japan and was deployed off Kozushima Island from April to September 2017. The MES lease concluded in September 2017 and the PB3 was shipped back to New Jersey. |
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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. | |
| ● | In 2016, we entered into a cooperative research and development agreement (“CRADA”) with the NDBC to conduct ocean demonstrations of its innovative Self-Contained Ocean Observing Payload (“SCOOP”) monitoring system integrated into our PB3-A1 PowerBuoy™ . NDBC operates a large network of buoys and stations which provide critical meteorological and oceanic observations that are utilized by government, industry, and academia throughout the world. Under the CRADA, an initial ocean demonstration was to be conducted off the coast of New Jersey. We integrated the SCOOP onto our PB3 PowerBuoy™ and in June 2016 we deployed the system off of the coast of New Jersey. Site-specific measurements of meteorological and ocean conditions, as well as system performance and maintenance data collection, were carried out. The SCOOP was powered by the PB3, and provided metocean data to OPT and to NDBC. The deployment proceeded for approximately three months and met all project objectives. |
Current Customers
The table below shows the percentage of our revenue we derived from significant customers for the periods indicated:
| Twelve months ended April 30, | ||||||||
| 2018 | 2017 | |||||||
| Eni S.p.A. | 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 | % | |||||
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.
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Historic Projects
Our relationships and projects during recent years include, but are not limited to, the following:
| ● | The U.S. Navy and Department of Homeland Security. |
| o | From 2009 to 2011, we ocean-tested our utility-scale PowerBuoy™ at the U.S. Marine Corps Base, Hawaii at Kaneohe Bay. The PowerBuoy™ was launched under our program with the U.S. Navy for ocean testing and demonstration of a prior iteration of our PowerBuoy™, including connection to the Oahu power grid. | |
| o | 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”). | |
| o | 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. | |
| o | 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. |
| ● | Lockheed Martin. From 2004 to 2014, we had several project teaming agreements and license agreements with Lockheed Martin. | |
| ● | 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. | |
| ● | Reedsport, Oregon Project. We obtained a permit in 2007 from the Federal Regulatory Commission (“FERC”) for a multi-stage wave power project off the coast of Reedsport, Oregon. In addition, we received two cost-sharing contracts with the DOE for approximately $4.4 million to construct and deploy a single PowerBuoy™ off the coast of Reedsport. We subsequently obtained a license from FERC in August 2012 that authorized installation and operation of a 10-buoy grid connected wave energy array (the “License”). Due to the complexity of the FERC regulations for the single buoy, higher than anticipated project costs, unanticipated technical risks, and uncertainty surrounding permitting, we made the decision not to proceed with the project. Accordingly, we announced in March 2014 our surrender of the permit for one phase of the project and announced in April 2014 that we were taking the steps necessary to close out this project with the DOE. In May 2014, we filed an application to surrender the FERC permit for the remaining phases. In August 2014, in cooperation with the State of Oregon Department of State Lands, we removed anchoring and mooring equipment from the seabed off of the coast of Oregon. In fiscal 2016, we dispositioned the PowerBuoy™. In late fiscal 2016 and early fiscal 2017, we disposed of the remaining anchoring and mooring equipment through a local entity and by June 2017 the project was closed out. | |
| ● | The EU WavePort Project. In 2010, we were awarded €2.2 million under the European Commission’s Seventh Framework Programme (“FP7”) by the European Commission’s Directorate (“EC”) responsible for new and renewable sources of energy, energy efficiency and innovation. This grant was part of a total award of €4.5 million to a consortium of companies, including us, to deliver a PowerBuoy™ wave energy device, referred to as the PB40 (a legacy utility scale buoy), under a project entitled WavePort. We commenced work under this grant in fiscal 2012, and this cost-sharing contract expired on July 31, 2014. Due to a variety of factors, in October 2014, we shipped the PB40 back to New Jersey in order to undertake to deploy it off of the coast of New Jersey using our own funding. The legacy utility scale buoy was deployed in July 2015 and retrieved in August 2015, due to failure of a component part. We do not intend to redeploy the PB40. Following a project audit, final payment under the WavePort Project was received and recognized as revenue in fiscal 2016. Subsequently, the Company proceeded with the deployment site remediation to meet the terms of its deployment permit requirements. The site remediation was completed on May 18, 2017. | |
| ● | PowerBuoy™ Development Projects. In April 2010, we received a $1.5 million award from the DOE for a feasibility study of a PowerBuoy™ with the ability to produce up to 500kW of power (referred to as the “PB500”). In fiscal 2011, we received additional awards totaling $4.7 million for the PB500 structure and PTO optimization study, $2.3 million from the U.K. Government’s Technology Strategy Board and $2.4 million from the DOE. In fiscal 2014, upon completion of the concept design and associated trade studies that included detailed mechanical analyses, manufacturability and overall projected performance, the study concluded that a PB500 would not be technically feasible or economically viable. In March 2015, we successfully completed a stage gate review and a review of project deliverables with the DOE where advancements related to PTO design aspects such as reliability, cost take out, manufacturability and scalability were reviewed. Following a stage gate review, the project was successfully completed in fiscal 2016. |
Manufacturing
We engage in two types of manufacturing activities: 1) the manufacturing of the high value-added PTO components for systems control, power generation and conversion, and energy storage for each PowerBuoy™; and 2) contracting with outside companies for the fabrication of the buoy structure, mooring system, and cabling.
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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.
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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.
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Intellectual Property
We believe that our technology differentiates us from other providers of wave energy conversion technologies. As a result, our success depends in part on our ability to obtain and maintain proprietary protection for our products, technology and know-how, to operate without infringing upon the proprietary rights of others and to prevent others from infringing upon our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. We also rely on trade secrets, know-how, and continuing technological innovation and may rely on licensing opportunities to develop and maintain our proprietary position.
As of June 2018, we have been issued 65 U.S. patents, of which 50 are active and 15 have expired. Outside of the U.S. we have been issued 200 patents across 13 countries with 33 of the active U.S. patents having at least one corresponding issued foreign patent. We have filed for 3 additional U.S. patents and 1 of the U.S. patents applications have corresponding foreign patent applications. Our patent portfolio includes patents and patent applications with claims directed to:
| ● | system design; | |
| ● | control systems; | |
| ● | power conversion; | |
| ● | anchoring and mooring; and | |
| ● | wave farm architecture. |
The expiration dates for our issued U.S. patents range from 2018 to 2032. We do not consider any single patent or patent application that we hold to be material to our business. The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in continuing to obtain effective patent claims and enforcing those claims once granted. In addition, certain technologies that we developed with U.S. federal government funding are subject to certain government rights as described in “Risk Factors — Risks Related to Intellectual Property.”
We
use trademarks on nearly all of our products and believe that having distinctive marks is an important factor in marketing our
products. We have registered our PB-Vue®, OPTMicrobuoy®, CellBuoy®, PowerTower®,
Making Waves in Power®, Talk on Water® and 
®
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.”
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Subsidies and Incentives
Renewable energy subsidies and incentives are generally applicable only to electric generation and supply to the utility grid. However, our autonomous applications may permit a customer to reduce its carbon emissions, which our potential customers may be able to publicize in their environmental stewardship reports.
Employees
As of April 30, 2018, we had 35 full-time employees. Of these employees, 34 are located in the United States and one is located in the United Kingdom. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. None of our employees are represented by a labor union, and we believe our employee relations are good.
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.
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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:
| ● | delays in permitting or acquiring necessary regulatory consents; | |
| ● | delays in the timing of contract awards and determinations of work scope; | |
| ● | delays in funding for or deployment of wave energy projects; | |
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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; | |
| ● | delays in meeting, or the failure to meet, specified contractual milestones or other performance criteria under project contracts or in completing project contracts that could delay or prevent the recognition of revenue that would otherwise be earned; | |
| ● | decisions made by parties with whom we have commercial relationships not to proceed with anticipated projects; | |
| ● | increases in the length of our sales cycle; and | |
| ● | inherent uncertainties in our manufacturing processes. |
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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:
| ● | performance, reliability and cost-effectiveness of wave energy technology compared to conventional sources and products; | |
| ● | fluctuations in economic and market conditions, such as increases or decreases in the prices of oil and other fossil fuels; | |
| ● | the development of new and profitable applications requiring the type of remote electric power provided by our autonomous wave energy systems. |
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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.
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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.
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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:
| ● | changes in general economic and political conditions in the countries in which we operate; | |
| ● | unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to renewable energy, environmental protection, permitting, export duties and quotas; |
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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; | |
| ● | fluctuations in exchange rates may affect demand for our PowerBuoys™ and may adversely affect our profitability in U.S. dollars to the extent the price of our PowerBuoys™ and cost of raw materials and labor are denominated in a foreign currency; | |
| ● | difficulty with staffing and managing widespread operations; | |
| ● | complexity of, and costs relating to compliance with, the different commercial and legal requirements of the overseas markets in which we offer and sell our PowerBuoys™; | |
| ● | inability to obtain, maintain or enforce intellectual property rights; and | |
| ● | difficulty in enforcing agreements in foreign legal systems. |
Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business, which in turn could adversely affect our business, financial condition and results of operations. The current economic environment, particularly the macroeconomic pressures in certain European countries, may increase these risks.
We anticipate that our contracts with our customers will generally include cancellation for convenience clauses that permit our customers to terminate the contract for their convenience; if a customer were to terminate its contract with us for convenience, this could materially adversely affect our business.
We anticipate that our contracts with our customers will be structured as capital equipment contracts or capital equipment leases, and could include a cancellation for convenience clause, which we believe is relatively standard in these types of contracts. Cancellation for convenience clauses allow the customer to cancel the contract or lease at their option without cause prior to defined points in time, generally subject to a reasonable notice period. If any of our current or future customers were to cancel their contracts with us for convenience, such cancellation could adversely affect our business.
Risks Related to Product Development and Commercialization
Our product development costs are substantial and may increase in the future.
Our product development costs primarily relate to our efforts to increase the output, durability and commercial viability of our PowerBuoy™. Our product development costs were $4.3 million and $5.0 million in fiscal 2018 and 2017, respectively. It is our goal to fund the majority of our product development expenses, including cost sharing obligations under some of our customer contracts, over the next several years with sources of external funding, but we do not currently have any such committed sources of funding, and we may not be able to secure any such funding in the future. If we are unable to obtain external funding, our operations may be materially and adversely affected, and we may be required to curtail our product development expenses, among other consequences.
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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.
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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.
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Risks Related to Intellectual Property
If we are unable to obtain or maintain intellectual property rights relating to our technology and products, the commercial value of our technology and products may be adversely affected, which could in turn adversely affect our business, financial condition and results of operations.
Our success and ability to compete depends in part upon our ability to obtain protection in the U.S. and other countries for our products by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We own a variety of patents and patent applications in the U.S. and corresponding patents and patent applications in several foreign jurisdictions. However, we have not obtained patent protection in each market in which we plan to compete. In addition, we do not know how successful we would be should we choose to assert our patents against suspected 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.
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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.
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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.
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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.
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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:
| ● | developments in our business or with respect to our projects; | |
| ● | the success of competitive products or technologies; | |
| ● | regulatory developments in the United States and foreign countries; | |
| ● | developments or disputes concerning patents or other proprietary rights; | |
| ● | the recruitment or departure of key personnel; | |
| ● | quarterly or annual variations in our financial results or those of companies that are perceived to be similar to us; | |
| ● | market conditions in the conventional and renewable energy industries and issuance of new or changed securities analysts’ reports or recommendations; | |
| ● | the failure of securities analysts to cover our Common Stock or changes in financial estimates by analysts; | |
| ● | the inability to meet the financial estimates of analysts who follow our Common Stock; | |
| ● | investor perception of our company and of our targeted markets; and | |
| ● | general economic, political and market conditions. |
Provisions in our corporate charter documents and under Delaware law may delay or prevent attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.
As a result of our reincorporation in Delaware in April 2007, provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:
| ● | advance notice requirements for stockholder proposals and nominations; | |
| ● | the inability of stockholders to act by written consent or to call special meetings; and | |
| ● | the ability of our Board of Directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our Board of Directors. |
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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.
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.
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.
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On July 10, 2015, a second derivative lawsuit, captioned Rywolt v. Dunleavy, et al., Case No. 3:15-cv-05469, was filed by another shareholder against the same defendants in the United States District Court for the District of New Jersey alleging similar claims for breach of fiduciary duty, gross mismanagement, abuse of control, and unjust enrichment relating to the now terminated agreement between VWP and ARENA. The Rywolt complaint also sought unspecified monetary damages and other relief. On February 8, 2016, the Court issued an order consolidating the Labare and Rywolt actions, appointing co-lead plaintiffs and lead counsel, and ordering a consolidated amended complaint to be filed within 30 days of the order. On March 9, 2016, the co-lead plaintiffs filed an amended complaint consolidating their claims and seeking unspecified monetary damages and other relief.
On April 21, 2016, a third derivative lawsuit, captioned LaCalamito v. Dunleavy, et al., Case No. 3:16-cv-02249, was filed by another shareholder against certain current and former directors and officers of the Company in the United States District Court for the District of New Jersey alleging similar claims for breach of fiduciary duty relating to the now terminated agreement between VWP and ARENA. The LaCalamito complaint sought unspecified monetary damages and other relief. The Company was not formally served and did not respond to the complaint.
On June 9, 2016, a fourth derivative lawsuit, captioned Pucillo v. Dunleavy, et al., was filed by another shareholder against certain current and former directors and officers of the Company in the United States District Court for the District of New Jersey alleging similar claims for breach of fiduciary duty, unjust enrichment, and abuse of control relating to the now terminated agreement between VWP and ARENA. The Pucillo complaint sought unspecified monetary damages and other relief. On August 2, 2016, the parties in the Pucillo lawsuit filed a Stipulation and Proposed Order pursuant to which: (i) the defendants agreed to accept service of the Pucillo complaint; (ii) the parties agreed to stay the Pucillo action pending the filing and resolution of a motion to consolidate the Pucillo action with the Labare and Rywolt actions; and (iii) the parties agreed that the defendants shall not be required to respond to the Pucillo complaint during the pendency of the stay. The Court approved the Stipulation on August 3, 2016.
On October 25, 2016, the Court approved and entered a Stipulation and Order that, among other things, (i) consolidated the four derivative actions; (ii) identified plaintiff Pucillo as the lead plaintiff in the consolidated actions; and (iii) stayed the consolidated actions pending the November 14, 2016 settlement hearing in the now-settled securities class action and further order of the Court.
On October 23, 2017, the parties entered into a Stipulation and Agreement of Settlement to resolve the four consolidated derivative lawsuits. The settlement provided for, among other things, the Company to implement certain corporate governance changes, a $350,000 payment to the plaintiffs’ attorneys for attorneys’ fees and costs that will be made by the Company’s insurance carrier, dismissal of the derivative lawsuits, and certain releases. On November 21, 2017, the plaintiffs filed an unopposed motion seeking preliminary approval of the settlement, which the Court granted on March 9, 2018. On May 14, 2018, the Court held a final settlement approval hearing at which the Court stated that it was approving the settlement. On June 13, 2018, the Court issued a Final Order and Judgement, approving the Stipulation and Agreement of Settlement. As of April 30, 2018, the Company has accrued $350,000 related to this matter as a probable and reasonably estimable loss contingency with the offset to Statement of Operations. The Company also recorded a receivable of $350,000 from its insurance carrier with the offset to the Statement of Operations.
On May 26, 2017, an attorney claiming to represent two stockholders sent the Company’s Board of Directors a Stockholder Litigation Demand letter (“Stockholder Demand”). The Stockholder Demand alleges that the voting of shares for the 1-for-10 reverse stock split at the 2015 annual meeting of stockholders held on October 22, 2015 was not properly counted, and further alleges that, although the Company reported the reverse stock split as having been passed, if the vote was properly counted the reverse stock split would not have been approved. The Stockholder Demand requests the Board of Directors either to deem the reverse stock split as ineffective and disclose the same or to seek a proper and effective stockholder ratification of the reverse stock split. In addition, the Stockholder Demand requests the Board of Directors to adopt and implement adequate internal controls and systems to prevent the alleged improper voting from recurring. On June 23, 2017, the Company responded to the Stockholder Demand, explained the procedures that were followed for the 2015 annual meeting of stockholders and provided the Oath of the Inspector of Elections and the Certificate of the Inspector of Elections that certified as accurate the results of the voting at the meeting including voting on the reverse stock split proposal. On June 26, 2017, the attorney representing the alleged stockholders replied to the Company’s response, further alleged that the proxy statement underlying the 2015 annual meeting provided voting instructions that misled the stockholders regarding whether their brokers could vote on the reverse stock split proposal and renewed their requests of the Board. On July 24,2017, the Company provided an additional response to the Stockholder Demand, denied the allegations, and declined to take any of the actions requested.
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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.
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| 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.
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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.
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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:
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| ● | 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.
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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.
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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.
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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.
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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.
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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 | % | ||||
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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 change in fair value of warrant liabilities
The change in fair value of warrant liabilities during the fiscal year ended April 30, 2018 was an unrealized gain of $122,000 versus an unrealized gain of $1,491,000 for the fiscal months ended April 30, 2017. The change between periods is mainly due to a lower stock price for the nine months ended April 30, 2018.
Interest income, net
Interest income consists of interest received on cash and cash equivalents, investments in commercial bank-issued certificates of deposit and U.S. Treasury bills and notes and interest expense paid on certain obligations to third parties. Total cash, cash equivalents, restricted cash, and marketable securities were $12.3 million as of April 30, 2018, compared to $8.9 million as of April 30, 2017.
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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.
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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. |
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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.
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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.
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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.
None.
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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.
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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.
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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.
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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.
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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. |
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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.
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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. |
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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.
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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.
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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.
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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.
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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.
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In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the Company. An award is any right to receive the Company’s common stock pursuant to the 2018 Inducement Plan, consisting of a performance share award, restricted stock award, a restricted stock unit award or a stock payment award. No Awards may be granted or awarded during any period of suspension or after termination of the Plan, and in no event may any Award be granted under the Plan after the tenth (10th) anniversary of the date of its adoption. Any Awards that are outstanding on the Expiration Date, or the date of termination of the Plan (if earlier), shall remain in force according to the terms of the Plan and the applicable Award Agreement. As of April 30, 2018, there were 97,297 shares outstanding and 402,703 shares available for grant under the 2018 Inducement Plan.
2018 Outstanding Equity Awards at Fiscal Year End Table
The following table contains certain information regarding equity awards held by the named executive officers as of April 30, 2018:
| 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.
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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.
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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
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| (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.
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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 | ||||
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| (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.
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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.
| 67 |
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 |
| 68 |
Exhibits Index
| 69 |
+ 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.
| 70 |
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
| F-1 |
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 |
| F-2 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors Ocean Power Technologies, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Ocean Power Technologies, Inc. and subsidiaries (the Company) as of April 30, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended April 30, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Ocean Power Technologies, Inc. and subsidiaries as of April 30, 2018 and 2017, and the results of their operations and their cash flows for each of the years in the two-year period ended April 30, 2018, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 (b) to the consolidated financial statements, as of April 30, 2018 the Company has cash and cash equivalents of $11.5 million, and the Company has suffered recurring losses from operations and has an accumulated deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in note 1 (b). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2004.
Philadelphia, Pennsylvania
July 17, 2018
| F-3 |
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
(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.
| F-4 |
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
| Twelve months ended April 30, | ||||||||
| 2018 | 2017 | |||||||
| Revenues | $ | 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.
| F-5 |
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.
| F-6 |
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
| F-7 |
OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
| Twelve months ended April 30, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (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
| F-8 |
OCEAN
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| (1) | Background and Liquidity |
(a) Background
Ocean Power Technologies, Inc. (the “Company”) was founded in 1984 in New Jersey, commenced business operations in 1994 and re-incorporated in Delaware in 2007. The Company is developing and commercializing its proprietary systems that generate electricity by harnessing the renewable energy of ocean waves. The Company uses proprietary technologies that convert the mechanical energy created by the heaving motion of ocean waves into electricity. The Company has designed and continues to develop the PowerBuoy™ product line which is based on modular, ocean-going buoys, which the Company has been periodically ocean testing since 1997. The Company markets its PowerBuoys™ in the United States and internationally. Since fiscal 2002, government agencies have accounted for a significant portion of the Company’s revenues. These revenues were largely for the support of product development efforts. The Company’s goal is that an increased portion of its revenues be from the sale or lease of products and maintenance services, as compared to revenue to support its product development efforts. As the Company continues to advance its proprietary technologies, it expects to continue to have a net decrease in cash from operating activities unless and until it achieves positive cash flow from the planned commercialization of its products and services.
(b) Liquidity/Going Concern
Our consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced substantial and recurring losses from operations, which have contributed to an accumulated deficit of $197.5 million at April 30, 2018. At April 30, 2018, the Company had approximately $11.5 million in cash on hand. The Company generated revenues of only $0.5 million and $0.8 million during the years ended April 30, 2018 and 2017, respectively. Based on the Company’s cash and cash equivalents and marketable securities balances as of April 30, 2018, the Company believes that it will be able to finance its capital requirements and operations into the quarter ending April 30, 2019, including $0.6 million of payments due by August 30, 2018 as a return of an option due to ineligibility for certain emission credits. The Company will require additional equity and/or debt financing to continue its operations. The Company cannot provide assurances that it will be able to secure additional funding when needed or at all, or, if secured, that such funding would be on favorable terms. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Management is evaluating different strategies to obtain the required additional funding for future operations. These strategies may include, but are not limited to, additional funding from current or new investors, officers and directors; borrowings of debt; a public offering of the Company’s equity or debt securities; partnerships and/or collaborations. There can be no assurance that any of these future-funding efforts will be successful.
In fiscal 2018 and 2017, the Company has continued to make investments in ongoing product development efforts in anticipation of future growth. The Company’s future results of operations involve significant risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, risks from lack of available financing and insufficient capital, performance of PowerBuoys™, its inability to market and commercialize its PowerBuoys™, technology development, scalability of technology and production, dependence on skills of key personnel, concentration of customers and suppliers, deployment risks and laws, regulations and permitting In order to continue to implement its business strategy, the Company requires additional equity and/or debt financing. The Company closed five equity financing arrangements during the two year period ended April 30, 2018. The Company does not currently have any committed sources of debt or equity financing, and the Company cannot assure that additional equity and/or debt financing will be available to the Company as needed on acceptable terms, or at all. Historically, the Company has raised capital through securities sales in the public capital markets. If sufficient additional financing is not obtained when needed, the Company may be required to further curtail or limit operations, product development costs, and/or selling, general and administrative activities in order to reduce its cash expenditures. This could cause the Company to be unable to execute its business plan, take advantage of future opportunities and may cause it to scale back, delay or eliminate some or all of its product development activities and/or reduce the scope of or cease its operations.
| F-9 |
On June 2, 2016, the Company entered into a securities purchase agreement, which was amended on June 7, 2016 (as amended, the “Purchase Agreement”) with certain institutional purchasers (the “June Purchasers”). Pursuant to the terms of the Purchase Agreement, the Company sold an aggregate of 417,000 shares of Common Stock together with warrants to purchase up to an aggregate of 145,952 shares of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.35 of a share of Common Stock at a combined purchase price of $4.60. The net proceeds to the Company from the offering were approximately $1.7 million, after deducting placement agent fees and estimated offering expenses payable by the Company, but excluding the proceeds, if any, from the exercise of the warrants issued in the offering. The warrants have an exercise price of $6.08 per share, became exercisable on December 3, 2016 (“Initial Exercise Date”), and will expire five years following the Initial Exercise Date. The Company paid the placement agents approximately $0.1 million as placement agent fees in connection with the sale of securities in the offering. The Company also reimbursed the placement agents $35 thousand for their out of pocket and legal expenses in connection with the offering.
On July 22, 2016, the Company entered into the Second Amendment to the Purchase Agreement (the “Second Amended Purchase Agreement”) with certain purchasers (the “July Purchasers”). Pursuant to the terms of the Second Amended Purchase Agreement, the Company sold an aggregate of 595,000 shares of Common Stock together with warrants to purchase up to an aggregate of 178,500 shares of Common Stock. Each share of Common Stock was sold together with a warrant to purchase 0.30 of a share of Common Stock at a combined purchase price of $6.75. The net proceeds to the Company from the offering were approximately $3.6 million, after deducting placement agent fees and estimated offering expenses payable by the Company, but excluding the proceeds, if any, from the exercise of the warrants issued in the offering. The Warrants were exercisable immediately at an exercise price of $9.36 per share. The Warrants will expire on the fifth (5th) anniversary of the initial date of issuance.
On October 19, 2016, the Company sold 2,760,000 shares of common stock at a price of $2.75 per share, which includes the sale of 360,000 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-allotment option by the underwriters in a public offering. The net proceeds to the Company from the offering were approximately $6.9 million, after deducting underwriter fees and offering expenses payable by the Company.
On May 2, 2017, the Company sold 6,192,750 shares of common stock at a price of $1.30 per share, which includes the sale of 807,750 shares of the Company’s common stock sold by the Company pursuant to the exercise, in full, of the over-allotment option by the underwriters in a public offering. The net proceeds to the Company from the offering were approximately $7.2 million, after deducting underwriter fees and offering expenses payable by the Company.
On October 23, 2017, the Company sold 5,739,437 shares of common stock at a price of $1.42 per share in a best efforts public offering. The net proceeds to the Company from the offering were approximately $7.4 million, after deducting placement fees and offering expenses payable by the Company.
The sale of additional equity or convertible securities could result in dilution to stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with the Company’s Common Stock and could contain covenants that would restrict its operations. Financing may not be available in amounts or on terms acceptable to the Company, or at all. If the Company is unable to obtain required financing, it may be required to reduce the scope of its operations, including its planned product development and marketing efforts, which could materially and adversely harm its financial condition and operating results. If the Company is unable to secure additional financing, it may be forced to cease operations.
| F-10 |
| (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.
| F-11 |
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.
| F-12 |
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 |
| F-13 |
(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.
| F-14 |
(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.
| F-15 |
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.
| F-16 |
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used along with existing auditing standards. The new standard applies to all entities for the first annual period ending after December 15, 2016, and interim periods thereafter. Early application is permitted. The Company adopted ASU 2014-15 for the fiscal year 2017. The Company’s addition of the standard did not have a material impact on its disclosures. See section (b) “Liquidity/Going Concern” within Note (1) “Background and Liquidity” of these financial statements for further discussion on the Company’s ability to continue as a going concern.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating the effect ASU 2016-02 will have on its consolidated financial statements and disclosures and has not yet determined the effect of the standard on its ongoing financial reporting at this time.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718).” The amendments of ASU No. 2016-09 were issued as part of the FASB’s Simplification initiative focused on improving areas of GAAP for which cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed within the financial statements. The amendments focused on simplification specifically with regard to share-based payment transactions, including income tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows. The guidance in ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 on May 1, 2017. Certain of the amendments are applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of May 1, 2017, while other amendments are applied retrospectively, prospectively or using either a prospective or a retrospective transition method. Upon adoption, the Company is beginning to account for forfeitures as they occur rather than estimate a forfeiture rate and has recorded a cumulative-effect adjustment in equity of approximately $11,000 on the date of initial adoption. In periods subsequent to adoption, a higher expense will be recognized earlier during the respective vesting periods of stock-based awards that are not forfeited. As a result of the valuation allowance against our deferred tax assets, there was no net adjustment to retained earnings for the change in accounting for unrecognized windfall tax benefits.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, providing additional guidance on eight specific cash flow classification issues. The goal of the ASU is to reduce diversity in practice of classifying certain items. The amendments in the ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company is evaluating the effect ASU 2016-13 will have on its consolidated financial statements and disclosures and has determined the standard will have no impact on its ongoing financial reporting at this time.
| F-17 |
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 | ||
| F-18 |
(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.
| F-19 |
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.
| F-20 |
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.
| F-21 |
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 | ||||||||
| F-22 |
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 | |||||
| F-23 |
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.
| F-24 |
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 | ||
| F-25 |
(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 | $ | - | $ | - | ||||
| F-26 |
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.
| F-27 |
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.
| F-28 |
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 Labare and Rywolt actions; and (iii) the parties agreed that the defendants shall not be required to respond to the Pucillo complaint during the pendency of the stay. The Court approved the Stipulation on August 3, 2016.
| F-29 |
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.
| F-30 |
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.
| F-31 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
CONTRACT
NO. POUK/C2394
BETWEEN
PREMIER OIL UK LIMITED
AND
OCEAN POWER TECHOLOGIES, INC.
FOR THE PROVISION OF INTELLIGENT MONITORING BUOY
………………………………………………….
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
PAGE INTENTIONALLY LEFT BLANK FOR DOUBLE SIDED PRINTING
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION I
FORM OF AGREEMENT INCLUDING APPENDIX 1
| Page | 1 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
FORM OF AGREEMENT
This CONTRACT is made between the following parties:
PREMIER OIL UK LIMITED, a company incorporated in Scotland (company number SCO48705) having its registered office at 4th Floor, Saltire Court, 20 Castle Terrace, Edinburgh EH1 2EN and its principal place of business at Upper Denburn House, Prime Four Business Park, Kingswells Causeway, Kingswells, Aberdeen AB15 8PU hereinafter called the COMPANY
and
OCEAN POWER TECHNOLOGIES, INC., a company incorporated in the State of Delaware, United States of America (Company Registration Number is US Federal ID: 22-2535818 with its registered office at 28 Engelhard Drive, Monroe Township, New Jersey, USA 08534hereinafter called the CONTRACTOR
(together referred to as the “PARTIES” and individually as a “PARTY”).
WHEREAS:
| 1. | the COMPANY wishes that certain WORK be carried out in accordance with the terms and conditions of this CONTRACT; and | |
| 2. | the CONTRACTOR wishes to carry out the WORK in accordance with the terms and conditions of this CONTRACT. | |
| COMPANY wishes that WORK shall be carried out, all as described in the CONTRACT, via authorisation with the issue of a PURCHASE ORDER. |
| NOW: |
The PARTIES hereby agree as follows:
| 1. | In this CONTRACT all capitalised words and expressions shall have the meanings assigned to them in this FORM OF AGREEMENT or elsewhere in the CONTRACT. | |
| 2. | The following Sections shall be deemed to form and be read and construed as part of the CONTRACT: |
| Section I | Form of Agreement including Appendix 1 |
| Section II | (A) | Standard Contracts for the UK Offshore Oil and Gas Industry - General Conditions of Contract for Services (On- and Off-shore) - Edition 3 - 2014 | |
| (B) | Special Conditions of Contract |
| Section III | Remuneration | |
| Section IV | Scope of Work | |
| Section V | Health, Safety and Environment | |
| Section VI | Administration Instructions |
| Page | 2 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| Exhibit 1 | PB3 PowerBuoy Technical Specification | |
| Exhibit 2 | CONTRACT Milestones |
The Sections shall be read as one document, the contents of which, in the event of ambiguity or contradiction between Sections, shall be given precedence in the order listed, with the exception that the Special Conditions of Contract shall take precedence over the General Conditions of Contract.
| 3. | In accordance with the terms and conditions of the CONTRACT, the CONTRACTOR shall perform and complete the WORK and the COMPANY shall pay the CONTRACT PRICE. | |
| 4. | The terms and conditions of the CONTRACT shall apply from the date specified in Appendix 1 to this Section I - Form of Agreement which date shall be the EFFECTIVE DATE OF COMMENCEMENT OF THE CONTRACT. | |
| 5. | The duration of the CONTRACT shall be as set out in Appendix 1 to this Section I - Form of Agreement. |
The authorised representatives of the PARTIES have executed the CONTRACT in duplicate upon the dates indicated below:
| For: | OCEAN POWER TECHNOLOGIES, INC. | For: | PREMIER OIL UK LIMITED | |
| (CONTRACTOR) | (COMPANY) |
| /s/ George H. Kirby III | /s/ Calum Knowles | |||
| Name: | George H. Kirby III | Name: | Calum Knowles | |
| Title : | President & CEO | Title : | Senior Contracts Engineer | |
| Date : | 6/26/18 | Date : | 6/27/18 |
| Page | 3 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
APPENDIX 1 TO SECTION I - FORM OF AGREEMENT
Reference
Section I
| Clause 4 | The EFFECTIVE DATE OF COMMENCEMENT OF THE CONTRACT is June 13, 2018 |
| Clause 5 | The CONTRACT shall commence on the EFFECTIVE DATE and shall continue through the RENTAL PERIOD (as that term is defined in Section III.7), which RENTAL PERIOD is anticipated to be nine (9) months (a combination of three (3) months initial trial period with a six (6) month option period to extend in direct continuation) with one (1) three (3) month option period. Both option periods to be exercised entirely at COMPANY’s discretion. |
| Key milestone dates and other relevant information for this CONTRACT, including but not limited to the success criteria for the three (3) months initial trial period, are set forth in Exhibit 2. | |
| Section II | |
| Clause 3.1(a) | The COMPANY REPRESENTATIVE is Pieter voor de Poorte |
| The CONTRACTOR REPRESENTATIVE is Chris Phebus | |
| Clause 5.1 | The COMPANY designated heliport is Dyce, Aberdeen |
| The COMPANY designated supply base is Peterson SBS Aberdeen or Edzell | |
| COMPANY reserves the right to nominate designated locations which may be revised as per instructions issued from time to time. | |
| Clause 10.2 (b) | The Defects Correction Period applies prior to and during the RENTAL PERIOD (as defined in Section III.7) |
| Clause 13.8 | The period of suspension is twenty eight (28) days |
| Clause 14.3 | Latest time for receipt of invoices after completion of the whole of the WORK shall be three (3) months after completion of the WORK. |
| Clause 14.9 | Interest rate per annum - Base Rate plus three percent (3%) pa |
| Clause 17.4 | Rights shall vest in CONTRACTOR |
| Clause 19.2(d) | Permanent third party oil and gas production facilities and pipelines as follows: NONE |
| Clause 20.2 | Insurance by CONTRACTOR, the amounts are |
| Page | 4 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
Employers Liability: Five Million Pounds (£5,000,000) per occurrence or as contained in legislation in the particular area in which the WORK is being performed whichever is the greater
General Third Party: Ten Million Pounds (£10,000,000) per single occurrence
An all-risk policy of insurance in the amount of €10,000,000 that covers any damage or loss of the RENTAL EQUIPMENT (as that term is defined in Section III.7)
Clause 27.4(a) (iii) Special Conditions remaining in full force and effect shall be: All
| Clause 29.6 | The addresses for the service of notices are: |
| (i) | COMPANY | |
| Premier Oil UK Limited | ||
| Upper Denburn House | ||
| Premier Four Business Park | ||
| Kingswells Causeway | ||
| Kingswells | ||
| Aberdeen | ||
| AB15 8PU | ||
| Attention: Supply Chain Manager | ||
| Email: L_Notices-uk@premier-oil.com | ||
| (ii) | CONTRACTOR | |
| Ocean Power Technologies Inc | ||
| 28 Engelhard Drive | ||
| Monroe Township, | ||
| New Jersey | ||
| USA 08534 |
| Clause 28.5 (d) | The period of suspension is twenty eight (28) days |
| Clause 30.1 (a) | Limitation of Liability, including but not limited to the liability specified in Section III.7, before the date of completion of the WORK |
| The sum is 100% of the PURCHASE ORDER value for the WORK | |
| Clause 30.1 (b) | Limitation of Liability, including but not limited to the liability specified in Section III.7, after the date of completion of the WORK |
| The sum is 100% of the PURCHASE ORDER value for the WORK | |
| Clause 30.2 | The limitation period is: As per statute |
| Clause 31.1(b) | Resolution of disputes. The nominees are: |
| (i) | COMPANY: Supply Chain Manager UKBU | |
| (ii) | CONTRACTOR: Chris Phebus, VP Engineering |
| Page | 5 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION II
TERMS AND CONDITIONS OF CONTRACT
| Page | 6 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION II - (A)
GENERAL CONDITIONS OF CONTRACT
PROVISION OF ON/OFF SHORE SERVICES
The General Conditions of Contract for the UK Offshore Oil and Gas Industry (issued under the auspices of LOGIC) - On- Off-shore Edition 3 dated March 2014 shall apply to the WORK performed under this CONTRACT subject to the Special Conditions contained in Section II (B).
For the avoidance of doubt the Guidance Notes of the General Conditions of Contract do not form part of the General Conditions and are not to be taken as a legal interpretation of the General Conditions.
| Page | 7 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION
II – (B)
SPECIAL CONDITIONS OF CONTRACT
| Clause | Special Conditions | |
Clause 1.4 COMPANY GROUP |
Delete the definition and replace with the following: “COMPANY GROUP” means (a) COMPANY and its AFFILIATES (b) CO-VENTURERS and their AFFILIATES (c) COMPANY’s other contractors of any tier (other than CONTRACTOR or any member of CONTRACTOR GROUP) and their AFFILIATES; and the respective directors, officers and employees (including agency personnel) of all of the foregoing.
| |
Clause 1.9 CONTRACTOR GROUP
|
Insert the words “of any tier” after “SUBCONTRACTORS” on line 1.
Delete the second sentence from “CONTRACTOR GROUP shall...” to “agency personnel).” in its entirety.
| |
Clause 1.12 SUBCONTRACT |
Delete existing Clause 1.12 and replace with the following:
“SUBCONTRACT” means any contract between the CONTRACTOR and any person (other than COMPANY or any employees of the CONTRACTOR) or between SUBCONTRACTORS of any tier for the performance of any part of the WORK.”
| |
Clause 1.18 (new) PURCHASE ORDER |
“PURCHASE ORDER” shall mean the document issued by COMPANY to CONTRACTOR, in accordance with the CONTRACT, detailing the specific WORK authorised under the CONTRACT to be carried out at that time. A specimen PURCHASE ORDER is provided in SECTION V Administration Instructions, Attachment 1. The PURCHASE ORDER shall not contain any terms or conditions that are not already addressed in the CONTRACT, and the PURCHASE ORDER shall not add to, change, modify, replace or otherwise vary any terms or conditions addressed in the CONTRACT.
| |
Clause 3.2 (a) COMPANY AND CONTRACTOR REPRESENTATIVES |
Delete the first word of this clause and replace with: “Only the” |
| Page | 8 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| Clause | Special Conditions | |
Clause 7.2 CONTRACTOR TO INFORM COMPANY/COMPANY TO INFORM CONTRACTOR |
At the end of the first sentence insert the following new sentence: “CONTRACTOR shall allow the COMPANY to participate in any investigation into such accidents and, in any event, shall provide a copy of any accident report and/or investigation report to the COMPANY as soon as reports become available.
| |
Clause 8.2 SUBCONTRACTING |
Insert new Clause 8.2(e) as follows:
“(e) CONTRACTOR shall provide that any SUBCONTRACT entered into by CONTRACTOR shall contain as a minimum provisions effectively the same as those contained in Clauses 13,16,17,18,19, 20, 21, 22,24,27,28 and 33 of the CONTRACT.”
| |
Clause 10.2 (b) DEFECTS CORRECTION |
Add to the end of the first paragraph of this Clause: “,at its sole cost and expense”
| |
Clause 13.1 (c) SUSPENSION
|
Delete 13.1(c) in its entirety and replace with: “The COMPANY shall have the right, by notice to the CONTRACTOR, to suspend the WORK or any part thereof to the extent detailed in the notice to suit the convenience of the COMPANY; however, any suspension of the WORK, or any part thereof, to suit convenience of COMPANY shall continue for a period of time not to exceed fourteen (14) calendar days. Thereafter, the suspended WORK or any part thereof shall resume unless the COMPANY proceeds in accordance with the termination provisions contained in LOGIC Clause 24 as modified by the CONTRACT. The COMPANY’s right to suspend the WORK or any part thereof pursuant to LOGIC Clause 13.1 (a) (addressing safety) are not subject to the 14 calendar days limitation set forth above.
| |
| Clause 13.2 (b) | After “COMPANY” insert “and shall use all reasonable endeavours to minimize COMPANY’s costs and expenditure during suspension.” |
| Page | 9 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| Clause | Special Conditions | |
Clause 20.1 INSURANCE |
In line 7 and in line 10/11 delete “COMPANY, CO-VENTURERS and its and their respective AFFILATES” and replace with “COMPANY GROUP”
| |
Clause 24.1 (a) TERMINATION
|
(i) The COMPANY shall have the right by giving notice to terminate all or part of the WORK or the CONTRACT at such time or times as the COMPANY may consider necessary to suit the convenience of the COMPANY; however, any termination of the WORK or the CONTRACT to suit the convenience of the COMPANY shall, subject to Clause 24.1(a) (ii) below, only apply prior to the commencement of the shipment of the PB3 PowerBuoy from the CONTRACTOR’s facility in the United States to the COMPANY’s WORKSITE in the United Kingdom. Thereafter, the COMPANY may only terminate all or part of the WORK or the CONTRACT at such time as the COMPANY may consider necessary pursuant to Clause 24.1(b) (addressing fault) or Clause 24.1(c) (Addressing bankruptcy). (ii) COMPANY has the right to terminate the CONTRACT at the end of the initial three (3) month trial period.
| |
Clause 24.3 (a) TERMINATION
|
After “notice”, and prior to the semi-colon insert: “in a prompt and orderly manner with the purpose of mitigating losses, minimising further expenditures and minimising disruptions to COMPANY’s ongoing operations.”
| |
| Clause 34 (new) | Insert the following new Clause: 34. INDUSTRY MUTUAL HOLD HARMLESS SCHEME
CONTRACTOR shall be and shall ensure that any SUBCONTRACTOR is a signatory to the Industry Mutual Hold Harmless scheme.
| |
Clause 35 (new) APPOINTMENT OF SERVICE AGENT |
Insert the following new Clause: 35. APPOINTMENT OF SERVICE AGENT “CONTRACTOR hereby irrevocably authorises and appoints Ocean Power Technologies, Ltd., located at 23-25 Waterloo Place, Lemington Spa, Warwickshire, CV32 5LA, United Kingdom as its agent to accept on its behalf service of all legal process in England in relation to any dispute arising out of this CONTRACT and any VARIATIONS. Nothing in this clause shall affect COMPANY’s right to serve process in any other manner permitted by law or the right to bring proceedings in any other jurisdiction for the purposes of enforcement or execution of any judgement or other settlement in any other courts.” |
| Page | 10 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION III
REMUNERATION
| A | REMUNERATION |
| 1.0 | GENERAL |
| 1.1. | The primary purpose of this Section III – Remuneration is to establish a pricing structure for the provision of WORK, as detailed within Section IV – Scope of Work, together with all relevant specifications applicable to same, determined against an agreed pricing and discount arrangement, that will apply for the duration of the CONTRACT, as authorised with any PURCHASE ORDER issued in accordance with same. |
| 1.2. | In full consideration of the satisfactory performance of the WORK by the CONTRATOR in complying with its obligations under the CONTRACT, the COMPANY agrees to pay, or cause to be paid to the CONTRACTOR, the CONTRACT PRICE, at the times and in the manner specified in the CONTRACT and as authorised with the relevant PURCHASE ORDER, as appropriate. |
| 1.3. | The CONTRACT PRICE shall consist of only the rates and prices as are contained within this Section III – Remuneration and shall be the full consideration to the CONTRACTOR for all costs, overheads and profits associated with the WORK and fulfilling all obligations and liabilities of the CONTRACTOR under the CONTRACT. All lump sums, unit rates and prices contained within this Section III – Remuneration are in US Dollars USD($) unless otherwise stated. |
| 1.4. | All lumps sums, unit rates and prices contained herein shall be exclusive of any incidence of Value Added Tax (VAT) applicable to the WORK undertaken by the CONTRACTOR for the COMPANY under the CONTRACT. The gross amount of VAT chargeable thereon shall be paid to the CONTRACTOR by the COMPANY additional to any other payment due under the CONTRACT, provided always that the CONTRACTOR supplies the COMPANY with a valid Tax invoice / Certificate as may be required by relevant statutes or regulations. |
| 1.5. | The CONTRACT rates and prices shall be calculated in accordance with this Section III |
| 1.6 | The CONTRACTOR shall invoice the COMPANY on the basis of the applicable lump sums, unit rates, and prices detailed in this Section III – Remuneration in accordance with the provisions of the CONTRACT as authorised in the relevant PURCHASE ORDER, as appropriate. |
| 1.7 | No reimbursement will be made for the WORK which is not performed in accordance with the CONTRACT. |
| 1.8 | The CONTRACTOR shall not be entitled to remuneration in respect of personnel or equipment time incurred non-productively: |
| (a) | Through shortages or delays in the supply by the CONTRACTOR GROUP of personnel, equipment, information or materials, provided that the COMPANY shall have given to the CONTRACTOR adequate notice of the need for such supply; and/or | |
| (b) | Due to a lack of planning on the part of the CONTRACTOR; and/or | |
| Page | 11 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| (c) | for time incurred non-productively through breakdown or loss of the CONTRACTOR GROUP’s equipment or plant; and/or | |
| (d) | through materials being non-compliant with the WORK requirements, in accordance with the provisions of the CONTRACT. |
| 1.9 | No claim or submission for additional monies will be accepted by the COMPANY for failure to price an item identifiable from Section IV- Scope of Work or other CONTRACT documents but not specifically identified herein, or for any item which proves to be required for the safe and proper performance of the WORK or to satisfy the requirements of any approving authority. |
| 1.10 | The CONTRACTOR’s schedules of personnel, equipment and consumables contained within this Section III – Remuneration are deemed to be total and complete. No other charges will be accepted or authorised unless the CONTRACTOR received prior written agreement from the COMPANY. |
| 1.11 | Unless otherwise stated herein, “Day” or “day” shall mean a period of twenty-four (24) hours beginning at 00:00 hours on any day and ending at 24:00 hours on the same day. |
| 1.12 | All invoices submitted on the basis of the rates detailed within this Section III – Remuneration shall be supported by CONTRACTOR approved personnel timesheets, plant sheets and shipping manifest where applicable. |
| 1.13 | All third party supplier invoices shall be submitted by CONTRACTOR to COMPANY within 30 days of the end of each calendar month for WORK carried out in such calendar month. |
| 2.0 | PREAMBLE TO LUMP SUMS AND UNIT RATES |
The lump sums, unit rates and prices included in this Section III – Remuneration shall be all-inclusive fixed for the WORK as specified in Section IV – Scope of Work, all in accordance with the CONTRACT and as authorised in the applicable PURCHASE ORDER, and shall include without limitation the cost of the following:
| i) | Provision of all necessary project management and engineering, design, draughting and other technical services for the WORK, all as more fully described in Section IV – Scope of WORK; | |
| ii) | The WORK as described in Section IV – Scope of WORK, attached; | |
| iii) | Provision (including MOBILISATION, operation and DEMOBILISATION) of all personnel, materials and equipment required for full performance of the WORK; | |
| iv) | Maintenance, repair and replacement of all necessary working equipment required for the execution of the WORK; | |
| v) | Provision of onshore facilities and services to support the WORK; | |
| vi) | Loading of CONTRACTOR’s materials and equipment onto COMPANY transport for delivery to COMPANY supply base and off-loading upon its return from offshore – all to COMPANY’s account; | |
| vii) | Provision of all documents that may be required by Customs and Excise, Port Authorities and any other statutory body with jurisdiction or requirements in connection with CONTRACTOR’s equipment and materials; |
| Page | 12 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| viii) | All consumable items and those not incorporated into the WORK, including materials, supplies, welding rods, facilities, maintenance and running costs for construction, plant, workshops, other buildings, construction equipment, craneage, hoists, loadout apparatus, power generation equipment, temporary construction aids, shelters, vehicles, protective clothing for CONTRACTOR’s personnel and any other equipment or facilities to be utilised; |
| ix) | Compliance with all safety and medical requirements, and safety and survival training for CONTRACTOR’s personnel and the provision to CONTRACTOR personnel offshore for all safety, protective and survival clothing and equipment, and medical check-ups, and obtaining all medical and training certificates; | |
| x) | All labour, materials, consumables and on-site services relating to inspection, and testing specifically called for by this CONTRACT, and any other tests considered necessary by CONTRACTOR; | |
| xi) | Procurement, expediting, inspection, purchase, documentation, unloading, handling, storage, preserving and protection, packing, transportation and incorporation (permanently or temporarily) into the WORKS of all equipment and materials associated with the WORK; | |
| xii) | The provision of all spares and consumables required during testing, Factory Acceptance Tests of any procured or repaired equipment including any testing / analysis equipment; | |
| xiii) | The provision of all installation material spares including, but not limited to bolts and gaskets. | |
| xiv) | Provision and installation of all protection materials necessary, whether of a temporary or permanent nature; | |
| xv) | The provision of all permits, licences and other authorisations required to operate the CONTRACTOR’s equipment; | |
| xvi) | Compliance with the requirements of COMPANY’s approved Verification Body (VB) to review and approve all detailed design activities, monitor construction activities and issue a statement of compliance for equipment and operations that will meet the requirements of COMPANY; | |
| xvii) | The provision of all permits, licences and other authorisations required to perform the WORK; | |
| xviii) | Compliance with the requirements of the United Kingdom DBERR, and H.S.E; | |
| xix) | Compliance with and the provision of all necessary details in accordance with the “F” Gas Regulations; | |
| xx) | Compliance with the requirements of the Civil Aviation Authority with regard to personnel fitness for travel; | |
| xxi) | Royalties, patent and licence fees, usage of proprietary information and systems and similar items; | |
| xxii) | Provision and maintenance of CONTRACTOR’s QA/QC system and EN BS ISO 9000 registration; |
| Page | 13 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| xxiii) | Development and implementation of all planning, cost, QA, materials and document controls; |
| xxiv) | Preparation of a Quality Plan for COMPANY APPROVAL describing the resources and activities which shall be employed to achieve the quality objectives for the WORK; | |
| xxv) | Provision of SUBCONTRACT WORK, services and personnel of either a technical or professional nature as required; | |
| xxvi) | Attendance of CONTRACTOR’s personnel at all meetings required by COMPANY and all costs associated therewith; | |
| xxvii) | Production of all drawings and specifications, reproducing such drawings and specifications as required and COMPLETION of scope drawings as required by COMPANY in both hard copy and electronic format; | |
| xxviii) | All documentation including operations and maintenance manuals for COMPANY approval, a verification manual for Independent Inspection Authority (IIA), and complete set of “As-built” drawings, certification and reports wherever appropriate; | |
| xxix) | Provision of all tools including hand tools; | |
| xxx) | Provision for onshore and offshore WORK of all direct, indirect, productive and non-productive labour, supervision, staff and management as are required for full performance of the WORK, including all wages and base salaries relating to normal, overtime, weekend, holiday or shift hours (whether day or night) and associated payroll burdens (including but not limited to premium payments, bonuses [including divers’ saturation premium and staff benefits], National Insurance Contributions and other payroll taxes, private health plan(s), pensions, employers’ liability or other insurances, sickness benefit, redundancy payments, industrial training levies, holidays, and all costs of crew changes, accommodation and living expenses, relocation and travel (so far as not expressly found to the contrary elsewhere within the CONTRACT) to achieve the completion of the WORK; | |
| xxxi) | All of CONTRACTOR’s overheads or other cost including but not limited to finance costs, depreciation, costs of non-chargeable staff and management, CONTRACTOR vehicles, administrative, legal, insurance, accounting, tax advisory, auditing, finance, marketing, computing, clerical and secretarial services, materials, consumables, utilities, stationery, and telefax facilities and usage, graphics, draughting (including CAD), reproduction, electronic mail (including the provision of Microsoft Office system) and other network computer facilities arising out of its corporate head office or other offices at which the WORK is being performed; | |
| xxxii) | Maintenance of buildings, workshops, offices, plant and equipment and all other parts and items in CONTRACTOR’s onshore site facility in a safe and operational condition including labour, materials, spare parts and other services; | |
| xxxiii) | Provision of any buildings, offices, workshops and other facilities (including site preparation and temporary WORKS) as required to complete the WORK and services hereto; | |
| xxxiv) | All travel, subsistence and associated costs including but not limited to hotel accommodation, air travel, taxi, car hire, meals and the like (so far as not expressly found to the contrary elsewhere in the CONTRACT) – travel and accommodation for CONTRACTOR personnel to be reimbursed as expensed; |
| Page | 14 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| xxxv) | Provision of a Performance Bond and/or Parent Company Guarantee in accordance with the provisions of the CONTRACT (not required); | |
| xxxvi) | Provision of CONTRACTOR’s insurance cover as required by the CONTRACT, including all associated costs; | |
| xxxvii) | The cost of any deductibles associated with claims made against COMPANY’s Construction All Risks or other Insurance Policy; | |
| xxxviii) | All remedial WORK necessary for compliance with the requirements of the CONTRACT; | |
| xxxix) | Any costs associated with the free-issue materials and equipment; | |
| xl) | All other overheads, risks, depreciation, expenses, liabilities and obligations which under the terms of the CONTRACT are to be borne by CONTRACTOR and other risks which CONTRACTOR could reasonably expect to bear in the performance of the WORK, and compliance with the CONTRACT articles generally; | |
| xli) | CONTRACTOR’s profit; | |
| xlii) | COMPANY shall not consider any request for additional reimbursement for loss of revenue, overheads or profit as a result of any, omission or addition due to the method which the CONTRACTOR has used to determine the CONTRACT PRICE. | |
| xliii) | The Manhour Rates shall apply to any applicable VARIATION under the Contract and shall include but not be limited to: |
| ● | All wages and salaries relating to normal, weekend, holiday or shift hours (whether day or night), overtime premiums, National Insurance contributions, private health plan, pensions, employer’s liability or other insurance, sickness benefit, holidays and bonuses; | |
| ● | Onshore hourly rates shall be reimbursed for the actual number of hours worked, as approved by COMPANY by means of timesheets; | |
| ● | Offshore day rates shall be reimbursed for each day CONTRACTOR’s personnel are offshore, as approved by COMPANY by means of timesheets. Part days shall be pro-rated. |
| xliv) | The day rates shall be inclusive of the items and activities specified herein and as detailed in Section IV – Scope of WORK. | |
| xlv) | The daily stand-by rates shall be payable, providing that in all respects the CONTRACTOR had programmed, was ready and available for work and shall be deemed to cover all costs and expenses incurred during a 24 hour period. Any stand-by occurring for less than 24 hours per day shall be reimbursed pro-rata from the day rate based on a 24-hour day; reimbursement shall be to the nearest half hour. | |
| xlvi) | DELETED | |
| xlvii) | The day rates shall not be payable in the event that the CONTRACT is suspended due to the negligence or fault of CONTRACTOR pursuant to the CONTRACT. | |
| xlviii) | In the event of award of CONTRACT, this shall be duplicated into Section III – Remuneration of the Pro Forma Contract and form part of CONTRACT. |
| Page | 15 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 3.0 | ONSHORE AND OFFSHORE PERSONNEL |
| 3.1 | The onshore and offshore personnel rates quotes shall be for personnel working on any UK and/or UKCS WORKSITE. |
| 3.2 | All accommodation and subsistence at the COMPANY’s offshore WORKSITE shall be to the COMPANY’s account. |
| 3.3 | The offshore day rate for the CONTRACTOR GROUP’s personnel shall be paid from the time of scheduled check-in at the COMPANY’s mobilisation point, en route to the offshore location, until return to same. The only exceptions to this are on ‘Mobilisation’ and ‘Demobilisation’ days, being the crew change days. On crew change days, a charge for one (1) of the CONTRACTOR GROUPs personnel only, will be accepted by the COMPANY (i.e. outgoing CONTRACTOR GROUP’s personnel will be reimbursed but not the incoming CONTRACTOR personnel on crew rotation). Subject to normal operating requirements, the COMPANY will transport the CONTRACTOR GROUP’s personnel between the mobilisation point and the offshore WORKSITE. Such transportation shall at all times be at the COMPANY’s discretion. |
| 3.4 | In the event of any delay in departure from the mobilisation point to the offshore WORKSITE, the CONTRACTOR GROUP’s personnel shall remain at the mobilisation point until stood down by the COMPANY. Should such delay result in the CONTRACTOR GROUP’s personnel remaining on standby overnight, the COMPANY (to suite operational requirements) shall reimburse the CONTRACTOR an agreed lump sum per night to cover accommodation in Aberdeen, meals and transportation to/from the accommodation and heliport, for those CONTRACTOR GROUP personnel normally not residing locally i.e. outwith a forty (40) mile radius of the mobilisation point. Such payments will be progressed in accordance with the applicable provisions of Section III – Remuneration. |
| 3.5 | The COMPANY shall be responsible for arranging meals, accommodation and transport as appropriate, all to its account if the helicopter having taken off from the drilling unit and/or other associated intervention vessel diverts to land at a location other than Aberdeen. |
| 3.6 | The COMPANY shall be liable for any documented costs incurred by the CONTRACTOR GROUP’s from the scheduled check-in time or subsequent to the disembarkation of the CONTRACTOR GROUP’s personnel at the designated demobilisation point, located in Aberdeen. |
| 3.7 | For the avoidance of doubt, the offshore working day shall be for a minimum twelve (12) hour day, and any hours worked in excess of this on any particular day shall be deemed to be included in the pertinent offshore daily rate. |
| 3.8 | The onshore daily rate(s) contained within this Section III – Remuneration, shall apply for each eight (8) hour day spent productively working onshore. In the event that only partial day is worked, then reimbursement shall be made on a pro-rata basis. In the event that more than eight (8) hours are worked in the same day, then such hours (over the nominal eight (8) hours) are deemed to be included in the pertinent onshore personnel day rate, and the COMPANY shall not be liable for any overtime charges. The only exception to this would be where specific overtime work is authorised in writing in advance by the COMPANY REPRESENTATIVE, and where a schedule of pertinent overtime rates per hour worked for each personnel category is agreed between both PARTIES. |
| Page | 16 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 3.9 | CONTRACTOR shall not remove, replace or transfer any personnel without prior agreement of COMPANY. CONTRACTOR shall submit complete resumes of all personnel to COMPANY for review prior to assigning personnel to the CONTRACT. COMPANY retains the right to remove any of CONTRACTOR’s personnel for lack of performance or irregular conduct. |
| 4.0 | PLANT / EQUIPMENT / MATERIALS / TOOLS ETC (NOT USED – SEE 7.0 BELOW ) |
(SECTION DELETED)
| 5.0 | THIRD PARTY MATERIALS AND SERVICES |
The COMPANY shall reimburse the CONTRACTOR for the provision of third party goods and services at actual net documented cost, provided that such goods and services:
| (a) | Are required solely for the performance of the WORK being additional to that specified or referred to in Section IV – Scope of Work and which are not included in Section III – Remuneration | |
| (b) | Have been requested by the COMPANY in advance in writing; and, | |
| (c) | Have been provided at demonstrably competitive rates, sums or prices. |
| 6.0 | CLAIMS |
COMPANY will not be obliged to consider any claim by CONTRACTOR unless the following procedure is strictly adhered to:
| (a) | CONTRACTOR will submit written notice to COMPANY within twenty-eight (28) days of the occurrence constituting such claim. | |
| And | ||
| (b) | CONTRACTOR will submit to COMPANY a written detailed statement of any such claim, which may be subject to audit, within sixty (60) days of the occurrence constituting such claim. |
Claim submissions identified outside the time scale described above shall be considered to be time barred.
| 7.0 | RENTAL EQUIPMENT |
“RENTAL EQUIPMENT” means the PB3 PowerBuoy as specified in Exhibit 1 of the CONTRACT and any substitutions or replacements of the PB3 PowerBuoy and all related accessories (other than those provided by the COMPANY), and any manuals and instructions as may be appropriate.
“RENTAL PERIOD” means that period of time beginning when RENTAL EQUIPMENT is delivered to COMPANY’s designated place of delivery, specified in Exhibit 2, and ending when such RENTAL EQUIPMENT is returned to COMPANY’s designated place of redelivery, specified in Exhibit 2.
| Page | 17 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 7.1 | CONTRACTOR represents and warrants to COMPANY that RENTAL EQUIPMENT shall: |
| (a) | comply with the description and any specification or sample specified in Exhibit 1; | |
| (b) | be new or as new and fit for the purpose specified in the CONTRACT; | |
| (c) | be free from defects in design, material and workmanship that prevent the RENTAL EQUIPMENT from operating or performing as designed or in accordance with the specifications identified in Exhibit 1; | |
| (d) | comply with all applicable statutory and regulatory requirements relating to manufacture, testing, calibrating, labelling, packaging, storage, handling and delivery. |
| 7.2 | CONTRACTOR is hereby put on notice that the RENTAL EQUIPMENT is to be used offshore by COMPANY. COMPANY is responsible for the offshore deployment and retrieval of RENTAL EQUIPMENT in accordance with directions and instructions provided CONTRACTOR. |
| 7.3 | Special returnable containers used for the delivery of RENTAL EQUIPMENT shall be returned to CONTRACTOR upon the delivery and/or installation of the RENTAL EQUIPMENT. |
| 7.4 | Charges in respect of RENTAL EQUIPMENT used offshore shall, unless otherwise agreed in writing, apply only during the RENTAL PERIOD. COMPANY shall provide CONTRACTOR with written notice of the date when the RENTAL PERIOD shall end and such written notice shall be provided at least 15 calendar days prior to the date when the RENTAL PERIOD shall end. |
| 7.5 | RENTAL EQUIPMENT, and any intellectual property associated with or embedded within RENTAL EQUIPMENT, shall at all times remain the property of CONTRACTOR, and COMPANY shall have no right, title or interest in or to RENTAL EQUIPMENT save the right to possession and use of the RENTAL EQUIPMENT subject to the terms and conditions of this CONTRACT. COMPANY shall have no obligation in respect of the RENTAL EQUIPMENT during the RENTAL PERIOD save (a) to maintain and operate RENTAL EQUIPMENT in accordance with the instructions provided by CONTRACTOR; (b) to make payment for RENTAL EQUIPMENT as agreed in the CONTRACT. |
| 7.6 | CONTRACTOR waives any right of lien against the RENTAL EQUIPMENT during the RENTAL PERIOD. CONTRACTOR shall not at any time during the RENTAL PERIOD suffer or permit any lien, attachment or encumbrance to be imposed by any PERSON upon any RENTAL EQUIPMENT (or any part thereof) by reason of a claim or demand against CONTRACTOR. |
| 7.7 | COMPANY shall be responsible for the RENTAL EQUIPMENT during the RENTAL PERIOD and COMPANY acknowledges that CONTRACTOR shall not be responsible for, and indemnifies CONTRACTOR from any claims for, any loss of or damage, to third parties arising out of or in connection with any misuse or mishandling of the RENTAL EQUIPMENT by COMPANY GROUP during the RENTAL PERIOD. |
| 7.8 | Notwithstanding Clause 7.7 above the RENTAL EQUIPMENT and title thereto shall remain the property of the CONTRACTOR at all times. Risk of loss or damage to the RENTAL EQUIPMENT shall be with CONTRACTOR at all times during the term of the CONTRACT, and CONTRACTOR indemnifies, releases and holds harmless the COMPANY GROUP in respect of loss or damage to the RENTAL EQUIPMENT irrespective of cause and notwithstanding the negligence or breach of duty (whether statutory or otherwise) of the COMPANY GROUP. |
| Page | 18 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| B | SCHEDULE OF RATES |
| Any remuneration will be in accordance with each CONTRACT for WORK (“CONTRACT”), executed by way of a PURCHASE ORDER. | |
| 1.0 | RATES, SUMS AND PRICE SCHEDULES |
| CONTRACTOR will detail a full list of personnel required to perform the WORK as set out in Section IV – Scope of Work and provide all-inclusive day rates for each and every category. | |
| CONTRACTOR will provide an exhaustive list of equipment which may be required in the performance of the WORK as set out in Section IV – Scope of Work and will provide daily rental rates for each or as agreed with COMPANY REPRESENTATIVE. | |
| 2.0 | GENERAL |
| 2.1 | The description of prices contained in this Section III is for the convenience of CONTRACTOR and COMPANY in the pricing and administration of payment for the WORK. As such, the descriptions are deemed to represent the total requirement for the Scope of Work. No claim or submission for additional compensation shall be accepted by COMPANY on the grounds that CONTRACTOR failed, or was unable, to price am item of the WORK which could be reasonably identified from the scope. |
| 2.2 | CONTRACTOR shall be responsible for notifying COMPANY, within seven (7) working days, of all CONTRACTOR equipment which has not been returned as planned. Failure to notify COMPANY of non-return of equipment shall result in equipment status being off-hire. |
| 3.0 | PRICING |
| 3.1.1 | PRE TRIAL WORK |
| ITEM | LIST PRICE | PRICE TO CUSTOMER | COMMENTS | |||
| Trial definition and System design | *** | *** | Assistance to define the functionality and sensors required | |||
| Integration of sensors and modification of functionality on software | *** | *** | Integration of equipment onto the PB3 FAT & system functionality test in house pre shipment. Sensor NRE in excess of $*** shall be billed at cost | |||
| Project management, design/operations meetings & logistics planning | *** | *** | In-house manpower | |||
| Delivery of PB3 to Aberdeen | *** | *** | Delivered Quayside Aberdeen – COMPANY to act as Consignee and | |||
| All risk insurance policy | *** | *** | Insurance for any loss or damage to the PB3. The cost of the insurance policy shall be billed at cost, and any deductibles or retentions required under the policy for any claims made shall be billed at cost. |
***This information has been omitted in reliance upon Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and has been filed separately with the Securities and Exchange Commission.
| Page | 19 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 3.1.2 | INITIAL TRIAL PERIOD – 3 MONTHS |
| ITEM | LIST PRICE | PRICE TO CUSTOMER | COMMENTS | |||
| Onsite support (2 men x 14 days) | *** | *** | Mobilisation / deployment supervisory and advisory role | |||
| Remote monitoring of the system | *** | *** | Initial high intensity monitoring support of PB3 | |||
| Training of COMPANY personnel for monitoring of system | *** | *** | To enable COMPANY personnel to monitor the system on day to day basis | |||
| 3 Month Rental of PB3 | *** | *** | Based on single 3 month rental |
| 3.1.3 | OPTION PERIOD 1 – 6 MONTHS |
| ITEM | LIST PRICE | FIRM PRICE TO CUSTOMER | COMMENTS | |||
| PB3 Rental for 6 months | *** | *** | Supervisory and advisory role | |||
| Remote monitoring of the system for 6 months | *** | *** | Monitoring / support for periodic health checks and monthly reporting | |||
| Decommissioning of PB3 support services | *** | *** | One man for 14 days max excluding travel & expenses | |||
| Shipment from Aberdeen to Monroe Township, NJ | *** | *** | FOB Aberdeen |
| 3.1.4 | OPTION PERIOD 2 – 3 MONTHS |
| ITEM | OPTION 2 FIRM PRICE | COMMENTS | ||
| PB3 Rental for 3 months | *** | Optional extension post 6 month rental period | ||
| Monthly Rental | *** | Flexibility in case of shorter / longer extension | ||
| PB3 Rental for 3 years | *** | |||
| PB3 Purchase Price | *** | PB3 price valid until 31 Dec 2018 | ||
| Decommissioning of PB3 | *** | One man x 14 days | ||
| Unscheduled onsite support visit services | *** | Per man day (min 5 days) excluding travel & expenses | ||
| Remote monitoring support (post 3 month | *** | Per month |
Notes to Pricing:
| ● | All prices are firm for the duration of the CONTRACT, based in US Dollars and exclusive of all UK taxes, VAT and customs duties | |
| ● | Initial Trial Period includes four (4) hours of remotely conducted monitoring training for COMPANY personnel, to be provided remotely by webcast or similar means. Additional training is additional at cost. | |
| ● | Additional deployment site visits post Initial Trial Period are chargeable to COMPANY |
***This information has been omitted in reliance upon Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and has been filed separately with the Securities and Exchange Commission.
| Page | 20 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| ● | Mooring design services, validation of mooring design, mooring installation procedures and mooring procurement shall be provided at COMPANY cost. Verification of mooring design included in Initial Trial Period by CONTRACTOR | |
| ● | Subject to COMPANY approval, PB3 rental shall be invoiced one (1) month in advance, commencing after 3.1.1 Initial Trial Period. The first rental payment shall include the first and second months rental fee. Thereafter, invoicing shall be monthly. | |
| ● | COMPANY to facilitate the provision of all mooring equipment and charter of suitable deployment and recovery vessels in accordance with CONTRACTOR approved PB3 loadout and recovery procedures. Recovery and deployment of PB3 will be provided for at COMPANY expense and performed under the supervision and instruction of CONTRACTOR. Permits and authorisations required for deploying the PB3 shall be obtained and maintained by COMPANY | |
| ● | Sensor NRE costs more than $*** shall be invoiced at net documented cost. | |
| ● | All communication costs, Satcom, 4G shall be to COMPANY’s cost | |
| ● | All prices are exworks CONTRACTOR premises Monroe Township, New Jersey, USA, CONTRACTOR to arrange delivery based on INCOTERM 2010 DAP to COMPANY designated delivery port and back charge in advance to COMPANY. All costs associated with quayside activity, storage and staging, transportation ex Aberdeen shall be provided by COMPANY at COMPANY’s cost. | |
| ● | PB3 standard warranty applies during the Rental Period (one year parts, labour and expenses), thereafter prices as above, COMPANY to provide suitable recovery vessel and support services to and from PB3 WORKSITE. | |
| ● | Remote monitoring service – initial 3 month trial period, no charge. High intensity for initial 2 weeks after deployment, reducing gradually thereafter to basic cover after 1st month (2 hrs per day, plus monthly report of system performance, performance monitoring, alarm resolution, telephone support to COMPANY, periodic tuning of the PB3 for maximum power production). | |
| ● | Travel and Lodging shall be reimbursed at Cost +10% (copy of receipts to accompany invoice and travel expense claim) |
***This information has been omitted in reliance upon Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and has been filed separately with the Securities and Exchange Commission.
| Page | 21 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION IV
SCOPE OF WORK
| A | INTRODUCTION | |
| 1.0 | GENERAL | |
| 1.1 | The WORK shall be performed fully in accordance with the provisions of the CONTRACT as authorised by the relevant PURCHASE ORDER(s). | |
| 1.2 | CONTRACTOR shall, upon receipt of a PURCHASE ORDER, carry out the WORK as required and as described in this Section IV and in Section III.7. | |
| 1.3 | The CONTRACTOR warrants that it: | |
| (a) | Possesses the necessary skills, equipment, personnel and organisation to perform the WORK in a manner satisfactory to the COMPANY and has a verified competency assurance system in place. | |
| (b) | Will conduct all activities in connection with the WORK in full compliance with all relevant and prevailing statutory requirements, codes, standards, specifications and regulations as applicable to the WORK. | |
| (c) | Will conduct all activities in connection with the CONTRACT in full compliance with all of the COMPANY’s policies, procedures and guidelines which are now, or may in future become applicable to the CONTRACTOR’s performance of the WORK, in a manner that is ethical and of the highest integrity, and will not engage in any form of illegal information brokering. | |
| 1.4 | The CONTRACTOR shall ensure that it contacts the COMPANY REPRESENTATIVE to establish which of the COMPANY’s procedures apply to the WORK and to obtain an up-to-date copy of such procedures prior to the commencement of the WORK. It shall be the CONTRACTOR’s responsibility to thereafter ensure that the WORK is at all times performed, and that any items provided by the CONTRACTOR are, in accordance with the COMPANY’s procedures, specifications and statutory requirements. | |
| At the COMPANY’s sole discretion, the CONTRACTOR may be required to propose the CONTRACTOR’S own procedures or specifications for the COMPANY’s approval and, once approved, adhere to them for the execution of the WORK. | ||
| 1.5 | During the term of the CONTRACT, the primary responsibility of both the COMPANY and the CONTRACTOR is to ensure the safe execution of the WORK. The COMPANY and the CONTRACTOR shall ensure effective management of all safety and environmental issues. Priority shall be given to minimising risks and minimising the exposure of all personnel to risks. | |
| 1.6 | During the terms of the CONTRACT and as directed by the COMPANY, the CONTRACTOR REPRESENTATIVE shall have regular operational meetings with the COMPANY REPRESENTATIVE to discuss and provide details of the CONTRACTOR’s performance. | |
| 2.0 | PERSONNEL | |
| 2.1 | The CONTRACTOR will, in accordance with the provisions of this CONTRACT, provide the necessary number of competent and skilled personnel to manage and undertake the WORK, in accordance with good UKCS oil & gas field practice, all legislative requirements and the CONTRACT. | |
| Page | 22 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 2.2 | The CONTRACTOR shall provide all necessary management, administrative and technical support personnel, at the CONTRACTOR’s base, to fully support the WORK. |
| 2.3 | The CONTRACTOR GROUP’s personnel will be capable of troubleshooting and correcting equipment/tool problems and failures. In the event that any member of the CONTRACTOR GROUP’s personnel is unable to perform their duties adequately, or fails to have proper equipment available, the CONTRACTOR shall replace such personnel, or remedy the situation to the COMPANY’s satisfaction, at the sole expense of the CONTRACTOR within forty-eight (48) hours. |
| 2.4 | Due to the nature of its activities, the COMPANY expects the maximum flexibility in the CONTRACTOR’s provision of the WORK. The CONTRACTOR GROUP’s personnel shall be required to be flexible in working hours, working relationships and location. |
| 2.5 | CONTRACTOR maybe requested to provide dedicated personnel for the provision of the WORK. Reimbursement shall be charged at the rates contained within Section III – Reimbursement. |
| 2.6 | All of the COMPANY’s operations will be conducted in English and the CONTRACTOR must ensure all of the CONTRACTOR GROUP’s personnel are fluent in spoken and written English. The COMPANY reserves the right to reject any such personnel whose English is not of a sufficient standard. |
| 2.7 | All personnel changes proposed by the CONTRACTOR must be discussed between the PARTIES and shall only be completed with the prior written approval of the COMPANY. In addition, KEY PERSONNEL alterations shall be subject to a management of change process, which must be agreed by the COMPANY sufficiently in advance, of the commencement of such a change, so as to permit a mutually satisfactory handover, which shall be a period of not less than thirty (30) days, to transfer operational knowledge to the replacement personnel. Replacement personnel shall be of an acceptable standard with similar experience to that detailed in the original personnel’s CV. |
| 2.8 | The CONTRACTOR shall provide the COMPANY with a list of twenty-four (24) hour contact details such that KEY PERSONNEL can always be contacted to discuss forthcoming and ongoing operations. |
| 3.0 | EQUIPMENT |
| 3.1 | The CONTRACTOR shall ensure that all equipment sent to the WORKSITE shall comply with the applicable specifications, procedures and regulations applicable to the WORKSITE. |
| 3.2 | CONTRACTOR shall ensure that all equipment is provided with all necessary certification, data sheets, packaging and slings, where required. |
| 4.0 | SUBCONTRACTORS |
| 4.1 | The CONTRACTOR shall clearly identify areas of potential SUBCONTRACT involvement within the workscope and advise the COMPANY of proposed or potential SUBCONTRACTOR(S). |
| 5.0 | INTERFACING |
| 5.1 | Should the CONTRACTOR be required to interface and undertake co-ordination activities with other contractors as relevant to the WORK, the CONTRACTOR shall agree with the COMPANY REPRESENTATIVE, the frequency and format of any meetings and co-ordination matters necessary between the CONTRACTOR and other parties. |
| Page | 23 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| B | SCOPE OF WORK |
| 1.0 | GENERAL |
CONTRACTOR shall provide for use by COMPANY one PB3 PowerBuoy Intelligent Monitoring Buoy (PB3), and associated sensor / alert equipment and support monitoring services as directed by COMPANY REPRESENTATIVE. The technical specification for the PB3 is set forth in Exhibit 1 to this CONTRACT.
The WORK shall be performed fully in accordance with the provisions of the CONTRACT, as authorised by the relevant PURCHASE ORDER(s). CONTRACTOR shall, upon receipt of PURCHASE ORDER, carry out the WORK as required and as described in the aforesaid PURCHASE ORDER. As set forth in Exhibit 2, commencement of the Trial Period shall occur once the PB3 is delivered to COMPANY in Aberdeen and deemed fit for purpose as set forth in Exhibit I.
| 2.0 | DESCRIPTION OF THE WORK |
| 2.1 | Summary Description |
| 2.1.1 | The WORK shall include the project management, engineering, design, supply, procurement, expediting, manufacturing, fabrication, inspection, acceptance testing, packaging and support during well intervention and abandonment programmes. |
| 2.1.2 | The WORK shall also include the provision of labour, supervision, QA/QC, equipment, consumables, materials, procurement, services and other resources necessary for, or incidental to, the complete performance of the WORK. |
| 2.1.3 | CONTRACTOR shall provide equipment and tools as agreed and specified in Exhibit 1. All equipment supplied shall be deemed to include the supply of all back-ups, consumables, spares and ancillary equipment necessary for the WORK. |
| 2.1.4 | COMPANY shall maintain and operate its equipment in accordance with CONTRACTOR’s recommendations and in a safe and operationally efficient manner in accordance with the requirements and instructions issued from time to time by CONTRACTOR. |
| 2.2 | Rental Tools and Associated Equipment (NOT USED – SEE SECTION III.7 ABOVE) |
| 2.3 | Personnel |
| 2.3.1 | The CONTRACTOR will, in accordance with the provisions of this CONTRACT as authorised by any relevant PURCHASE ORDER, provide the necessary number of competent and skilled personnel to manage and undertake the WORK, in accordance with good UKCS oil & gas field practice, all legislative requirements and the CONTRACT. |
| 2.3.2 | The CONTRACTOR shall provide all necessary management, administrative and technical support personnel, at the CONTRACTOR’s base, to fully support the WORK. |
| 2.3.3 | The CONTRACTOR GROUP’s personnel will be capable of troubleshooting and correcting equipment/tool problems and failures. In the event that any member of the CONTRACTOR GROUP’s personnel is unable to perform their duties adequately, or fails to have proper equipment available, the CONTRACTOR shall replace such personnel, or remedy the situation to the COMPANY’s satisfaction, at the sole expense of the CONTRACTOR within forty-eight (48) hours. |
| Page | 24 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 2.3.4 | Due to the nature of its activities, the COMPANY expects the maximum flexibility in the CONTRACTOR’s provision of the WORK. The CONTRACTOR GROUP’s personnel shall be required to be flexible in working hours, working relationships and location. |
| 2.3.5 | CONTRACTOR shall guarantee performance of the WORK on a 24 hour, 365 day basis. |
| 2.3.6 | CONTRACTOR maybe requested to provide dedicated personnel for the provision of the WORK. Reimbursement shall be charged at the rates contained within Section III – Reimbursement. |
| 2.3.7 | All of the COMPANY’s operations will be conducted in English and the CONTRACTOR must ensure all of the CONTRACTOR GROUP’s personnel are fluent in spoken and written English. The COMPANY reserves the right to reject any such personnel whose English is not of a sufficient standard. |
| 2.3.8 | CONTRACTOR shall supply personnel to undertake both onshore and offshore Services. CONTRACTOR shall be responsible for ensuring that its personnel are fully equipped, at CONTRACTOR’s cost, with suitable protective clothing. |
| 2.3.9 | All personnel changes proposed by the CONTRACTOR must be discussed between the Parties and shall only be completed with the prior written approval of the COMPANY. Replacement personnel shall be of an acceptable standard with similar experience to that detailed in the original personnel’s CV. |
| 2.3.10 | The CONTRACTOR shall provide the COMPANY with a list of twenty-four (24) hour contact details such that KEY PERSONNEL can always be contacted to discuss forthcoming and ongoing operations. |
| 2.4 | Equipment |
| 2.4.1 | The CONTRACTOR shall ensure that all equipment sent to the WORKSITE shall comply with the applicable specifications, procedures and regulations applicable to the WORKSITE. |
| 2.4.2 | CONTRACTOR shall ensure that all equipment is provided with all necessary certification, data sheets, packaging and slings. |
| 2.5 | Subcontractors |
| 2.5.1 | CONTRACTOR shall clearly identify areas of potential SUBCONTRACT involvement within the WORK and advise the COMPANY of proposed or potential SUBCONTRACTOR(S). |
| 3.0 | INTERFACING |
| 3.1 | Should the CONTRACTOR be required to interface and undertake co-ordination activities with other Contractors as relevant to the WORK, the CONTRACTOR shall agree with the COMPANY REPRESENTATIVE, the frequency and format of any meetings and co-ordination matters necessary between the CONTRACTOR and other parties. |
| 4.0 | COMPANY AND CONTRACTOR INTERACTION |
| 4.1 | The COMPANY will monitor the CONTRACTOR’s activities relative to quality, value of WORK completed and schedule requirements and in compliance with the CONTRACT. This will be carried out by utilising the COMPANY personnel who will be responsible for the safeguarding of the COMPANY’s interests. |
| Page | 25 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| (a) | Monitor the WORK of the CONTRACTOR GROUP; | |
| (b) | Review selected engineering documentation, requisitions, calculations, manuals, etc., issued for review at various stages of the design; | |
| (c) | Review VARIATION Proposals submitted by the CONTRACTOR for approval; and | |
| (d) | Establish regular meetings with the CONTRACTOR to discuss and evaluate progress of the WORK and other items relevant to the CONTRACT. | |
| 4.2 | Regular meetings shall be held between the COMPANY and the CONTRACTOR as agreed with CONTRACTOR REPRESENTATIVE and COMPANY REPRESENTATIVE. | |
| 4.3 | When meetings are confirmed, the agreed agenda shall be issued to all parties concerned. | |
| Both the COMPANY and the CONTRACTOR shall ensure, in accordance with their respective responsibilities that reports, documentation and forward planning information relating to agenda items are issued in sufficient time to allow adequate preparatory study and evaluation, as agreed between the COMPANY and the CONTRACTOR. | ||
| 4.4 | CONTRACTOR shall be responsible for preparing minutes of every meeting whenever any meeting is held. The CONTRACT title, meeting location, date, time and a list of those present must be included at the head of the minutes. | |
| All actions defined at the meeting must be numbered and those responsible for undertaking the action highlighted and submitted to COMPANY REPRESENTATIVE within forty-eight (48) hours of completion of the meeting. | ||
| 5.0 | DOCUMENTATION MANAGEMENT | |
| 5.1 | CONTRACTOR shall ensure that all necessary and contemporary legal records are maintained and are available for inspection at all times. | |
| 5.2 | Documentation including vendor instruction manual, technical bulletins and other amendments issued by vendors, inspection reports, certification and technical reports, shall be provided by the CONTRACTOR in hard copy and uploaded into COMPANY’s electronic database by the CONTRACTOR. CONTRACTOR shall collate the foregoing documentation for all existing equipment and update the documentation for all new equipment. | |
| 6.0 | PLANS, PROGRAMME & SCHEDULE | |
| 6.1 | The CONTRACTOR shall commence performance of the WORK in accordance with the schedule set forth in Exhibit 2 and shall proceed with the same with all due diligence, so as to achieve the completion of the WORK on or before the specified completion date. | |
| 6.2 | The CONTRACTOR shall at all times afford the WORK the highest priority and shall not assign to any other work a priority which affect or interferes with the due and timely performance of the WORK in accordance with the agreed programme. | |
| 6.3 | Where applicable to the WORK, the CONTRACTOR shall develop a Risk Identification Analysis which identifies typical risks associated with its WORK, covering: project management, procurement and associated QA/QC phases along with technical and Health Safety and Environmental issues. | |
| Page | 26 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 6.4 | If at any time during the course of its performance of the WORK, the CONTRACTOR for any reason believes that the WORK or any part thereof cannot be completed in accordance with the programme, the CONTRACTOR shall promptly notify the COMPANY in writing of such possible delay and specify the following: | |
| (a) | Cause of the delay; | |
| (b) | Effect on the agreed programme; and | |
| (c) | Remedial action considered appropriate | |
| 6.5 | If in the opinion of the COMPANY, the CONTRACTOR’s progress is inadequate or the CONTRACTOR fails to comply with the agreed programme then the COMPANY shall notify the CONTRACTOR of such inadequacy in writing and the CONTRACTOR shall, at no additional expense to the COMPANY, immediately take such action as the COMPANY considers necessary to comply with the requirements of the agreed programme. | |
| 6.6 | CONTRACTOR shall provide the necessary resources and services to effectively manage all aspects of the WORK associated with the CONTRACT. The WORK shall be completed in accordance with CONTRACTOR’s established quality assurance procedures and systems. | |
| 6.7 | CONTRACTOR shall ensure that all aspects of the WORK are in compliance with UK statutory requirements and current health and safety legislation and shall ensure that all equipment provided (whether purchased or rented) is of sound quality and complies with recognised industry standards and codes. | |
| 6.8 | CONTRACTOR shall endorse COMPANY supplied documents to the effect that they are sufficient and adequate in content and correctness for the CONTRACTOR to carry out the WORK in accordance with terms and conditions of the CONTRACT and agreed delivery schedule. CONTRACTOR shall report to COMPANY any discrepancies in such technical documents discovered during its review of same in accordance with the CONTRACT. Conflicts between specifications, codes, standards and drawings shall be resolved by COMPANY whose decision shall be final and binding on both parties. | |
| 6.9 | The CONTRACTOR shall provide, maintain and be responsible for the management and control of all resources and SUBCONTRACTORs which are involved in all aspects of the WORK. The CONTRACTOR shall co-ordinate and interface with COMPANY in the performance of the WORK. COMPANY shall have reasonable access to any place where the WORK is undertaken, and shall have open and unrestricted communication with any of CONTRACTOR’s personnel. | |
| 6.10 | CONTRACTOR shall ensure that the proposed management structure demonstrates a full commitment to maintaining and administering the quality and safety of the WORK. As a minimum, the CONTRACTOR shall be responsible for the following: | |
| ● | Putting in place all insurances required in the name of the CONTRACTOR; | |
| ● | Planning and progress control; | |
| ● | Cost and invoicing control; | |
| ● | Design and interface engineering; | |
| ● | Change control; | |
| ● | Procurement of CONTRACTOR materials and equipment; | |
| ● | Award and administration of SUBCONTRACTS; | |
| ● | Material Control; | |
| ● | HSEQ management; | |
| ● | Reporting. | |
| Page | 27 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 7.0 | MANAGEMENT |
| 7.1 | It is the intent of the CONTRACT that the WORK will be executed to the mutual satisfaction of both parties, at the highest level of safety and execution performance for the lowest possible cost and in a timely manner, commensurate with excellence in quality standards. CONTRACTOR’s overall management of the services shall be proactive in seeking innovative, efficient working methods and approaches to problems and issues that arise. |
| 7.2 | CONTRACTOR will provide sufficient management resource such that the programmes of work are organised, planned and effectively co-ordinated with all other site activities to ensure efficient implementation. |
| 7.3 | CONTRACTOR shall be required to maintain an environment that supports quantifiable and measurable continuous performance improvement. CONTRACTOR shall provide adequate management support to achieve the objectives with the CONTRACTOR’s REPRESENTATIVE, being given overall responsibility, authority and accountability within the CONTRACTOR’s organisation for the success of the CONTRACT and for the interface with the COMPANY REPRESENTATIVE. |
| 8.0 | CALL-OFF SERVICES (NOT USED) |
| Page | 28 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION V
ADMINISTRATION INSTRUCTIONS
| Page | 29 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION V - ADMINISTRATION INSTRUCTIONS
| 1.0 | Introduction |
This Section sets out certain WORK related ‘General Administration’ which shall be adopted by the CONTRACTOR in the performance of the WORK under this CONTRACT.
All communications between the Parties shall include a reference to the CONTRACT number, and/or associated PURCHASE ORDER.
| 2.0 | Invoice Management / Instructions |
All invoices submitted by the CONTRACTOR must be on a strict monthly basis, and in a structured manner, which can be easily monitored against forecast expenditure. In instances where the CONTRACTOR is supplying materials and/or services to one or more of the WORKSITES separate invoices should be submitted for each location.
The CONTRACTOR shall submit 1 (one) original sales invoice to the following address and contact person for payment:
By email to: aberdeen-accounts@premier-oil.com
(Please note all invoices should be single attachments and the total size of the email, including the attachments, should be no greater than 12mb or the email maybe rejected due to size)
All invoices must contain the following information :-
| ● | Contract Number – POUK C2394 | |
| ● | Platform (Location / Asset) – e.g. Huntington or as detailed within the PURCHASE ORDER – will always be uniquely numbered | |
| ● | Cost centres / Account codes: Shall be detailed in the relevant PURCHASE ORDER |
Failure to incorporate this information on the invoice may lead to the invoice being returned to CONTRACTOR
CONTRACTOR shall ensure that all necessary back up is attached to invoices to enable ease of checking. In particular, good quality copies of the following shall be attached (as applicable):
| ● | Cargo Summary Ticket(s); | |
| ● | CONTRACTOR Outbound Manifest(s), Receipt and Delivery Ticket(s); | |
| ● | CONTRACTOR Inward Manifest(s), Consignment Note(s); | |
| ● | Authorised Timesheets by COMPANY REPRESENTATIVE or designated COMPANY personnel; and | |
| ● | Work Instruction(s). |
CONTRACTOR may only invoice for completed WORK following receipt and retention of duly executed original PURCHASE ORDER
| Page | 30 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 3.0 | Purchase Order Mechanism | |
| 3.1 | COMPANY shall issue a unique PURCHASE ORDER number for each individual WORK requirement to be undertaken by the CONTRACTOR under the CONTRACT. Prior to the PURCHASE ORDER being issued the following procedure shall be complied with by the parties: | |
| (a) | COMPANY shall submit to the CONTRACTOR a written scope of requirements. | |
| (b) | CONTRACTOR shall, on receipt of the written scope of requirements submit to the COMPANY electronically, a uniquely referenced quotation submission detailing the method, resources and price for completing the WORK, in accordance with Section III, Remuneration. In the event that revisions are required to the original or to any subsequent quotations issued by the CONTRACTOR, the CONTRACTOR shall give each revision a unique reference. | |
| (c) | On the receipt of the final version of the quotation from the CONTRACTOR, COMPANY shall issue a PURCHASE ORDER to the CONTRACTOR containing CONTRACTOR’s unique reference for the WORK and the PURCHASE ORDER number. This is the PURCHASE ORDER upon which the CONTRACTOR shall commence the WORK (refer to the sample format provided in Attachment 1). The PURCHASE ORDER shall also contain the information detailed in Clause 2.0 above. | |
| 3.2 | Notwithstanding 3.1 above, in the event that the COMPANY requests by way of a telephone call to the CONTRACTOR that the CONTRACTOR undertakes WORK under the CONTRACT, the CONTRACTOR shall, as soon as practicable thereafter, send a written electronic notification to the COMPANY specifying the CONTRACT and PURCHASE ORDER Number, the WORK to be performed, the schedule and cost. This form of commitment mechanism shall constitute a PURCHASE ORDER. | |
| 3.3 | Written acknowledgment of the PURCHASE ORDER by the CONTRACTOR or commencement by the CONTRACTOR of any part of the WORK described therein shall be deemed to be acceptance of the PURCHASE ORDER and the terms and conditions of this CONTRACT. | |
| 3.4 | In the event of any member of the CONTRACTOR GROUP and/or any equipment owned, hired, leased or otherwise belonging to any member of the CONTRACTOR GROUP being mobilised to a COMPANY OFFSHORE FACILITY to undertake WORK on behalf of the COMPANY in circumstances where no PURCHASE ORDER has been entered into by the parties, but the provisions of 3.2 above have been applied, then the terms and conditions of this CONTRACT shall apply in their entirety to such a mobilisation and/or WORK. | |
| 3.5 | COMPANY has no obligation towards CONTRACTOR in connection with the CONTRACT until such time as a PURCHASE ORDER is issued. COMPANY gives no guarantee of any WORK being generated as a result of a CONTRACT being entered into between COMPANY and CONTRACTOR. | |
| 4.0 | Interfacing (Not Used) | |
Should the CONTRACTOR be required to interface and undertake co-ordination activities with other contractors as relevant to the WORK as detailed in Section IV – Scope of WORK, the CONTRACTOR shall agree with COMPANY REPRESENTATIVE, the frequency and format of any meetings and co-ordination matters necessary between the CONTRACTOR and other parties.
| Page | 31 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
Recognise and insert where applicable Key Personnel
CONTRACTOR’s Key Personnel are identified as follows: -
| Name | Discipline | |
| Chris Phebus | Vice President, Engineering | |
| Chris Bukosky | Senior Director, Operations | |
| Hizykas Dufera | Program Manager |
Support personnel of CONTRACTOR will be provided on an as required basis
CONTRACTOR shall not change out Key Personnel without the prior agreement of COMPANY.
| 5.0 | Materials / Services Control |
All materials and equipment procured for this CONTRACT shall be rigorously controlled and reported by the CONTRACTOR to the COMPANY.
| 6.0 | Reporting |
Reporting requirements, specific formats and frequencies will be stipulated and agreed with the COMPANY REPRESENTATIVE and incorporated in Section IV – Scope of Work.
| 7.0 | Company Change Control / Variation Procedures |
The COMPANY and the CONTRACTOR shall operate a Change Control / Variation Notice Procedure whereby changes to the WORK should be formally submitted by the CONTRACTOR, reviewed and approved by the COMPANY prior to any such change to the WORK being implemented. The impact on the overall cost to the COMPANY should be determined and projected.
Each request for a Change / Variation Order Request (VOR) to the relevant PURCHASE ORDER should be submitted to the COMPANY containing the following details:-
Potential Variation Order – Supporting Documentation
| ● | Description | |
| ● | Justification | |
| ● | Unit Cost & Schedule Impact | |
| ● | Schedule |
| Page | 32 |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION V
ATTACHMENT 1
PURCHASE ORDER EXAMPLE
1.0 GENERAL
COMPANY will raise a PURCHASE ORDER for WORK provided under this Scope of Work, and CONTRACTOR shall perform the Work as described in the relevant Purchase Order. Each PURCHASE ORDER shall reference the CONTRACT and be allocated a specific PURCHASE ORDER number. The PURCHASE ORDER number shall be quoted on all correspondence regarding each individual PURCHASE ORDER. Consistent with the CONTRACT, the PURCHASE ORDER shall describe requirements for CONTRACTOR’S personnel, rental equipment together with the applicable rates and/or prices, scope of work and any other relevant details.
Prior to the issue of a PURCHASE ORDER, CONTRACTOR shall liaise with COMPANY to provide estimated costs for the services. Consistent with the CONTRACT, the COMPANY has the right to issue instructions to the CONTRACTOR at any time to make any variations to the PURCHASE ORDER, or issue a new PURCHASE ORDER, which are within the capability and resources of the CONTRACTOR.
COMPANY has no obligation towards CONTRACTOR in connection with the CONTRACT until such time as a PURCHASE ORDER is issued. COMPANY gives no guarantee of any Work being generated as a result of a CONTRACT being entered into between COMPANY and CONTRACTOR. A signed PURCHASE ORDER however is binding on both parties.
COMPANY’S pro-forma PURCHASE ORDER is as shown herein.
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION VI
HEALTH, SAFETY, SECURITY, ENVIRONMENTAL PROTECTION
and QUALITY MANAGEMENT
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
HEALTH SAFETY AND ENVIRONMENTAL
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION VI - HEALTH SAFETY AND ENVIRONMENTAL
| 1.0 | Safe and Environmentally Responsible Performance of THE WORK |
| 1.1 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall perform the WORK in a manner that minimises the risks to the environment, and the health and safety of the CONTRACTOR GROUP’s personnel and all others who may be affected by the CONTRACTOR GROUP’s acts and/or omissions. |
| 1.2 | Prior to commencement of the WORK, the CONTRACTOR shall provide the COMPANY with a statement on the Health, Safety and Environmental (HSE) policy of the CONTRACTOR. The CONTRACTOR shall notify the COMPANY of any revision or amendment issued to the CONTRACTOR’s HSE policy which is made during the term of the CONTRACT. The CONTRACTOR shall also have established arrangements for monitoring this policy. |
| 1.3 | The CONTRACTOR shall incorporate HSE safety expectations into the business planning process and shall maintain an organisation capable of delivering the required safety performance, the organisation shall define: |
| ● | Roles, responsibilities, relationships and reporting lines; | |
| ● | Field personnel with designated responsibilities; | |
| ● | Support available from the corporate organisation; | |
| ● | A system of enabling all personnel to participate in safety matters; and | |
| ● | Arrangements for the communication of policy. |
| 1.4 | The CONTRACTOR must have in place and be actively using a formal HSE Management System which demonstrates commitment to continuous improvement and excellence in HSE issues. The internationally recognised OHSAS 18001, and ISO 14001 Standards shall be used as guidance for what constitutes an effective process for overall HSE management. |
| 1.5 | The CONTRACTOR’s HSE Management System shall be adequately documented, shall be shown to be effective in implementing the aims and objectives of the CONTRACTOR’s HSE policy and shall include the method and provisions for auditing the effectiveness of the CONTRACTOR’s HSE Management System as applied to the WORK. |
| 1.6 | The CONTRACTOR and its SUBCONTRACTORS shall review their HSE Management System at least annually and update it as necessary. |
| 1.7 | The CONTRACTOR’s HSE Management System shall, where relevant interfaces exist, be compatible with the COMPANY’s HSE Management System. The CONTRACTOR shall liaise with the COMPANY REPRESENTATIVE to ensure that the roles and responsibilities in both systems are clearly defined and allocated and are clearly understood by all parties involved in the WORK. |
| 1.8 | Within the framework of its HSE Management System, the CONTRACTOR shall perform the WORK to HSE performance standards which are compatible with those in the COMPANY’s HSE Management System. |
| 1.9 | Where appropriate, the interfaces between the CONTRACTOR and the COMPANY shall be documented in the form of an HSE Management System (“HSEMS”) Interface Document which shall be deemed to be part of the CONTRACT which must be delivered within thirty (30) days of the date of execution of the CONTRACT. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
The CONTRACTOR shall, if required in relation to the WORK, also deliver to the COMPANY an adequate written safety plan (HSE Plan). CONTRACTOR shall ensure that the HSEMS Interface Document and HSE Plan is implemented and maintained throughout the duration of the CONTRACT. CONTRACTOR shall review the HSEMS Interface Document and HSE Plan at appropriate intervals, on the written request of the COMPANY or, as a minimum, on an annual basis every twenty-four (24) months and revise the same as necessary.
The HSEMS Interface Document shall incorporate any specific requirements relevant to the WORK and take account of ‘Step Change’ and Oil & Gas UK Guidelines on Safety Management System interfacing. CONTRACTOR shall be responsible for ensuring that interface arrangements are communicated to the CONTRACTOR GROUP’s workforce and for monitoring the implementation of such arrangements.
| 1.10 | The CONTRACTOR shall be responsible for ensuring that the CONTRACTOR GROUP and their respective personnel understand and operate in accordance with the principles and requirements of the HSE provisions and that similar standards apply to their HS&E management systems and HS&E performance. |
| 1.11 | If requested by the COMPANY, the CONTRACTOR shall, as a minimum, prepare, on an annual basis, a plan for the management of all aspects of the WORK, known as the “HSE Plan”. The HSE Plan shall address the requirements of these HSE provisions, including the requirements of the HSE Management System and the Safety Management System (SMS) Interface Document (where appropriate). |
CONTRACTOR shall make certain, and shall procure that the CONTRACTOR GROUP ensures, that all necessary SMS Interface Documentation is in place in relation to any and all WORK undertaken.
The HSE Plan shall be submitted to the COMPANY REPRESENTATIVE for review and endorsement within a timeframe as agreed with the COMPANY REPRESENTATIVE.
| 1.12 | The CONTRACTOR shall develop and agree with the COMPANY REPRESENTATIVE, performance measures to give visibility that the HSE Plan is being implemented. |
| 1.13 | The HSE Plan shall form part of the CONTRACT. It shall be reviewed at least annually and updated as necessary to incorporate any changes to the WORK and/or the CONTRACT. |
| 1.14 | The HSE Plan shall address identification of HSE risks associated with the WORK and definition of methods of controlling those risks to an acceptable level. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 2.0 | Compliance |
| 2.1 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall observe and comply with all relevant and current statutory requirements, approved codes of practice and industry guidance on HSE matters as well as ensure that compliance is maintained in relation to both COMPANY and CONTRACTOR’s HSE Management System and expectations. |
| 2.2 | The CONTRACTOR shall ensure that all personnel provided by the CONTRACTOR GROUP comply with all relevant HSE legislation and guidance and that they are: |
| (a) | fully conversant with the working conditions at the WORKSITE, the hazards and risks associated with the WORK and the roles and standards relating to the environment including the handling of waste and hazardous materials; | |
| (b) | fully aware that they are expected to bring to the immediate notice of their supervisor all health, safety and environmental risks which they believe not to be under adequate control, so that action may be taken to eliminate or minimize environmental impacts, prevent potential injuries or other losses, and provide a safe and healthy WORKSITE; | |
| (c) | familiar with all other safety and working instructions applicable at the WORKSITE and in particular the COMPANY’s work control system; and | |
| (d) | available at all times for periodic drills, instructions on survival, lifesaving, firefighting, and spill response as requested and conducted by the COMPANY and shall, prior to or on the day of arrival offshore, attend an HSE induction course conducted by the COMPANY. |
| 2.3 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall observe and comply with all relevant and current COMPANY standards and expectations on HSE matters. |
| 2.4 | If, in the opinion of the COMPANY REPRESENTATIVE, the CONTRACTOR and/or a member of the CONTRACTOR GROUP is working in a manner which contravenes any requirement of these HSE provisions, the COMPANY shall serve notice on the CONTRACTOR to this effect and the CONTRACTOR shall immediately take action to rectify the situation. |
| 2.5 | Notwithstanding CONTRACTOR’s general responsibility for the safe and environmentally responsible conduct of its operations, where COMPANY has notified CONTRACTOR of any specific HSE requirements relating to the CONTRACT, CONTRACTOR shall ensure compliance with such requirements. |
| 2.6 | In the event of conflict between the HSE standards of COMPANY and CONTRACTOR, such conflict shall be notified by CONTRACTOR as soon as possible and a resolution sought that does not compromise the safety of COMPANY operations. |
| 2.7 | All chemicals, issued under permits, shall be fully approved by the Department of Energy and Climate Change (DECC) and shall be fully documented on current Centre for Environment, Fisheries and Aquaculture Science (CEFAS) lists. |
| 2.8 | In accordance with the Offshore Chemical Regulations 2002, CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall make all reasonable efforts to replace products with “Substitution Warnings” and products which generate a high Risk Quotient (RQ) on charm modelling with new products showing better environmental performance. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 2.9 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall provide advice and assistance in the preparation of Drilling Operators Chemical and / or Oil Discharge Permit applications including estimated chemical usage and discharge, and current templates to CEFAS. |
| 2.10 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall maintain complete DECC / Oil & Gas UK environmental emissions monitoring records for submission. |
| 2.11 | The CONTRACTOR shall provide multiple copies of a comprehensive manual of all the relevant safety and environmental data for all chemicals and products which shall be shipped to, and used on any WORKSITE. Copies of this manual shall be distributed to the COMPANY. |
| 2.12 | Where the COMPANY has a Prevention of Pollution Act (POPA) Exemption in place for the limited discharge of oil to the environment (e.g. well clean up), the CONTRACTOR shall assist by sampling and testing offshore and onshore to meet the schedule of requirements as laid out in the POPA Exemption. |
| 2.13 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall comply with any future regulatory changes that may be introduced during the CONTRACT period. |
| 3.0 | HSE AWARENESS |
| 3.1 | CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall ensure that its and their personnel understand HSE arrangements pertaining to the CONTRACT, and are aware of any specific risks associated with the WORK and how such risks are to be managed. |
Risk Management
| 3.2 | Without prejudice to the foregoing generalities, the CONTRACTOR GROUP’s HSE Management System shall:- |
| (a) | require an assessment of all identifiable HSE hazards and risks associated with the WORK to be submitted to the COMPANY and shall indicate the proposed method of controlling those risks to an acceptable level; | |
| (b) | include measurable and realistic targets for HSE performance, covering, but not necessarily limited to: |
| ● | the frequency of injuries; | |
| ● | the frequency of chemical and oil spills; | |
| ● | the number of statutorily reportable events; and | |
| ● | predetermined targets for environmental emissions and waste production | |
| ● | as appropriate to the WORK; |
| (c) | include a follow-up system to ensure that all remedial actions identified by reviews and investigations are closed out, including accidents, incidents and HSE audits; | |
| (d) | incorporate measures which demonstrate that all personnel provided by the CONTRACTOR GROUP are physically/medically fit at all times to perform their tasks; |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| (e) | incorporate measures which demonstrate that, in the performance of the WORK, personnel provided by the CONTRACTOR GROUP are not under the influence of drugs or alcohol (see Item 5, herein); and | |
| (f) | demonstrate that the system for the pre-qualification and selection of SUBCONTRACTORS ensures the compatibility and effectiveness of the SUBCONTRACTOR’s own HSE Management Systems. |
| 3.3 | Certain activities pose a higher risk to the safety of personnel, property and the environment. Higher risk activities will accordingly demand a higher level of HSE management from the CONTRACTOR. Where the use of a SUBCONTRACTOR involves the importation of higher risk activity, the CONTRACTOR shall ensure and demonstrate the appropriate level of HSE management. |
| 3.4 | In order to adequately minimise and manage HSE Risk the CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall have in place and be actively using a formal HSE management system which demonstrates commitment to continuous improvement and excellence in HSE issues. |
Risk can vary from one WORKSITE to another and, where the WORK is being provided at more than one WORKSITE, the CONTRACTOR may be required to provide different levels of HSE management at each WORKSITE.
Environmental Risk Management
| 3.5 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall co-operate with COMPANY in managing the environmental effects arising from operations. |
| 3.6 | The CONTRACTOR shall ensure that in the performance of the WORK, action is taken to eliminate or minimise adverse environmental effects associating with the CONTRACTOR GROUP’s activities. |
| 3.7 | The CONTRACTOR GROUP shall act to prevent the uncontrolled and unpermitted release of pollutants in the execution of the WORK. |
| 3.8 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall ensure that waste arising from, or associated with its activities, is properly managed by observing COMPANY and site-specific Waste Management arrangements. |
| 3.9 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall ensure that all routine and non-routine emissions and discharges are reported to the COMPANY. |
| 3.10 | The CONTRACTOR is required to operate within the principles of an internationally recognised standard for an environmental management system (e.g. ISO 14001). |
| 3.11 | The CONTRACTOR shall be required to implement an Environmental Management System (EMS) which may form part of an integrated and/or combined HSE Management System. |
| 3.12 | The CONTRACTOR shall ensure that the following environmental objectives for the WORK are achieved: |
| ● | all WORK shall comply with all applicable government regulations, statutes and permitting requirements; | |
| ● | the WORK is performed in a manner consistent and compatible with COMPANY policies and business objectives; |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| ● | all marine vessels comply with the relevant annexes of International Convention for the Prevention of Pollution from Ships (MARPOL) and any additional requirements of the local Port Authorities where docking/unloading takes place; and | |
| ● | wastes are eliminated where possible, minimised at source, and reuse maximised. Disposal is controlled in accordance with duty of care principles and records maintained for legal and audit purposes. |
| 3.13 | The CONTRACTOR shall consider its significant environmental aspects in the design, development or change of its products and services and provide on request information about potential significant environmental impacts during the delivery of the goods or services and during use and end of life treatment of the product, as appropriate. The CONTRACTOR shall make best endeavours, where practicable, to reduce the environmental impact over the whole lifecycle of its products. |
Applicable Operational Conditions
| ● | Environmental Issues and Pollution |
| » | Prior to commencement of the WORK, CONTRACTOR shall provide documentary evidence that: |
| ● | all recycling, re-use and disposal routes for the products of the process are acceptable to the relevant local authority and the Scottish Environmental Protection Agency (SEPA); | |
| ● | all carriers are licensed waste carriers, registered in accordance with the appropriate legislation and that the appropriate documentation accompanies the consignment at all times; | |
| ● | the contaminated drill cuttings are fully characterised prior to and after treatment; and | |
| ● | appropriate waste documentation is retained by the CONTRACTOR for the statutory period. |
| » | On an ongoing basis during the provision of the WORK, as evidenced by sampling, CONTRACTOR shall provide documentary evidence that all residue from the process destined for landfill disposal conforms with the relevant local authority and SEPA requirements. CONTRACTOR acknowledges that COMPANY’s environmental policy stipulates a preference for products of any cuttings treatment process to be recovered and re-used (as opposed to landfill disposal). | |
| » | From the time that the unprocessed cuttings have been consigned to CONTRACTOR, CONTRACTOR shall: |
| ● | own and shall be responsible for the safe and secure handling, transport, processing and storage of waste; | |
| ● | be responsible for safe and secure handling, transport, processing and storage of recovered oil; and | |
| ● | be responsible for the clean-up of any spills, emissions or pollution arising therefrom in accordance with the CONTRACT. |
| » | For the avoidance of doubt, CONTRACTOR shall not own recovered oil unless CONTRACTOR and COMPANY agree otherwise in writing. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| ● | Recovered Products |
| » | CONTRACTOR shall be responsible for recycling, re-use or disposing of the recovered products from the cuttings treatment process (oil, water and solids). | |
| » | COMPANY may at its sole option elect to retain the recovered oil at no cost to COMPANY. In this event CONTRACTOR shall store the recovered oil until COMPANY requests that it be returned to COMPANY. Any transportation required for returning the recovered oil to COMPANY shall be for COMPANY’s account. | |
| » | Should COMPANY not exercise this option, the CONTRACTOR may, with COMPANY’s approval seek to sell it to an appropriate third party, or dispose of it as waste oil. | |
| » | Prior to the commencement of the WORK, CONTRACTOR shall submit a detailed disposal plan for all recovered products (oil, water and solids) to COMPANY for approval. COMPANY reserves the right to reject this plan in whole or in part, in which case CONTRACTOR shall be requested to propose alternative recycling, re-use or disposal routes for COMPANY’s approval. | |
| » | Once the disposal plan has been mutually agreed between COMPANY and CONTRACTOR, under no circumstances shall CONTRACTOR divert from this plan without COMPANY’s prior approval in writing. All recycling, re-use or disposal routes shall require to be fully auditable, and COMPANY reserves the right to audit CONTRACTOR at any time. | |
| » | COMPANY shall notify CONTRACTOR of its intentions regarding the retention of recovered oil in writing. | |
| » | Where COMPANY elects to retain ownership of the recovered oil, it shall be CONTRACTOR’s responsibility to collect, label and retain representative samples of oil from each batch of cuttings processed for quality control purposes. On COMPANY’s request, these samples shall be forwarded to COMPANY’s designated laboratory as appropriate for testing. In addition the CONTRACTOR will cooperate fully with the COMPANY to ensure regulatory requirements for removing the recovered oil from the waste chain and enabling its re-use are met. |
Health Risk Management
| 3.14 | Health Impact Assessment (HIA), Health Risk Assessment (HRA) and Health Risk Management are essential to ensure that personal, occupational and environmental health risks are managed properly. |
The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall implement specific health management measures for all aspects of the WORK. This shall be defined in the CONTRACTOR HSE Plan and shall include:
| ● | Clear health standards; | |
| ● | Compliance with all applicable laws and regulations; or standards where laws and regulations do not exist; regarding safe handling of toxic materials and hazardous chemicals and all other construction work practices; | |
| ● | Identification of health hazards through risk assessments; | |
| ● | Provision for health, sanitations catering and medical facilities for the personnel at each WORKSITE; and | |
| ● | A fitness for work programme to confirm that personnel are capable of performing WORK without undue risk to themselves or others. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 3.15 | The COMPANY is committed to providing a safe and healthy working environment for all personnel, visitors and third parties impacted by its operations. This includes an environment free from the hazards caused by the abuse of substances including, without limitation, alcohol. The policy equally applies in all aspects to both onshore and offshore personnel both of the COMPANY, CONTRACTOR GROUP, and any other contractors at all WORKSITES. CONTRACTOR GROUP shall comply with requirements of the policy currently in force which is referenced in Item 5, herein. |
Design Risk Management
| 3.16 | Excellence in design safety is an engineering responsibility and is best achieved through design hazard management, which is a process involving major hazard identification, evaluation and continuous risk reduction through design safety measures. Design hazard management is underpinned by five engineering activities: |
| ● | Inherently safer design; | |
| ● | Safety critical, and environmentally critical design measures; | |
| ● | Performance standards; | |
| ● | Safety study programme (including Human Factors), and | |
| ● | ALARP demonstration. |
Managing hazards in design involves eliminating or minimising major accident hazards at the source and preventing those that remain from becoming major accidents. It also involves the provision of sufficient design integrity to control the consequences of a major accident to reduce severity and potential adjustment, while providing mitigation and protection for personnel and key facilities from the effects (e.g. heat, smoke, gas, toxic fumes etc.).
The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall apply the above design safety principles to all design activities related to the WORK and where appropriate refer to the COMPANY’s “Technical Integrity Performance Standards” as a guide in the management of technical integrity as relevant to the WORK.
Safety Risk Management
| 3.17 | The CONTRACTOR shall, at its own expense, provide its personnel with all necessary protective clothing and equipment suitable for the working conditions. For duty offshore, such clothing/equipment shall be in accordance with the COMPANY standard requirements. |
| 3.18 | The CONTRACTOR shall ensure that CONTRACTOR GROUP’s Personnel are equipped with and make proper use of suitable personal protective clothing and equipment for the WORK being undertaken and that such protective clothing and equipment is maintained in good condition at all times. |
| 3.19 | The CONTRACTOR shall ensure that arrangements are in place for the repair and/or replacement of personal protective equipment. |
| 3.20 | When located at a WORKSITE owned, operated or controlled by the COMPANY, all personnel provided by the CONTRACTOR shall comply with all current and relevant COMPANY HSE Practices as they relate to the WORK. At other WORKSITES, the CONTRACTOR and the COMPANY shall agree which HSE Practices are appropriate to the WORK and this will be addressed in the HSE Interface Document. Where necessary and appropriate, the CONTRACTOR shall seek advice from the COMPANY on the interpretation of the COMPANY’s HSE Practices. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 3.21 | The CONTRACTOR shall observe and comply and shall ensure that the CONTRACTOR GROUP observes, and complies with the COMPANY’s procedures with regard to the selection, deployment, operation and maintenance of equipment offshore. For the purposes of this Section V- Health, Safety and Environment, equipment shall mean, without limitation, all portable or transportable plant, tools, offices, workshops etc. provided by the CONTRACTOR GROUP. |
| 3.22 | The CONTRACTOR is responsible for ensuring that all equipment is operated in accordance with safe working practices. |
| 3.23 | The location of equipment at an offshore WORKSITE shall be agreed in advance by the CONTRACTOR with the COMPANY REPRESENTATIVE. |
| 3.24 | The CONTRACTOR shall formally advise the COMPANY REPRESENTATIVE(S) in writing of any known medical disability or condition of any personnel provided by the CONTRACTOR and/or a member of the CONTRACTOR GROUP in connection with the WORK which may adversely affect their own health and safety, or the health and safety of others. |
| 3.25 | The CONTRACTOR shall ensure that all personnel provided by the CONTRACTOR and/or the CONTRACTOR GROUP shall keep all WORKSITES as clean and tidy as is reasonably practicable under the circumstances, to minimise the risk of causing injury to persons, damage to property or delays in providing the WORK. |
| 3.26 | On completion of the WORK, the CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall, without delay, clear away and remove from the WORKSITE all surplus materials and equipment and leave all areas in a clean and tidy condition to the satisfaction of the COMPANY REPRESENTATIVE. |
| 4.0 | TRAINING AND COMPETENCE |
| 4.1 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP ensures that all personnel are trained and competent to perform the WORK in a safe and efficient manner. The CONTRACTOR shall ensure that all personnel mobilising to the WORKSITE are trained as per the COMPANY minimum standards outlined in Section V – Health, Safety and Environment. |
| 4.2 | The CONTRACTOR shall provide all necessary technical and vocational training to ensure that CONTRACTOR’S personnel maintain the necessary level of competence for the WORK. |
| 4.3 | The CONTRACTOR shall ensure that all offshore assigned personnel are in possession of emergency training certification in line with Oil & Gas UK Guidelines. |
| 4.4 | The CONTRACTOR shall ensure that all CONTRACTOR GROUP personnel co-operate with COMPANY by taking part in any site or job specific training deemed necessary by COMPANY. |
| 4.5 | The CONTRACTOR shall ensure that, prior to mobilisation to an offshore WORKSITE and / or to a COMPANY OFFSHORE FACILITY as appropriate, each member of the CONTRACTOR GROUP conforms to the following training requirements: |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| (a) | has successfully attended sea survival, firefighting and refresher courses as necessary in accordance with Oil & Gas UK guidelines; | |
| (b) | has successfully completed the Minimum Industry Safety Training (MIST) (Minimum Industry Safety Training) and holds up-to-date certified evidence thereof in accordance with the COMPANY’S HSE; and | |
| (c) | has completed the mandatory Integrated Safe Systems of Work (ISSOW) Roles and Responsibilities Training as well as the appropriate level of ISSOW Training which is commensurate with the users roles and responsibilities within the system. |
In addition, the CONTRACTOR shall be obliged to ensure sufficient CONTRACTOR GROUP supervisory personnel are employed to make sure that all of the CONTRACTOR GROUP’s personnel engaged upon the WORK fully understand any and all of the COMPANY’s procedures and policies written in the English language. The CONTRACTOR shall ensure that there are sufficient CONTRACTOR GROUP supervisory personnel employed to translate and interpret to non-English speaking/reading CONTRACTOR GROUP personnel engaged in the work the ISSOW permit to work system and the COMPANY procedures and policies and how they are to be complied with.
| 5.0 | MEDICAL FITNESS |
| 5.1 | The CONTRACTOR shall ensure that all CONTRACTOR GROUP personnel for the performance of the WORK provided are medically fit and that in particular, all personnel proposed by the CONTRACTOR GROUP for duty on an offshore WORKSITE and / or COMPANY OFFSHORE FACILITY shall be certified as medically fit (including dental fitness) for duty offshore in accordance with the “Recommenced General Medical Standards of Fitness for Designated Offshore Employees, UKCS” as issued by UKOOA now known as “Oil & Gas UK”. |
| 5.2 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall ensure that all personnel engaged in the WORK are aware of, and comply with COMPANY’s Substance Abuse Policy, and co-operate with COMPANY in the implementation of that policy. |
| 6.0 | MATERIALS, TOOLS AND EQUIPMENT |
| 6.1 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall ensure that all materials, tools and equipment provided, whether owned or rented, are fit for their intended purpose, are appropriately certified, and are stored and maintained such that risks to users and others and to the environment are minimised. |
| 6.2 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall ensure that all materials and equipment for transportation to COMPANY WORKSITES are properly packaged and labelled, and that all relevant documentation requirements are met. |
| 6.3 | The CONTRACTOR shall where reasonably requested by the COMPANY ensure that third party inspections are carried out in accordance with COMPANY procedures. The CONTRACTOR shall and shall procure that that the CONTRACTOR GROUP shall be familiar with, and shall ensure that, the maintenance of temporary and portable equipment is inspected in accordance with the COMPANY’s Maintenance Procedure. |
| 6.4 | The CONTRACTOR shall provide evidence of compliance with a Written Scheme of Verification for any supplied equipment deemed to be a Safety Critical Element |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 7.0 | HSE INCIDENT REPORTING AND INVESTIGATION |
| 7.1 | CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall ensure that personnel are aware of, and comply with, COMPANY’s requirement to properly report all incidents including near-misses. |
| 7.2 | The CONTRACTOR shall notify COMPANY both orally and in writing immediately after discovering, or receiving a report relating to any of the following events in relation to the WORKSITE: |
| ● | The death of any member of the CONTRACTOR GROUP; | |
| ● | The injury of any member of the CONTRACTOR GROUP; | |
| ● | Near Misses; | |
| ● | Environmental releases; | |
| ● | Any regulatory reportable incident or any event with adverse public/authority/NGO/media response; | |
| ● | Any significant security event; | |
| ● | The receipt by the CONTRACTOR GROUP of any environmental improvement notice by any governmental authority; | |
| ● | The receipt by the CONTRACTOR GROUP of notice of any alleged violation of HSE regulations or of any action against the CONTRACTOR GROUP by any government authority; or | |
| ● | Any proceedings being commenced or threatened, alleging any failure by CONTRACTOR GROUP to comply with HSE regulations or alleging potential responsibility for the release of hazardous material. |
| 7.3 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall co-operate with the COMPANY in the investigation of any incidents with which CONTRACTOR GROUP is deemed to have an association. |
| Where the event is related to the WORK, COMPANY shall be invited to participate in both the investigation and root cause analysis process and be kept informed of progress relating to close out of incident and associated actions. | |
| 7.4 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall co-operate with the COMPANY in implementing corrective and preventive measures identified by incident investigations. |
| 7.5 | The CONTRACTOR shall and shall procure that the CONTRACTOR GROUP shall co-operate with the COMPANY in ensuring that any lessons learned from incident investigations are properly communicated, and are incorporated into HSE Management Systems and workplace practice, where appropriate. |
| 7.6 | The CONTRACTOR shall ensure that the COMPANY is advised of any incidents occurring at CONTRACTOR GROUP’s premises that involve COMPANY people or equipment or could adversely impact on COMPANY’s business. |
| 8.0 | PERFORMANCE MANAGEMENT |
| 8.1 | The CONTRACTOR shall on behalf of the CONTRACTOR GROUP, submit a formal report to the COMPANY REPRESENTATIVE, as and when requested by COMPANY, which summarises its HSE performance in the preceding reporting period. This report shall detail, without limitation, the following: |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| (a) | performance against agreed/planned HSE targets; | |
| (b) | all Oil & Gas Producers (OGP) and Reporting of Injuries, Diseases and Dangerous Occurrence (RIDDOR) reportable injuries; | |
| (c) | all other accidents, spills or other unplanned discharges which either result in, or have potential for, significant injury/damage/loss or are reportable to a statutory authority; | |
| (d) | all near miss incidents which have potential for injury/damage/loss; | |
| (e) | the issue or proposed issue of an Improvement or Prohibition Notice, notice of intended prosecution or other legal process; | |
| (f) | any other event reportable to a statutory authority; | |
| (g) | a summary of monitoring activity, reviews, inspections and audits; | |
| (h) | a summary of the status of any remedial actions; and | |
| (i) | total worked hours for all personnel provided by the CONTRACTOR GROUP on the WORK. |
| 8.2 | The CONTRACTOR shall undertake an appropriate level of monitoring of HSE performance in the execution of the CONTRACT workscope. |
| 8.3 | The CONTRACTOR shall co-operate with the COMPANY in the formal HSE audit and review of the CONTRACT Scope of Work. |
| 8.4 | The CONTRACTOR shall co-operate with COMPANY in the identification and implementation of HSE performance improvement measures. |
| 8.5 | The CONTRACTOR shall routinely provide updates to the COMPANY of the HSE Plan, refer to items 1.10 to 1.14, herein. |
| 9.0 | EMERGENCY RESPONSE |
| 9.1 | The CONTRACTOR GROUP shall co-operate with the COMPANY in providing an appropriate response to emergencies occurring at COMPANY OFFSHORE FACILITIES and WORKSITES. |
| 9.2 | The CONTRACTOR shall be required to provide an emergency response support capability as defined by the SMS Interfacing process. |
| 9.3 | The CONTRACTOR shall co-operate with the COMPANY in ensuring that emergency response arrangements are effective by taking part in simulation exercises as requested by COMPANY. |
| 9.4 | The CONTRACTOR shall co-operate with the COMPANY in providing an appropriate response to emergencies occurring at COMPANY OFFSHORE FACILITIES and WORKSITES. |
| 10 | AUDIT AND ASSURANCE |
| The COMPANY reserves the right to access and audit all processes and procedures relevant to ensure that WORK is carried out safely without risk to health or the environment. | |
| 11 | REFERENCE DOCUMENTS |
| In the performance of the WORK, in addition to the CONTRACTOR’s own HSE Management System, the CONTRACTOR shall refer to the appropriate systems that specify the COMPANY’s HSE requirements. The COMPANY HSE Policy and Golden Rules are attached below. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
For further details on the COMPANY’s Golden Rules, please open the attached PDF:
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| 12.0 | QUALITY ASSURANCE |
| 12.1 | It is a requirement of the CONTRACT that the CONTRACTOR has a documented and maintained Quality Management System (QMS) to control all aspects of the WORK |
| 12.2 | The CONTRACTOR shall upon request from the COMPANY demonstrate an overview of its QMS, its parameters and operational functionality and shall provide the COMPANY with a copy of any independent certification of the system by an accredited body. |
| 12.3 | The CONTRACTOR is required to develop and maintain a “contract specific” Quality Plan for the WORK. The outline “contract specific” Quality Plan shall describe management activities necessary to fulfil the requirements of the work including organisation, personnel and resources. The outline “contract specific” Quality Plan shall also describe how any proposed subcontracted supply and services will be managed and describe Quality Control (QC) measures that will be used to assure supply / services meet with specified requirements. |
| 12.4 | The CONTRACTOR shall prepare and submit any audit schedule that it proposes to initiate and maintain in connection with the provision of the WORK. The audit schedule shall include sufficient audits to assure compliance with stated quality requirements from the CONTRACT and the QMS. The COMPANY, or the COMPANY’s nominated independent verification body, may wish to participate in the contractor’s audits and / or perform its own audits of the contractoR’s activities. |
| 12.5 | The CONTRACTOR shall participate in the COMPANY Non-Conformance Reporting (NCR) and Performance Monitoring Systems and shall accommodate the COMPANY QC requirements in all aspects of the WORK. |
| 12.6 | Quality requirement clarification meetings shall be held between the COMPANY and the CONTRACTOR post-contract award; these meetings may produce additional and/or more detailed quality and quality related requirements with which the CONTRACTOR shall comply. |
| 12.7 | The CONTRACTOR shall, if requested, be able to provide to the COMPANY an acceptable ‘Work History’ for all equipment supplied by CONTRACTOR GROUP for the COMPANY’s operations. Such data may include, but not be limited to hours run, damage history, maintenance history, certification and testing history, manufacture and source information etc., in both written and graphic form. |
| 12.8 | The CONTRACTOR shall maintain and, when required, be able to demonstrate that it has procedures for inspection of all non-magnetic equipment. |
| 12.9 | Any certification supplied should remain valid for the period such equipment is expected to be offshore, where this is not the case, the CONTRACTOR shall seek COMPANY acceptance and / or dispensation. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION VII
TRAINING
(Not Used)
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
SECTION VIII
MATERIALS, SERVICES and FACILITIES to be PROVIDED by the COMPANY
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
The COMPANY shall, in addition to its responsibilities defined elsewhere in the CONTRACT, provide or be responsible for the following at no cost to the CONTRACTOR:
| 1.0 | The provision of such drawings, specifications and technical data and information in connection with or regarding the WORK as is deemed appropriate by the COMPANY REPRESENTATIVE. |
| 2.0 | The collection and re-delivery to the CONTRACTOR’s premises all CONTRACTOR material and plant for transportation offshore and provision of craneage at the COMPANY’s supply base; |
| 3.0 | The supply and delivery to the offshore WORKSITE or the CONTRACTOR’s premises, as appropriate, of COMPANY provided items in accordance with the dates or times specified in any agreed programme. |
| 4.0 | The provision of travel to and from the heliport (or in the case of sea transfer the embarkation point) and COMPANY’s offshore installations, all offshore accommodation, messing and medical facilities. |
| 5.0 | COMPANY to facilitate the provision of all mooring equipment and charter of suitable deployment and recovery vessels in accordance with CONTRACTOR approved PB3 loadout and recovery procedures. Recovery and deployment of PB3 will be provided for at COMPANY expense and performed under the supervision and instruction of CONTRACTOR. Permits and authorisations required for deploying the PB3 shall be obtained and maintained by COMPANY |
| 8.0 | All prices are exworks CONTRACTOR premises Monroe Township, New Jersey, USA, CONTRACTOR to arrange delivery based on INCOTERM 2010 DAP to COMPANY designated delivery port and back charge in advance to COMPANY. All costs associated with quayside activity, storage and staging, transportation ex Aberdeen shall be provided by COMPANY at COMPANY’s cost. |
| 9.0 | COMPANY shall pay sensor NRE costs of more than $***. |
***This information has been omitted in reliance upon Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and has been filed separately with the Securities and Exchange Commission.
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
Exhibit 1
INTRODUCTION
This document provides high level specification for PB3-A3 PowerBuoy™ for Premier Oil (PMO).
Reference Documents
Below is the list of reference documents for this buoy.
| 1. | 800-6000-0000 PB3-A3 Buoy Assembly | |
| 2. | 800-6000-0100 PMO Buoy Assembly |
Acronyms
CG: Center of gravity
CB: Center of buoyancy
PTO: Power take-off
Buoy Characteristics
System Characteristics
Mechanical
| - | Survival and fatigue design loads are derived from a 25 m deep North Sea site | |
| - | Total float stroke: 1.5 m | |
| - | Free float stroke: 1.2 m | |
| - | Max operational force: 15 kN | |
| - | Max operational velocity: 1.0 m/s | |
| - | Brake force: 22.5 kN |
Electrical
| - | Usable Energy Storage System(ESS) size: 30 kWh | |
| - | Battery type: Lithium Ion | |
| - | Nominal HVDC bus voltage: 320 VDC | |
| - | Nominal LVDC bus voltage: 24 VDC | |
| - | 100 Mbit ethernet data connectivity |
Physical Characteristics
Below are the high-level physical characteristics of the buoy.
| - | Height: 13.0 m | |
| - | Length and Width: 3.0 m | |
| - | Dry mass: less than 10,000 kg |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
Structure Specification
Bridge
| - | Bridge has general-purpose mounting provisions for various equipment | |
| - | Instruments on Bridge: |
| 1. | Marine Beacon | |
| 2. | Satelite tracker | |
| 3. | Lightening rod | |
| 4. | Radar reflector |
Float
| - | Float trims at the mid-plane; the float displacement only supports the mass of itself, bridge assembly and moving PTO components. | |
| - | The float guides constrain the roll motion relative to the spar within 2 degrees (+/-1 deg). | |
| - | The float guides constrain the yaw motion relative to the spar within 2 degrees (+/- 1 deg). | |
| - | The float has lifting lugs for horizontal or vertical lifting of the float halves. |
Spar
Function
| - | Spar houses the power conversion assembly, energy storage system, electrical control panel, and autoballast system. | |
| - | Linear seal on the lid prevents water ingress into the spar, while allowing low friction movement of the input rod |
Design
| - | Spar is designed based on loads during survival conditions resulting from waves, float movements and 1.5 times the maximum hydrostatic pressure. |
Ballast provisions
| - | The auto ballast system is standard on PB3 PowerBuoys. This allows for remote activation of ballasting and de-ballasting of the buoy. | |
| - | Manual (diver assisted) ballasting provisions is available in case of emergencies. | |
| - | The controlled balasting system feature allows the buoy to be towable horizontaly. The operational ballast must be sufficient to trim the spar such that the float mid-plane and spar mid-stroke is coincident. Ballast chamber has at least 10% additional capacity to compensate for manufacturing weight tolerances. | |
| - | Maximum allowable payload mass on the lid for PB3 is 140 kg | |
| - | Maximum allowable payload mass on heave plate for PB3 is 950 kg |
Mooring Connections
| - | Spar has three upper and three lower mooring lugs. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
| - | The mooring lugs are DNV certified for an optional tow-out operation. |
Lifting
| - | Spar has two lifting lugs on either side of the CG and capable of lifting the assembled buoy. | |
| - | The lifting points are designed for offshore lifting under the conditions described in DNVGLST-0001 |
Heave Plate
Design
| - | Heave plate is designed for survival moment and axial forces. |
Weight plates
| - | Heave plate allows for bolting enough weight plates so that the buoy keels in proper orientation during horizontal towing. |
PowerBuoy™ Controls and Communications
Buoy Controller:
| - | PowerBuoy control and comand function | |
| - | Local data collection and storage | |
| - | Transmission of select data back to shore station | |
| - | HMI for real time monitoring and control |
Communications System:
| - | Cellular modem with VPN capability | |
| - | Wi-Fi for local buoy control and high-speed data transfer | |
| - | Satellite and fiber optic options are available, but not part of the base buoy design |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
Applicable Lid Interfaces
Upper Junction Box
Electrical Connections
| Connector Size & Pin Count | Signal Description | Intended Use | Connection Number | |||
| M12, 4 Pin | 24V Switched Power, 2 Pairs @ 2A Output Total | Upper Junction Box Network Switch & Comms | J172 | |||
| M12, 8 Pin | Ethernet & DC Power | External Power & Ethernet | J105 | |||
| M12, 8 Pin | 24V Switched Digital Outputs, 4 Channels @ 1A Each Output | Payload Control | J79 | |||
| M44, 4 Pin | 320V Switched Power, 1 Channel, 2 Pairs @ 12.5A Total Output | HVDC Ext Payloads | J14 |
Additional Sensors
COMPANY and CONTRACTOR shall mutually agree on sensors to be utlitised with the PowerBuoy. Sensors shall be provided by the COMPANY to CONTRACTOR or COMPANY shall be billed for sensors by the CONTRACTOR.
CONTRACTOR shall provide up to US$*** in Non-Recurring Engineering (NRE) expenses to the COMPANY at no charge for integration of the sensors. NRE, validation testing, and manufacturing labour costs exceeding US$*** will be billed at CONTRACTOR’S standard rates, including profit and overhead.
Warranties and Representations
CONTRACTOR shall warrant Rental Equipment against defects in material and workmanship during the RENTAL PERIOD, not to exceed one year from the commencement of the RENTAL PERIOD. This warranty shall NOT cover, nor shall CONTRACTOR be responsible for, any and all costs incurred for recovery, handling, storage, and redeployment of defective Rental Equipment.
***This information has been omitted in reliance upon Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and has been filed separately with the Securities and Exchange Commission.
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
CONTRACT NO: C2394
PROVISION OF INTELLIGENT MONITORING BUOY AND SUPPORT SERVICES
Exhibit 2
Contract Milestones
| Date | Milestone | |||
| No later than 11/5/2018 | Delivery Date | PB3 delivered to Premier Oil Aberdeen facility | ||
| Not Later than 11/19/2018 | Deemed “Fit for Purpose” | Commencement of the Trial Period occurs the earlier of PB3 “deemed fit for purpose” or fourteen (14) calendar days after delivery, unless the buoy is “not deemed fit for purpose” within the fourteen (14) day period. | ||
| 2/12/2019 | Initial Trial Completion | Completion of the first three-month rental period | ||
| 8/12/2019 | Six Month Option Completion | Completion of the remaining six-month rental of the cumulative nine-month Rental Period | ||
| 8/6/2019 | Redelivery Date | PB3 redelivered to Premier Oil Aberdeen facility by Premier Oil at the conclusion of the Rental Period, subject to term of the Rental Period. This date is intended to represent the end of the nine (9) month rental period. |
The Place of Delivery is Monroe Township, New Jersey, USA
Success Criteria for the Three (3) Months Initial Trial Period
At the conclusion of the three-month initial trial period, and as a condition for commencing the six-month option period, CONTRACTOR shall demonstrate to the reasonable satisfaction of the COMPANY REPRESENTATIVE that the material provisions of the following success criteria have been accomplished:
| ● | The PB3 design and build quality supports the deployment, recovery and operational requirements. | |
| ● | The PB3 has demonstrated its ability to be successfully and securely moored, providing a platform on which native and 3rd party equipment can operate. | |
| ● | Notwithstanding prolonged extreme weather events, the PB3 has been able to provide all its consumers (native as well as 3rd party equipment) with continuous power and communications. | |
| ● | The PB3’s internal housekeeping and (energy) management systems have been functional 24/7. | |
| ● | Notwithstanding uptime of the communication links between the PB3 and OPT’s onshore base, demonstrate the ability of OPT’s onshore condition monitoring system to continuously collect, store and process housekeeping data from the PB3 offshore (excluding 3rd party equipment), and present this data to end users onshore via a secure web portal and/or dedicated application. |
| Approved by COMPANY............. | Approved by CONTRACTOR............. |
EXHIBIT 21.1
| Subsidiary | Jurisdiction of Incorporation | |
| Ocean Power Technologies Ltd | United Kingdom | |
| Ocean Power Technologies (Australasia) Pty Ltd | Australia | |
| Reedsport OPT Wave Park LLC | Oregon | |
| Oregon Wave Energy Partners I, LLC | Delaware | |
| Victorian Wave Partners Pty Ltd | Australia |
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Ocean Power Technologies, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-217209 and No. 333-213519) on Form S-1, registration statements (No. 333-214316, No. 333-208522 and No. 333-224436) on From S-8, and the registration statement (No. 333-221867) on Form S-3 of Ocean Power Technologies, Inc. of our report dated July 17, 2018, with respect to the consolidated balance sheets of Ocean Power Technologies, Inc. and subsidiaries 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, which report appears in the April 30, 2018 Annual Report on Form 10-K of Ocean Power Technologies, Inc.
Our report dated July 17, 2018 contains an explanatory paragraph that states that the Company’s cash balance, recurring losses from operations, and accumulated deficit raise substantial doubt about the Company’s ability to continue as a going concern, as discussed in Note 1(b) to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.
(signed) KPMG LLP
Philadelphia, Pennsylvania
July 17, 2018
EXHIBIT 31.1
CERTIFICATIONS
I, George H. Kirby III, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Ocean Power Technologies, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or other persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
George H. Kirby III
President and Chief Executive Officer
Dated: July 17, 2018
EXHIBIT 31.2
CERTIFICATIONS
I, Matthew T. Shafer, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Ocean Power Technologies, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or other persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Matthew T. Shafer
Chief Financial Officer and Treasurer
Dated: July 17, 2018
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Ocean Power Technologies, Inc. (the “Company”) for the year ended April 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, George H. Kirby III, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
George H. Kirby III
President and Chief Executive Officer
Date: July 17, 2018
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Ocean Power Technologies, Inc. (the “Company”) for the year ended April 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Matthew T. Shafer, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Matthew T. Shafer
Chief Financial Officer and Treasurer
Date: July 17, 2018
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.