Ocean Power Technologies
Overview
Founded in 1984 and headquartered in Pennington, New Jersey, Ocean Power Technologies (OPTT) believe Ocean Power is the leader in ocean wave power conversion technology. The company's PB3 PowerBuoy is its first fully commercial product which generates electricity by harnessing the renewable energy of ocean waves. In addition to its PB3 PowerBuoy, the company continue to develop its PowerBuoy product line based on modular, ocean-going buoys, which Ocean Power has been periodically ocean testing since 1997.1
The PB3 PowerBuoy generates power for use in remote offshore locations, independent of a conventional power grid, and it incorporates a unique onboard power take-off (“PTO”) system, which incorporates both energy storage and energy management and control systems. The PB3 generates 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. The company's standard energy storage system (“ESS”) has an energy capacity of up to a nominal 150 kilowatt-hours (“kWh”) to meet specific application requirements. The company continue to develop and test its new PowerBuoys, with the objective to incrementally scale up power production. The company believe there is a substantial addressable market for the current capabilities of its PB3, which the company believe could be utilized in a variety of applications.
In addition to leveraging earlier design aspects of its autonomous PowerBuoy, the PB3 has undergone extensive factory and in-ocean design validation testing. Currently, its engineering efforts are focused primarily on cost reductions and life extensions of the PB3, while also scaling its technologies to increase the energy output. The company's 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 its PowerBuoy or located in its vicinity, such as on the seabed and in the water column.
Based on its market research and publicly available data, the company believe that multiple markets have a direct need for its PowerBuoys including oil and gas, ocean observing, defense and security, and communications. Depending on payload power requirements, sensor types and other considerations, Ocean Power has found that its PowerBuoy could satisfy several application requirements within these markets. The company believe that the PB3 persistently generates sufficient power to meet the requirements of many potential customer applications within its target markets.
Since fiscal 2002, government agencies have accounted for a significant portion of its revenues. These revenues were largely for the support of its development efforts relating to its technology. Today its goal is to generate the majority of its revenue from the sale or lease of its products, and sales of services to support its business operations. As the company continue to develop and commercialize its products, the company expect to have a net loss of cash from operating activities unless and until the company achieve positive cash flow from the commercialization of its products and services. During fiscal 2017 and the first quarter of fiscal year 2018, the company continued work on projects with the U.S. Department of Defense (“DOD”) and Mitsui Engineering and Shipbuilding Co., Ltd. (“MES”), while the company continued to validate the reliability and power output of its PB3 PowerBuoy.
Product Development
The development of its technology has been funded by revenue generating projects, capital the company raised, and by development engineering contracts the company received starting in fiscal 1995, including projects with the DOE, the U.S. Navy, the Department of Homeland Security and MES.
Through these historic projects, the company also continued development of its PowerBuoy technologies. Ocean Power is continuing to focus on marketing and developing its PowerBuoy products and services for use in autonomous power applications.
During fiscal 2017, the company continued to focus on the commercialization of its PowerBuoy technology and its PB3 product in autonomous application markets. The company completed its work under its DOE contract that focused on further optimization of its modular PTO technology and delivered the project final report to the DOE in the prior year. In the prior year, the company 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 the company continued to focus on the development and validation of its PB3 PowerBuoy commercial product, its activities concentrated mainly on implementing all of its lessons learned during its efforts in the prior fiscal year from its 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 to fulfill the requirements of its lease with MES, including a deployment off of Kozushima Island in the Pacific Ocean. 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 its modular energy storage system, and to make it available to support its 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 its target markets. Such features include:
The design, development and implementation of a versatile mooring interface that allows the PB3 to accommodate various types of mooring configurations depending on the specifics and the needs of the customer, eliminating the need for a redesign to the device. The design, development and implementation of a flexible power transmission system intended to support delivery of power and communication capabilities to customer payloads which are external to the PowerBuoy, and which may reside in the water column or on the seabed.
Additionally, and building upon its initial success in implementing an auto-ballast system in its commercial PB3, the company further enhanced this feature in order to achieve faster and more cost effective PB3 deployments and retrievals.
Further, Ocean Power is continuing the development of its PB15, the next scale-up of its autonomous PowerBuoy, which will provide higher peak power than its PB3. The company completed the preliminary design of its PB15 in fiscal 2017. Ocean Power is continuing to obtain market feedback on the value proposition of this design while at the same time advancing the commercialization of its PB3. 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 its 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, the company believe the PB3 has achieved a maturity level for immediate commercial use. The company believe that the PB3 will generate and store sufficient power to address various application requirements in its target markets. The company's product development and engineering efforts are focused, in part, on increasing the energy output and efficiency of its PowerBuoys and, if Ocean Power is able to do so, the company believe the PowerBuoy would be useful for additional applications where cost savings and additional power are required by its potential customers. The company continue to explore opportunities in these target markets, and Ocean Power has not yet finalized any product offerings in these potential markets. The company believe that by increasing the energy output of its PowerBuoys the company may be able to address larger segments of its target markets. By improving its design and manufacturing, the company also seek to reduce the cost of its PowerBuoys through further design iterations and manufacturing ramp-up. In so doing, the company seek to improve customer value, displace additional incumbent solutions, and become a viable power source for new applications in its target markets.
The company also are continuing to work to develop solutions seeking to improve its products’ durability and reliability and to reduce their cost. For example, the redesigned PB3 leverages its knowledge base from past designs to incorporate new design features which the company believe will improve its reliability and efficiency, including a redesigned PTO and a higher efficiency and higher voltage ESS. In July 2016, the company deployed its 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 six-month lease of the PB3 PowerBuoy under a previously announced customer agreement. In March 2017, its commercial PB3 was deployed off the coast of Kozushima Island in Japan as part of this lease, and continues to operate meeting all project requirements.
Commercial Activities
Ocean Power is seeking to build strategic relationships 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 2016, the company 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 its 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. The company integrated the SCOOP onto its PB3 PowerBuoy and in June 2016 the company 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. Ocean Power is continuing discussions with the NDBC around next steps. In May 2016, the company entered into a Memorandum of Agreement (“MOA”) with WCS to explore the use of its 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. Ocean Power is continuing discussions with WCS around next steps.
In May, 2016 the company entered into a contract with MES totaling nearly $1.0 million, a portion of which was performed in fiscal 2016 as agreed under a letter of intent signed in March 2016. The contract with MES includes certain engineering and other services, and a six-month lease of its PB3 PowerBuoy off the coast of Japan, which commenced in March 2017. This six-month lease has been extended an additional month, that will now go through September 2017, at which time this PB3 Powerbuoy will be recovered. In September 2016, the company entered into a contract with the U.S. Department of Defense Office of Naval Research (“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. Overall, progress was made on the project whereby design and analysis tasks as well as a portion of the test were completed and documented. The Company requested two no-cost extensions to ONR in order to address some “infant mortality” findings on the life test portion of the testing effort associated with implementing improved sealing elements and improving test fixture alignment and the completion of the actual test. In December 2016, the company 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. Founded in 1973, Sonalysts is a multi-disciplinary engineering and technical services firm with tremendous competency and expertise as systems integrator developing and supporting mission critical systems for the U.S. Navy Submarine Force. Such applications include real-world mission and tactical analyses and electronic warfare, imaging and combat control systems. Sonalysts’ core strengths also include developing and delivering interactive, computer-based training solutions, operations analysis, human systems integration solutions, and weather and aviation information processing and streaming systems. Additionally, Sonalysts maintains core technology and expertise in undersea wireless communications and in autonomous undersea systems analysis which are available to a variety of defense and commercial customers. The company believe that bringing the unique capabilities and expertise of its two companies together will enable the autonomous undersea vehicle infrastructure in these two critically important business sectors.
In February 2017, the company 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. HAI has experience in a variety of technologies and applications in the offshore oil and gas industry including subsea chemical systems. Chemical injection techniques are used to mitigate the diminishing effects of buildup in piping and pumping systems used in subsea oil production operations. HAI has developed an innovative, compact and modular concept which moves the chemical injection system closer to the production field. The company believe HAI Technologies’ advanced chemical injection solutions, combined with OPT’s PB3 PowerBuoy, creates a unique opportunity to pair two distinctive offshore technologies creating new methods to deal with long distance and remote offshore field developments.
Capital Raises
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 from the offering to it were approximately $1.7 million, after deducting placement agent fees and estimated offering expenses payable by it, 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 3, 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 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.
The sale of additional equity or convertible securities could result in dilution to its 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 its common stock and could contain covenants that would restrict its operations. The company do not have any committed sources of debt or equity financing and the company cannot assure you that financing will be available in amounts or on terms acceptable to it when needed, or at all. If Ocean Power is unable to obtain required financing when needed, the company may be required to reduce the scope of its operations, including its planned product development and marketing efforts, which could materially and adversely affect its financial condition and operating results. If Ocean Power is unable to secure additional financing, the company may be forced to cease its operations.
Backlog
As of July 31, 2017, its negotiated backlog was $0.1 million. As of April 30, 2017, its negotiated backlog was $0.3 million. The company's backlog can include both funded amounts, which are unfilled firm orders for its 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 its contracts were to be terminated, its backlog would be reduced by the expected value of the remaining terms of such contract. The company's backlog was fully funded at July 31, 2017.
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 its revenue has been for the support of its 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. The company's backlog is also typically subject to large variations from time to time due to the timing of new awards.
Business Strategy
The company continue to commercialize its PB3 PowerBuoy for use in remote offshore power and real-time data communications applications, and in order to achieve this goal, Ocean Power is pursuing the following business objectives:
- Sell and/or lease PB3 PowerBuoys. The company believe its PB3 PowerBuoy is well suited for many remote offshore applications. Ocean Power has observed potential market demand for both PowerBuoy sales and leases within its selected markets, and the company intend to sell and lease PB3 PowerBuoys to these markets. Additionally, the company 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. The company continue to increase its 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. Ocean Power is currently focusing its marketing efforts in North America, Europe, Australia, and parts of Asia, including Japan. The company believe that each of these areas has sizable end market opportunities, political and economic stability, and high levels of industrialization and economic development.
- Expand its relationships in key market areas through strategic partnerships and collaborations. The company 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, to create new market channels, to expand commercial know-how and geographic footprint, and to bolster its product delivery capabilities.
- ► Commercial collaborations. The company believe that an important element of its business strategy is to collaborate with other organizations to leverage its combined expertise, market presence and access, and core competences across key markets. Ocean Power has formed such a relationship with several well-known groups, including MES in Japan, the National Data Buoy Center (“NDBC”), the Wildlife Conservation Society (“WCS”), Gardline Environmental (an international and multi-disciplinary marine service company), 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). The company continue to seek other opportunities to collaborate with application experts from within its selected markets.
- ► Outsourcing of fabrication, deployment and service support. The company outsource all fabrication, anchoring, mooring, cabling supply, and in most cases deployment of its PowerBuoy in order to minimize its capital requirements as the company scale its business. The company's PTO is a proprietary subsystem and is assembled and tested at its facility. The company believe this distributed manufacturing and assembly approach enables it to focus on its core competencies ensure a cost-effective product by leveraging a larger more established supply base. The company also continue to seek strategic partnerships with regards to servicing of its PB3 PowerBuoy.
- PB3 cost reduction and PowerBuoy product development. The company's engineering efforts are focused on customer application development for PB3 sales, cost reduction of its PB3 PowerBuoy and improving the energy output, reliability, maintenance interval and expected operating life of its PowerBuoys. The company continue to optimize manufacturability of its designs with a focus on cost competitiveness, and the company believe that the company will be able to address new and different applications by developing new products that increase energy output.
Going Concern
The company's financial statements have been prepared assuming the company will continue as a going concern. Ocean Power has experienced substantial and recurring losses from operations, which losses have caused an accumulated deficit of $190.0 million at July 31, 2017. Based on the Company’s cash and cash equivalents and marketable securities balances as of July 31, 2017 the Company believes that it will be able to finance its capital requirements and operations into the quarter ending July 31, 2018.
The report of its independent registered public accounting firm on its consolidated financial statements filed with its Annual Report on Form 10-K for the year ended April 30, 2017, contains an explanatory paragraph regarding its ability to continue as a going concern, based on, among other factors, that its ability to continue as a going concern is dependent upon its ability to raise additional external capital and increase revenues. These factors, among others, raise substantial doubt about its ability to continue as a going concern. The company's consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The company cannot assure you that the company will be successful in its efforts to generate revenues, become profitable, raise additional outside capital or to continue as a going concern. If Ocean Power is not successful in its efforts to raise additional capital sufficient to support its operations, the company would be forced to cease operations, in which event investors would lose their entire investment in its company.
