Business Context and Reporting Period
Company: Ocean Power Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2008
Business Overview: The Company develops and commercializes proprietary systems (PowerBuoy) that generate electricity by harnessing ocean wave energy. Operations include utility-scale systems for power grids and autonomous systems for remote locations. The Company has not been profitable since inception and relies on development contracts and capital raises to fund operations.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2008 | Three Months Ended July 31, 2007 |
|---|---|---|
| Revenues | $1,786,628 | $555,704 |
| Cost of Revenues | $1,948,146 | $804,992 |
| Gross Loss | $(161,518) | $(249,288) |
| Operating Loss | $(4,416,283) | $(4,061,624) |
| Net Loss | $(3,893,164) | $(2,437,844) |
| Net Loss Per Share (Basic/Diluted) | $(0.38) | $(0.24) |
| Cash and Cash Equivalents (End of Period) | $73,644,649 | $102,227,435 |
| Short-term Investments | $22,814,188 | $0 |
| Total Current Assets | $100,191,711 | $92,517,642 |
| Total Liabilities | $6,569,928 | $7,452,356 |
| Long-term Debt | $126,491 | $188,784 |
| Accumulated Deficit | $(56,820,805) | $(52,927,641) |
Cash Flow Summary (Three Months Ended July 31, 2008):
- Net cash used in operating activities: $(4,202,987)
- Net cash used in investing activities: $(10,925,451)
- Net cash used in financing activities: $(42,801)
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 222% to $1.8 million, driven by increased activity on the US Navy Hawaii project, the wave power station construction in Spain, and the 150kW PowerBuoy installation in Scotland.
- Cost of Revenues: Increased 142% to $1.9 million. This includes a $231,000 provision for anticipated losses on the Spain contract and higher activity levels.
- Operating Expenses: Total operating expenses rose 12% to $4.3 million. Selling, general, and administrative (SG&A) costs increased 28% due to company growth and public company compliance costs. Product development costs decreased slightly (6%) as resources were shifted to revenue-producing activities.
- Interest Income: Decreased 62% to $547,592 due to lower invested cash balances and reduced interest rates.
- Foreign Exchange: Shifted from a gain of $179,494 in the prior year to a loss of $24,473, primarily due to fluctuations in the British pound sterling.
- Liquidity: Cash and cash equivalents decreased by approximately $15.2 million during the quarter, largely due to operating losses and net purchases of short-term investments.
Guidance, Outlook, and Risks
- Outlook: Management believes current cash, cash equivalents, and investments ($96.5 million total) are sufficient to meet anticipated needs through fiscal 2010. The Company expects revenues from commercial utilities to eventually surpass government revenues.
- Contract Losses: The Company recognized an additional $231,000 in losses related to the Spain wave power station contract. Reserves for loss contracts totaled approximately $1.33 million as of July 31, 2008.
- Customer Concentration: Significant reliance on a few customers. Iberdrola and Total accounted for 50% of revenues, and the US Navy accounted for 41% in the quarter ended July 31, 2008.
- Risk Factors: The Company has not been profitable since inception. Future profitability depends on the successful commercialization of PowerBuoy systems. Risks include the ability to secure financing, manage fixed-price contract costs, and navigate foreign exchange fluctuations (exposure to GBP, EUR, AUD).
- Backlog: As of July 31, 2008, the backlog was $3.7 million, a decrease of $1.8 million from the previous quarter.
Investor Verification Checklist
- Contract Loss Provisions: Verify the magnitude and likelihood of further cost overruns on the Spain project, which currently holds a $1.33 million loss reserve.
- Cash Burn Rate: Assess the sustainability of the ~$4.2 million quarterly operating cash burn against the $96.5 million cash/investment balance.
- Customer Concentration: Evaluate the risk associated with 91% of revenue coming from just two customer groups (Iberdrola/Total and US Navy).
- Commercialization Timeline: Confirm progress on the transition from government/demonstration contracts to utility-scale commercial sales.
- Foreign Exchange Exposure: Review the impact of currency fluctuations on the $7.9 million held in foreign-denominated accounts.