Business Context and Reporting Period
Company: Ocean Power Technologies, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: July 31, 2010 (Three Months)
Business Overview: The Company develops and commercializes proprietary systems (PowerBuoy) that generate electricity from ocean waves. 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 government contracts (primarily US Navy) and development funding.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2010 | Three Months Ended July 31, 2009 |
|---|---|---|
| Revenues | $1,374,407 | $1,310,937 |
| Cost of Revenues | $1,588,246 | $1,024,227 |
| Gross Profit (Loss) | $(213,839) | $286,710 |
| Operating Expenses | $6,054,696 | $3,527,671 |
| Operating Loss | $(6,268,535) | $(3,240,961) |
| Net Loss | $(6,270,072) | $(2,047,420) |
| Net Loss Attributable to OPT | $(6,266,593) | $(2,098,477) |
| Diluted Net Loss Per Share | $(0.61) | $(0.21) |
| Cash and Cash Equivalents (End of Period) | $3,925,600 | $5,336,756 |
| Total Assets | $66,733,630 | $72,978,193 |
| Total Liabilities | $7,606,409 | $8,123,103 |
| Accumulated Deficit | $(96,679,691) | $(90,413,098) |
Material Changes vs. Prior Period
- Revenue: Increased 5% to $1.4 million, driven by increased billable work on the US Navy's LEAP program. This was partially offset by a $0.2 million revenue reduction related to the Spain construction agreement and decreased activity on the Hawaii project.
- Gross Margin: Shifted from a gross profit of $0.3 million in 2009 to a gross loss of $0.2 million in 2010. Cost of revenues increased 55% due to higher activity levels on specific projects and the revenue reduction on the Spain contract which did not have a corresponding cost reduction.
- Product Development Costs: Surged 196% to $4.0 million, primarily due to efforts to increase the power output and reliability of the 150kW utility PowerBuoy system.
- Foreign Exchange: Recorded a loss of $0.24 million compared to a gain of $0.40 million in the prior year, attributable to fluctuations in the British pound, Euro, and Australian dollar against the US dollar.
- Other Income: Decreased to zero from $0.5 million in the prior year, as the previous period included a one-time settlement of a claim against a supplier.
Guidance, Outlook, and Risks
- Liquidity Outlook: Management believes current cash, cash equivalents, and marketable securities (totaling approximately $60.8 million) are sufficient to meet anticipated needs through fiscal 2012. If resources become insufficient, the Company may seek additional equity or debt financing, which could result in dilution or restrictive covenants.
- Backlog: As of July 31, 2010, the backlog was $6.5 million, an increase of $0.8 million from the prior quarter.
- Customer Concentration: The US Navy accounted for 83% of revenues in the current quarter (92% in the prior year). The loss of this customer would significantly impact financial results.
- Spain Construction Agreement: The Company is in discussions with Iberdrola Energias regarding modifications to the Spain project. If no modification is agreed upon, the customer may terminate the agreement without further milestone payments. The Company has accrued approximately $785,000 for anticipated contract losses.
- Government Funding: Future growth depends on securing government grants and tax credits (e.g., US Production Tax Credit). There is no assurance of obtaining such funding.
Investor Verification Checklist
- Spain Project Status: Verify the outcome of negotiations with Iberdrola Energias regarding the Spain construction agreement and potential termination risks.
- US Navy Contract Renewals: Assess the sustainability of revenue given the 83% reliance on the US Navy and the timeline for commercial utility contracts.
- Product Development Burn Rate: Review the justification for the 196% increase in product development costs and the timeline for commercializing the 150kW PowerBuoy.
- Cash Runway: Confirm the sufficiency of the $60.8 million in liquid assets to fund operations through fiscal 2012 without additional capital raises.
- Contract Loss Accruals: Examine the $785,000 accrual for contract losses and whether further adjustments are anticipated.