Business Context and Reporting Period
Company: Ocean Power Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2009
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 government contracts (primarily US Navy) and commercial development agreements.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2009 | Three Months Ended July 31, 2008 |
|---|---|---|
| Revenues | $1,310,937 | $1,786,628 |
| Gross Profit | $286,710 | $(161,518) |
| Operating Loss | $(3,240,961) | $(4,416,283) |
| Net Loss | $(2,047,420) | $(3,893,164) |
| Net Loss Attributable to OPI | $(2,098,477) | $(3,893,164) |
| Diluted Net Loss Per Share | $(0.21) | $(0.38) |
| Cash and Cash Equivalents | $5,336,756 | $73,644,649 (End of Period 2008) |
| Total Marketable Securities | $74,349,869 | $N/A (Combined Current/Noncurrent) |
| Total Assets | $86,786,732 | $N/A |
| Long-Term Debt | $345,386 | $N/A |
| Accumulated Deficit | $(73,341,268) | $(71,242,791) |
Note: Total Marketable Securities for July 31, 2009, is the sum of Current ($44,940,113) and Noncurrent ($29,409,756) balances.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 27% to $1.3 million, primarily due to reduced billable work on the wave power station off the coast of Spain as the project neared completion. This was partially offset by increased revenue from US Navy autonomous PowerBuoy projects.
- Improved Gross Margin: The Company achieved a gross profit of $0.3 million compared to a gross loss of $0.2 million in the prior year. This improvement was driven by lower activity on the Spain contract and the absence of contract loss provisions that were accrued in the prior period.
- Reduced Operating Loss: Operating loss improved by 27% to $3.2 million. Product development costs decreased 20% and SG&A costs decreased 15%, largely due to reduced consulting expenses and lower share-based compensation.
- Non-Operating Gains: The net loss was significantly mitigated by a $0.5 million "Other Income" gain from the settlement of a supplier claim and a $0.4 million foreign exchange gain, compared to a small loss in the prior year.
- Cash Position: Cash and cash equivalents decreased significantly from $12.3 million at the start of the quarter to $5.3 million at period end, reflecting net cash used in operating activities of $2.5 million and investing activities of $5.3 million.
Guidance, Outlook, and Risks
- Liquidity Outlook: Management believes current cash, cash equivalents, and marketable securities ($80.9 million total) are sufficient to meet anticipated needs through fiscal 2011. However, future capital requirements depend on development costs and commercialization success.
- Spain Project Contingency: The Company is in discussions regarding modifications to its Spain construction agreement. If an agreement is not reached, the contract may be terminated if the first phase is not completed by December 31, 2009. The customer would be entitled to direct damages only, limited by the agreement.
- Customer Concentration: The US Navy accounted for 92% of revenues in the current quarter, up from 41% in the prior year. Iberdrola and Total accounted for 9%. The loss of the US Navy contract would significantly impact financial results.
- Market Risks: The Company faces exposure to foreign currency fluctuations (GBP, EUR, AUD) and interest rate changes on its investment portfolio. A 10% fluctuation in foreign exchange rates could impact results by approximately $1.0 million.
- Profitability: The Company has an accumulated deficit of $73.3 million and does not know if or when it will become profitable due to uncertainties in commercializing wave energy technology.
Key Facts for Investor Verification
- Contract Loss Accruals: Verify the status of the $1.1 million accrued for anticipated contract losses included in accrued expenses, specifically regarding the Spain project.
- Spain Agreement Status: Confirm the outcome of negotiations regarding the Spain construction agreement modifications and the risk of termination by December 31, 2009.
- US Navy Dependency: Assess the sustainability of revenue streams given that 92% of Q1 2010 revenue came from the US Navy.
- Cash Burn Rate: Monitor the rate of cash consumption ($2.5 million operating cash outflow in one quarter) against the $80.9 million liquidity buffer to validate the "through fiscal 2011" runway.
- Non-Recurring Income: Note that the reduction in net loss was aided by a one-time $0.5 million supplier settlement and foreign exchange gains, which may not be repeatable.