OPTT

Business Context and Reporting Period

Company: Ocean Power Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2008
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 commercial development contracts.

Key Financial Metrics

Liquidity: As of October 31, 2008, the Company held approximately $89.6 million in total cash, cash equivalents, and investments. Management believes these resources are sufficient to meet anticipated needs through fiscal 2010.

Material Changes vs. Prior Period

• Revenue Decline (QoQ): Revenues for the three months ended October 31, 2008, decreased by 60% ($1.0 million) compared to the same period in 2007. This was primarily due to the completion of projects for the US Navy in Hawaii and a wave power station in Spain.
• Revenue Increase (YoY Six Months): Revenues for the six months ended October 31, 2008, increased by 9% ($0.2 million) compared to the prior year, driven by autonomous PowerBuoy contracts with the US Navy and the Spain construction project.
• Widening Losses: Net loss for the three months ended October 31, 2008, increased by 227% to $6.1 million. For the six-month period, net loss increased by 132% to $10.0 million.
• Foreign Exchange Impact: The Company recorded a foreign exchange loss of $1.2 million for the three months ended October 31, 2008, compared to a gain of $0.3 million in the prior year period, largely due to fluctuations in the British pound sterling.
• Contract Loss Provisions: The Company recognized additional provisions for anticipated losses on contracts of $221,000 (three months) and $452,000 (six months) related to the Spain project.

Guidance, Outlook, and Risks

• Outlook: Management expects revenues from utilities and non-government commercial customers to eventually surpass government revenues. However, profitability remains uncertain due to the emerging nature of the renewable energy market.
• Backlog: As of October 31, 2008, the Company's backlog was $8.0 million, an increase of $4.3 million from July 31, 2008, following new contracts with the US Navy and the US Department of Energy.
• Key Risks:
  • Customer Concentration: The US Navy accounted for 65% of revenues in the quarter and 47% for the six-month period. Iberdrola and Total accounted for 14% and 40%, respectively.
  • Contract Losses: The Company is absorbing additional costs on the Spain wave power station project beyond contractual obligations, impacting margins.
  • Liquidity Dependence: The Company has never been profitable and relies on capital raised and contract revenues. Future financing may be required, potentially resulting in dilution.
  • Foreign Exchange: Significant exposure to currency fluctuations (GBP, EUR, AUD) without hedging strategies in place.

Investor Verification Checklist

• Spain Project Economics: Verify the extent of cost overruns and the specific terms regarding the Company's decision to absorb costs beyond contractual obligations for the Santoña, Spain project.
• US Navy Contract Renewals: Assess the sustainability of revenue given the heavy reliance (47-65%) on US Navy contracts and the status of the new $3.0 million contract awarded in October 2008.
• Cash Burn Rate: Monitor the rate of cash consumption against the $89.6 million investment portfolio to validate the "through fiscal 2010" liquidity assertion.
• Foreign Exchange Exposure: Review the specific currency balances ($4.5 million in foreign currencies) and the potential impact of further GBP/USD volatility on operating results.
• Commercialization Timeline: Evaluate the progress of the transition from government demonstration projects to utility-scale commercial sales to reduce revenue concentration risk.