Ocean Power Technologies, Inc. (OPTT) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ocean Power Technologies’ Fiscal Year 2011 Fourth Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and webcast. I would now like to turn this conference over to the Chief Financial Officer of Ocean Power Technologies, Mr. Brian Posner. Please proceed.

Thank you. Welcome to Ocean Power Technologies' Earnings Conference Call for the Fourth Quarter and Fiscal Year Ended April 30, 2011. OPT issued its earnings release earlier today, and later today, we'll file the company's annual report on Form 10-K with the Securities and Exchange Commission. All public filings can be viewed on the SEC website at sec.gov, or you may go to the OPT website, www.oceanpowertechnologies.com. With me on today's webcast is Charles Dunleavy, our Chief Executive Officer. Please advance to Slide 2 of our presentation. During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. As indicated in the slide, these forward-looking statements are subject to numerous assumptions made by management regarding future circumstances over which the company may have little or no control and involve risks and uncertainties and other factors that may cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. We refer you to the company's Form 10-K and other recent filings with the Securities and Exchange Commission for a description of these and other risk factors. I'll now turn the call over to Chuck Dunleavy, OPT's CEO.

Thank you, Brian, and thanks to everyone for being with us today. Brian and I will be available to answer questions following our prepared statement. Turning to Slide 3. I'd like to note some recent developments of which we're particularly proud. We've accomplished a great deal this past quarter and ended this fiscal year on a high note, with plenty of traction heading into fiscal year 2012. We deployed our first utility-scale PB150 PowerBuoy off the coast of Scotland on April 15, 2011. Since that time, we've been measuring the performance of the unit, and we've been very pleased by the results. I'll go into this in a little more detail in a moment. In addition, we have continued to make progress with the construction and land testing of our PB150 unit for Reedsport, Oregon. We've made advances on our next-generation PowerBuoy, the PB500, and also on our Autonomous PowerBuoy for the U.S. Navy's LEAP program. Our grid-connected PowerBuoy in Hawaii continues to be going strong. Total fiscal 2011 revenue rose over 30% compared to fiscal 2010, and during the year, we brought in $10.3 million of new orders. With a record backlog of $8.9 million at April 30, 2011, we are well positioned for further success in fiscal 2012. Moving to Slide 4. Let me add some information about the initial deployment of our PB150 off Scotland. This 150-kilowatt-rated device was designed by OPT to generate utility-scale renewable wave energy in arrays of multiple buoys for commercial power stations in locations around the globe. In January 2011, we are very pleased to announce that OPT achieved an independent certification of the PB150 structure and mooring system by the internationally respected Lloyd's Register. This certification confirmed that the PB150 design complies with certain international standards for floating offshore installations. During recent ocean testing of the PB150, average electrical power of 45 kilowatts was achieved, with wave heights as low as 2 meters, exceeding our performance expectations for the PB150. We believe this capacity factor of 30%, represented by the 45-kilowatt average power, exceeds capacity factors generally seen in other forms of alternative energy, such as wind and solar. The power take-off system also exceeded expectations with respect to energy conversion efficiency in the irregular ocean wave conditions encountered. Overall, the range of PB150 power outputs we saw at specific operating points during the ocean testing was in line with our model predictions for such wave states. And this means that our confidence in power predictions at other sites is greatly increased, particularly since the performance of the Hawaii PowerBuoy has also agreed with our model. We're, therefore, confident that at sites where wave conditions are higher than those encountered thus far during ocean trials, our use can produce 150 kilowatts on average. In addition, the environmental conditions experienced by this PB150 off Scotland included storm waves, with electrical-power-generating peaks of over 400 kilowatts. We find all of this very encouraging, and we'll be testing the Scotland PowerBuoy for another 1 to 2 months. The company is seeking a commercial customer for this PB150 after the trial phase is complete. All in all, our success in this project speaks to just terrific performance by our employees on both sides of the ocean -- the Atlantic Ocean, both within the U.S. as well as in the U.K. Slide 5 shows the towing of the buoy during the deployment process. A video of the deployment is available on the OPT website at oceanpowertechnologies.com. In addition, the Bloomberg Television program, Inside Track, aired a segmented on OPT and the Scotland PowerBuoy on June 28, which you can also see on our website. Slide 6 provides a view of the buoy after its deployment at the site, about 30 nautical miles off the northeastern coast of Scotland. Now turning to Slide 7. I'd like to provide an update on our project in Reedsport, Oregon. The project has 2 phases. The first, on which we are now working, is for the deployment of one PB150 PowerBuoy. This will be followed by a second phase, during which we expect to build and deploy 9 additional PB150s and connect all 10 buoys to the Oregon grid through OPT's proprietary undersea substation pod, all for a total of 1.5 megawatts. We have finished initial construction of the steel structure of the PB150 for the first phase, which is shown in the picture on this slide. The power take-off, or PTO, and our proprietary electronic control system are now undergoing testing in our New Jersey production facility. At this point, we are cycle-testing the complete PTO system under various simulated wave conditions. We expect the first PB150 to be ready for deployment by the end of calendar year 2011, with the exact time of deployment weather-dependent. We are very pleased by the opportunities presented by this project. Earlier this fiscal year, we reported that we and 14 other interested federal, state and nongovernmental stakeholders signed a groundbreaking agreement for the Reedsport project. This agreement supports the responsible, environmentally-sensitive development of the 10 PowerBuoy 1.5-megawatt wave power station, which will be America's first commercial-scale grid-connected wave power station. This 1.5-megawatt wave power station is subject to the receipt of appropriate final licensing from the U.S. Federal Energy Regulatory Commission and additional funding for the build-out of the second phase, encompassing 9 more PowerBuoys in the grid connection infrastructure. Moving to Slide 8. Let me comment briefly on 2 other major projects that are moving ahead and will show further progress in fiscal 2012. In Hawaii, we continue to demonstrate the in-ocean performance of our first grid-connected wave energy PowerBuoy, which was deployed in December, 2009 at the Marine Corps Base in Oahu. This PowerBuoy recently reached a significant milestone with the completion of over 5 million cycles in operation. This is an important achievement and confirms the durability of our grid-connected system, which has successfully survived severe storms and also tsunamis originating in both Japan and Chile. In addition, we continue to utilize and leverage our experience with the Hawaii PB40 and our Scotland PB150 to refine the design of the company's next-generation PowerBuoy, the PB500. We're making significant progress with concept design and wave tank testing of this larger-scale system, aimed at further lowering the cost per kilowatt hour of wave power, making it more competitive with other energy sources. We expect the PB500 to be ready for ocean trials in late calendar 2013, and we're working on appropriate grants and other funding from a range of sources to make this a reality. In the interim, our PB150 PowerBuoy will be our workhorse for utility-grade installations over the next several years. Now turning to Slide 9. I'd like to give an update on our LEAP project. This highlights our Autonomous PowerBuoy that can operate in remote ocean applications where there is little access to grid-connected power. The Navy's Littoral Expeditionary Autonomous PowerBuoy program has as its goal the generation of remote reliable energy for long-term homeland security and maritime surveillance. OPT is making solid progress completing the LEAP PowerBuoy structure, incorporating a new power take-off system, which has successfully completed its land testing at our facilities in New Jersey. We plan to integrate the PTO into the PowerBuoy and deploy it for testing in the Atlantic Ocean off the coast of New Jersey later this year. We are pleased with our pace on this autonomous project and look forward to working with the U.S. Navy during ocean testing within the coming months. Turning to Slide 10. I'd like to talk about our overseas initiatives in Japan and Australia. We've made continued progress with regard to bringing clean wave energy to Japan, and following the recent, very tragic events there, demand now seems greater than ever. We are working with Mitsui Engineering & Shipbuilding, or MES, on developing a new mooring system for our PowerBuoys customized for wave power stations off the coast of Japan. We've also worked with MES to conduct certain development engineering in connection with the project as well as to perform tests at their wave tank facilities. The company has continued to make progress towards the next steps of completing economic assessments and identifying a project site for an in-ocean trial of the PowerBuoy system. Following an expected agreement for that work and the identification of a project site, MES and OPT would then enter into a contract to conduct ocean trials of the demonstration PowerBuoy system. The trial PowerBuoy system would provide the basis for the expected build-out of a commercial-scale OPT wave power station with an initial capacity of several megawatts, scalable to 10 megawatts or more. It's very exciting, and Mitsui is proving to be an excellent partner. We've seen accelerated interest by the Japanese government and industry since the dangers of nuclear power were exposed earlier this year. Moving to Australia. And, as previously reported, our joint venture there with Leighton Contractors won a AUD $66.5 million grant from the Commonwealth government, the equivalent of about USD $71 million, with the purpose of building a 19-megawatt wave power station off the coast of Victoria, supplying electricity for up to 10,000 homes. The grant is conditional on Leighton obtaining the balance of funding needed for the project, although it is expected this can be raised in stages. Leighton and OPT have been discussing the best methods for securing project financing. We are encouraged by the strong interest in our power applications and by the support of the Australian government, and we look forward to providing an update on this important project as we get more visibility on the project financing. I will now turn the call over to Brian Posner, who will discuss our financial performance for the fourth quarter and fiscal year in detail.

Thanks, Chuck. As noted on Slide 11, OPT reported revenue of $1.9 million for the fourth quarter as compared to revenue of $2.4 million in the 3 months ended April 30, 2010. The decline year-on-year primarily reflects a reduction in revenue from OPT's Deep Water Active Detection System, or DWADS, project with the U.S. Navy as that contract moved towards completion. OPT's contract backlog at April 30, 2011, was a record $8.9 million, as Chuck just mentioned, compared to $5.7 million at April 30, 2010 and $5.8 million at January 31, 2011. The reported backlog at our fiscal year end included 2 previously-announced awards from the U.S. Department of Energy totaling $4.8 million for the deployment of one of OPT's PowerBuoys at Reedsport, Oregon and for the development of the PB500. The company reported an operating loss of $5.4 million for the 3 months ended April 30, 2011 as compared to a loss of $6.4 million for the 3 months ended April 30, 2010. The reduction in operating loss in the current fiscal quarter was primarily due to a decrease in product development costs, principally for the PB150 system in Oregon and an increase in gross margin, partially offset by an increase in selling, general and administrative costs. The increase in SG&A expenses was largely due to higher compensation and marketing costs. OPT reported a net loss of $5.3 million for the 3 months ended April 30, 2011 as compared to $6.2 million for the same period in the prior year. This decrease in net loss was primarily due to the decrease in operating loss and a decrease in foreign exchange loss, partially offset by a decrease in interest income. Interest income for the quarter decreased $142,000 compared with $268,000 for the same period last year. This decrease was largely due to the decline in average yield and in the total invested cash and marketable securities. Turning to the full fiscal year, OPT posted revenue of $6.7 million, or 31%, as compared to revenue of $5.1 million in the prior year period. This is the highest level of revenues reported by OPT since it commenced operation. The top line growth primarily reflects an increase in revenue from the U.S. Navy under the company's LEAP program. In addition, there was an increase in revenue from OPT's PB150 PowerBuoy project in Reedsport, Oregon and the company's PB500 development project. The revenue increases in these projects were partially offset by declines in revenue from OPT's DWADS project with the U.S. Navy, a utility-scale project in Spain, a utility PowerBuoy project with the U.S. Navy at the Marine Corps Base in Hawaii as activity for the current phases of these contracts was completed. The company reported a full year gross profit of $400,000 as compared to $800,000 for the 12-month period ending April 30, 2010. The current fiscal year's gross profit was negatively impacted by a reduction of $240,000 due to a change in estimated revenue recognized in connection with the wind-down of the company's prior project in Spain. In addition, gross profit for the 2010 fiscal year was favorably affected by a reversal of a provision for contract losses in connection with our project in Spain of approximately $400,000. Product development costs increased to $13.3 million as compared to $13 million last fiscal year, reflecting an increase in cost from OPT's PB150 PowerBuoy project in Oregon. SG&A costs for the year decreased to $8.4 million from $9.1 million in fiscal 2010, largely due to a decrease in compensation and recruiting expenses. The operating loss for the fiscal year ended April 30, 2011 was $21.3 million, in line with fiscal year 2010. Interest income in fiscal 2011 decreased to approximately $700,000 from $1 million in the prior-year period, reflecting a decline in average yield and in the total invested cash in marketable securities. In addition, the current fiscal year excludes $558,000 in other income recorded in the prior year prior to settlement of a claim by OPT against a supplier of engineering service. OPT recognized foreign exchange loss of $229,000 for the 12 months ended April 30, 2011 as compared to a foreign exchange gain of $541,000 for the same period last year. The difference was due to the relative change in the value of the British pound sterling, euro and Australian dollar as compared to the U.S. dollar during the 2 periods. In fiscal 2011, OPT also recognized an income tax benefit of $364,000 in connection with the sale of New Jersey net operating tax losses. The company's net loss was $20.4 million for fiscal 2011 versus $19.2 million in fiscal 2010. Turning to Slide 12. On April 30, 2011, total cash, cash equivalents, restricted cash and investments were $48.3 million. The company's cash equivalents and investments continue to be highly liquid investments consisting primarily of U.S. Treasury notes and term deposits with large commercial banks. We believe the rate of cash outflows will decrease in fiscal 2012, reflecting completion during the current fiscal year of significant milestones associated with the construction of our PB150 systems for Oregon and Scotland. Now I will turn the call back over to Chuck for a discussion of some of our near-term goals and projects.

Thanks, Brian. Now turning to Slide 13. Ocean Power Technologies is gaining the necessary traction to move us into full commercialization of our PowerBuoy technology. We're now proving the efficiency and durability of our PowerBuoys for both grid-connected and autonomous applications. External third-party validation of our technology includes the PB150 design certification by Lloyd's Register, certification of our grid connection by Intertek Testing Services and our having received the highest rating in connection with an independent environmental assessment performed on our technology. Our commercial partners include Mitsui, Lockheed and the U.S. Navy, among others. But we see this as only the beginning as we continue to work with governments and utilities across the globe to validate our systems and accelerate deployment opportunities. We're focused on achieving specific goals during fiscal 2012, including finalizing our ocean trials in Scotland, deploying our PB150 off the coast of Oregon and deploying an autonomous PowerBuoy for the Navy's LEAP program in the Atlantic Ocean off New Jersey. We also expect to make business development progress in North America, Europe, Australia and Japan. To our investors, we want to assure you that we remain focused on the fundamentals: demonstrating the survivability of our technology, increasing the efficiency of the PowerBuoy, reducing the cost of energy, bringing in new business and expanding our relationships with strategic partners. We expect that our balance sheet will continue to be strong, and we believe 2012 will be a year of significant accomplishment for OPT, one that sees further deployments, increased demand and additional technology achievements. We thank our investors for their continued interest in our success. This concludes our prepared statement for the fourth quarter review. We'll now open the call for questions, so please go ahead, Operator.

[Operator Instructions] Our first question comes from the line of George Santana with Ascendiant Capital.

There's been a lot of interesting developments over in Australia with their carbon tax and talk about the clean energy development fund. Can you talk a little bit about that and whether that would help OPT?

Sure, happy to. We've been following it very closely. The most recent story, which is the government's announcement of this proposed, I guess they call it the climate change plan, but it's more commonly known as the carbon tax plan, actually has its antecedence in the previous administration but it did not get too much traction. Now under Prime Minister Gillard's government, we're very happy to see these proposals in the nation's dialogue, and it looks like it's going to really gain some strong reception within the government. A couple of -- by the way, I think for our project that we're pursuing in Australia, to really cut to the heart of your question, this very definitely will help the building of the finance to support the project, the financing, and I think as well will speak very positively to further initiatives as not only relate to our 19-megawatt project, but to scale it up beyond the 19 megawatts. A couple elements of the program that we're following closely, this is, again, the carbon tax plan, as we understand it, first of all, that they are setting a floor price for carbon. I believe it's AUD $23 per ton starting in 2012, and rising with an inflation rate in years thereafter. So that's important to us in that it really establishes, I think, a market structure that supports pricing. And we have been talking with some parties with respect to power purchase agreements on this project, and this particular aspect of the carbon tax plan will be very helpful. Also, another big part of it is, as you rightfully point out, I think it's several billion dollars of monies that are allocated for investment by this newly-formed clean energy finance corporation. And these are billions of Aussie dollars for investment in renewable energy, I think energy efficiency technologies and also related industries. So we see that as a very important part of the picture for our work in Australia. And one thing that was also rather stunning to us was the fact that apparently, they're going to be looking to close something like 2,000 megawatts of polluting-energy electricity-generation plants by 2020. And when you kind of look back in the history, certainly over the last 20, 30 years in Australia's industrial development, the use of highly-polluting ground coal has really been an important part of what has provided energy for their industries. So that's a very bold measure by the government. All told, very positive for our work in Australia.

And Chuck, you mentioned a few times this financing and how do you plan or propose to finance each of these projects in Oregon, Scotland? Would you do project finance at the project level? Or actually fund it, retain a piece of the equity? Can you talk a little bit about that?

Right. Generally speaking, we seek to form special purpose vehicles that are project-specific, and that would be the vehicle that would be utilized to bring in the money for the project. And I framed it as the money for the project. Because, for example, in the case of Oregon, there are a number of avenues for us to pursue, including the business energy tax credit, which is very favorable, I think, as a provision that's been set up in Oregon. We have received the benefits of this by the issuance of some certificates by the state of Oregon, with respect to our first PowerBuoy, and as well the second phase that I referred to in the prepared statements. But the recipient of that is the special-purpose vehicle that we set up. That's one aspect of the money for the Oregon project that, or the financing for it. Another would be, I think, to which you referred a little bit earlier in your question, set up the question, which is that, yes, for the second phase, that is to say 9 additional buoys as well as the grid-connection infrastructure, we're looking for partners and customers for that who would put money into that project. So it would not be financing that runs to OPT Inc. It would run to the special-purpose vehicle. And we're taking the same tack, by the way, in Australia with the formation of an entity called Victorian Wave Partners, which was set up by Leighton, our partner there. And it is that entity, Victorian Wave Partners, which is the beneficiary of the grant that we announced to the AUD $66.5 million grant that runs from the Commonwealth to this project. So generally speaking, we utilize special-purpose vehicles, and that's the level at which we bring in the financing, which in turn can come from a number of different sources.

Our next question comes from the line of Jason Feldman with UBS.

So has the tone of conversations with potential customers changed at all following the deployment of the PB150 in Scotland now that you have an actual buoy out there and some testing data? Or is it still too early and the data's too new for that to have made much difference yet?

No, it has made a difference. And we're seeing that in a number of parts of the world in which we're targeting our business development activities, which again, as we may have said in previous calls, our BD efforts are focused on North America, Europe, Japan and Australia. So very definitely, that is helping in the dialogue, also by jumping out in the marketplace and announcing hard data. That's, I think, that is helping and creating a sense of greater transparency in the industry. One other thing I would add is that, what has helped also, helped us a great deal, Jason, is the continuing success of the Hawaii PowerBuoy, which is grid connected. It's been out there for, now, since December 2009. And the absence of any news about it tends to take it sometimes off of the newspapers or any reporting about us as a company. But simply the fact that there's no news, the fact that it has continued to be connected to the grid, it's out there, survived storms, is really fabulous news. And when we talk with customers, we certainly bring out that point. So the combination of these 2, I think, has very definitely added and increased the levels of interest we're getting, including new interest as well as existing dialogues with prospective customers in those 4 parts of the world.

Okay. And how has the dialogue been, I mean? Are customers saying they want to wait for the PB500? Is it they're saying they want to see some incremental testing time for the PB150? Or is it really just uncertainty, depending on the country, about energy policy and what the economics of the power generation are going to be going forward? What's holding customers back?

Sure. Well, we very definitely are engaging a lot of discussion about our PB150. We do indeed see that as our workhorse over the next several years. What we intend to be selling in the utility power markets, that's the level of discussion that we're having right now with a number of customers. By the way, the first phase of our project in Australia would be with 150s, talking with Mitsui about 150s, likewise in Oregon and also in Europe. So there's no waiting for the next generation, if you will, from the standpoint of interest that at least we're seeing at this point in a lot of our dialogues. To the other part of your question though, another dimension in a few of these areas, by the way, not only Australia but also U.K., and kind of following in up on the question asked by George Santana a little bit earlier is that the greater certainty associated with carbon price stabilization very definitely helps. And that uncertainty in Australia that had existed and which we see now is becoming result, will help, and I believe that perhaps has slowed things down in Australia. Similarly, in the U.K., what's almost directly in parallel with what's going on in Australia, the U.K. government, the Department of Energy and Climate Change, has recently issued a White Paper which is very redolent of what we've heard associated with the carbon tax plan in Australia, for example. One of the key elements of their program being proposed in the U.K. also includes stabilization for the pricing of CO2. So those kinds of initiatives which add certainty to pricing and which in addition attach longer time frames for that certainty have, I think, definitely on a prospective basis, will help accelerate bringing customers in. And while it's hard for me to quantify, and it's never going to specifically be said to us, I got to believe that some of that uncertainty up to this point has slowed things down and been something that customers have thought about.

That's very helpful. And just lastly, and I'm sorry, I'm not trying to be overly picky, but in the press release, the comments about backlog says it includes snap [ph] of funded and unfunded amounts, which is slightly different language than prior releases? Has there been a change in the way that you're recognizing backlog? Or is there something else there that I'm just not following?

Jason, we've actually been very conservative on how we report our backlog. The DoE awards were announced in September of 2010, and we did not include those in our backlog until we had executed contracts with the DoE. Just basically the reason for the disclosure language here is just to comply with SEC regulations. We expect these awards to be fully funded. But again, in conformance with SEC regulations, we have to denote what's funded and what's unfunded at this point. But again, the company expects these awards to be fully funded.

I would also add one quick point to that, Jason, which is that in prior years, we've had some unfunded amounts related to a few of our government contracts, but the unfunded amount was generally very small. Because we cut these big contracts from DoE and the funding is coming over 2 fiscal years, we needed to disclose that, as Brian said, in compliance. It's just a more material amount than in the past. So it's really the materiality of the unfunded amount, which has grown a little bit from what it was in the past. It's that increased materiality that has precipitated this new -- what looks like new disclosure.

Okay. So it's increased materiality, but the point is there's not a change in policy in any way?

Exactly right. Yes.

Our next question comes from the line of Aram Fuchs with Fertilemind Capital.

I was just wondering if you can give us a little more specifics on the system that was quantified in the power generated off Scotland? Was there something built in-house, or was it a system built by a third party?

Sure, Aram. The system itself, the metal structures associated with it were all built in Scotland. Much of the power take-off system resident inside the buoy and the controls, much of that was assembled and tested in the United States, then moved over to the U.K., where it underwent a great deal of land cycle testing. We then integrated it in Scotland into the buoy itself. And I would say that certainly the vast majority of the system itself was not only procured, but as well built and assembled in Scotland.

But the actual meter that calculated the electricity generated. That is something that a third party built, or is that something in-house? In other words, I just want to be confident that it's an accurate number that you have.

You and us as well. Absolutely. The PowerBuoy, to that specific point, the PowerBuoys have a great deal of instrumentation and sensors within them, all of which we buy off the shelf. In fact, it's a great part about the PowerBuoy, there's virtually nothing in it that is highly customized. Instead, we can procure almost everything off the shelf. So the instrumentation and equipment that is used in gathering the data is all externally procured. The data that it gathers is then transmitted by satellite to our land-based computers. And so we then take it from there. We get that data, and we compare it to what our models predict.

And then on the survivability front. Were the peak waves typical for the season in Scotland? Or was it better weather, worse weather?

Sure. It's fairly consistent, from what our marine people as well as our advisers in Scotland has told us. It did include some storm weather. There's one storm system that came through, if I remember correctly, I think it was the first half of May. And we had some peak waves in that timeframe that were as high as 3 meters, a significant wave height that came through. But fairly consistent with experience in the past. One thing that's just you can count on is that it's irregular. In general, you have seasonality, but within whatever season you may be doing your testing or having your system in the water, you still have a high degree of irregularity to the wave patterns. And that was part of the reason why we're so pleased with the results.

Right. And why didn't you release this data for the Hawaii buoy?

Well, the Hawaii buoy, for one thing, was a is system that was much smaller. It is one that at its outset was a test system. So we wanted to make sure that we had a fair amount of data that we could track easily to our model, that was more robust as a system. And in turn, with respect to the 150, that's our bread and butter, that's our utility system, and we wanted to get that information out. I think on the Hawaii system, that's, again, a smaller system that was originally was autonomous. It was not pre-connected, and then we effected the grid connection back in September 2010.

Are you getting similar capacity factors in it? Or is there something different because it's smaller that it's sort of meaningless to even do commercial equations like that?

Well, all data is good data, first of all, picking up on your word "meaningless". You always get good information. Whether it's good or bad, it helps perfect your model, it helps perfect your technology. But that particular system, you're right in that the earlier stages of it is something where we -- when we spec-ed this particular buoy, it was as a 40. We ended up putting it in fairly shallow water, by the way. So to maybe get a little more specific, though, because I'm not trying to dance around your question, here, to get a little more specific about the data, it's rated as a PB40, so it should be producing, on average, about 10 to 12 kilowatts. And that gives you a sense of capacity factor there, the 12 out of 40. We've been experiencing a bit less than that 10 to 12 range because it's in shallow water and also because of the way we spec the systems, the -- actually, more precisely, the generator and the transformer in it. So the power output of that has been less than that archetypal or expected capacity factor.

Got it, that's helpful. And then one last question. Brian, you mentioned that you think cash burn will go down. But I'm just trying to do some back-of-the-envelope calculations on your backlog, and then you're mentioning that the cost for Scotland should go down. What I would have assumed is that in the second quarter, the costs had already started going down in Scotland. So can you give me some further evidence of why you think this burn rate will start declining?

Well, the big driver is the product development expense. Again, that's one of the biggest numbers on our P&L, if not the biggest number, $13.3 million this year. And the big components or the major components of that expense are the PB150 in Scotland and Oregon. So with those construction projects complete and behind us, we believe the rate will go down, the rate of cash burn will go down. It could be still lumpy in the first and second quarters of the fiscal year. But, however, we're very confident. We're confident over the full fiscal year that the cash burn should go down. Again, with the deployment of the PB150 in Scotland in particular, that burn was a significant component, and that a lot of that or almost -- most of that is behind us.

And so of that $13.3 million, you're saying that a vast majority was real checks to the fabricators and to buy this off-the-shelf equipment?

Final assembly and deployment and those kind of other expenditures.

And then on this backlog, how do you price the gross margin into that? I mean, is it sort of what we're seeing? Or can you talk about that? Or is this just...

I don't want to get too detailed. It really depends on the nature of the contracts we have, as we disclosed in our SEC filings.

And our last question comes from the line of Robert Littlehale with JPMorgan.

Chuck and Brian, just wanted to ask about the milestones that you anticipate reaching fairly quickly. Is that prompting any triggers on any additional funding or access to any additional grants or anything along those lines?

You mean in terms of what monies might be needed in order to achieve these funds?

Are these internal milestones that you guys set? Or were these milestones set by someone who said, "If you achieve these levels of success, the following will happen?"

Sure.

Like you'll have access to additional monies or grants or anything like -- I just needed a little clarification on that.

Right. Well, certainly the general statement, success on any of these is, we believe, going to help in the successive rounds of either grants or funding from the specific customers who might be involved, such as on the LEAP program. Progress in one phase definitely helps, moving forward, in getting additional financing. In the case of the Scotland program, the successful conclusion of these trials is one where, or at least one related to our ongoing efforts to find a customer for that system. The next step would be, I guess, for that system, again, we find a customer. So in that sense, achievement of this and the success that we've reported on this PB150 is something that will, we believe, lead to further funding. It's not a specific milestone that those prospective sources funding have said to us, "Gee, do this, and then we'll put in more money." So we don't have quite that sense of quid pro quo and that straight line between the 2 dots in most cases. And we certainly never presume anything when it comes to our business development efforts. But in general, all of these goals which, yes, are set by us internally or result from a contract, again, such as LEAP, that's all a contractual step. And we hope that they will point to additional opportunities for us to either get new contracts or bring in new sources of grants.

Thank you, and that concludes our questioning period. Mr. Dunleavy, you may proceed with any closing remarks.

Thank you very much. And thanks again to all of you for attending today's call and for your continued interest in Ocean Power Technologies. If you do have any further questions, please don't hesitate to contact us, either myself or Brian Posner. Otherwise, we look forward to speaking with you all in the next quarter.

Thank you, everyone. This concludes our presentation. Everyone may now disconnect, and have a great day.