Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2014, filed March 14, 2014. The filing is unaudited. The company develops and seeks to commercialize PowerBuoy systems and related services that generate electricity from ocean waves.
Financial performance and position
| Metric | Three months ended Jan. 31, 2014 | Three months ended Jan. 31, 2013 | Nine months ended Jan. 31, 2014 | Nine months ended Jan. 31, 2013 |
|---|---|---|---|---|
| Revenue | $0.2 million | $0.9 million | $1.1 million | $3.2 million |
| Gross profit | $6,409 | $(24,498) | $8,232 | $92,060 |
| Gross margin | 3.2% | (2.8%) | 0.7% | 2.9% |
| Operating loss | $(2.6) million | $(3.0) million | $(9.8) million | $(12.2) million |
| Net loss attributable to OPT | $(0.7) million | $(1.5) million | $(7.8) million | $(10.6) million |
| Loss per share | $(0.06) | $(0.14) | $(0.71) | $(1.02) |
- Operating expenses were $2.6 million in the quarter and $9.8 million year to date. Nine-month product development expense declined 33% to $3.7 million, while selling, general and administrative expense declined 11% to $6.1 million.
- Net loss benefited from a $1.7 million income tax benefit arising from the sale of New Jersey net operating loss carryforwards and research and development credits. This was not an indication of recurring operating profitability.
- Net cash used in operating activities was $8.1 million for the nine months, compared with $8.2 million in the prior-year period.
- Investing activities provided $1.7 million, primarily from net maturities of marketable securities. Financing activities provided $5.9 million, primarily from the sale of common stock under the ATM facility.
- Cash and cash equivalents were $5.9 million at January 31, 2014. Marketable securities were $11.5 million and restricted cash was $2.1 million, for combined cash, marketable securities and restricted cash of approximately $19.6 million.
- Total assets were $22.3 million and total liabilities were $5.7 million. Debt totaled $275,000, consisting of $100,000 current and $175,000 long-term debt.
- Accumulated deficit was $148.4 million at January 31, 2014.
Material changes versus the prior comparable period
- Quarterly revenue decreased 77% and nine-month revenue decreased 65%, primarily because of the suspension of the Oregon Mark 3 PowerBuoy project, lower billable development work, completion of a prior-year Mitsui project, and higher estimated costs on the Spain WavePort project.
- The company recorded negative revenue from the WavePort project in the quarter because estimated costs at completion increased.
- Quarterly operating loss improved 15%, and nine-month operating loss improved 20%, primarily because of lower product development and SG&A spending.
- The company issued 2,254,180 shares under its ATM facility during the nine months for net proceeds of approximately $5.9 million. It issued an additional 1,052,154 shares in February 2014 for approximately $3.8 million net proceeds.
- Shares outstanding increased to 12.7 million at January 31, 2014 from 10.4 million at April 30, 2013; reported shares outstanding as of February 28, 2014 were 13,755,519.
- Negotiated backlog increased to $5.6 million from $4.3 million at January 31, 2013. Approximately $1.2 million related to the Oregon project, whose realization depends on regulatory matters and additional project funding.
Guidance, outlook, risks and unusual items
- Management expected existing cash and marketable securities as of January 31, 2014 to fund operations and capital requirements into the second calendar quarter of 2015, but stated that additional equity or debt financing would be required to execute its growth strategy.
- Following the February share sales, the company stated that it had effectively reached the limit of the ATM agreement and was evaluating additional financing alternatives. Approximately $30 million remained available under the S-3 shelf registration, subject to applicable limitations.
- The Oregon project was suspended while the company assessed additional FERC requirements, project delays, costs and project-specific financing. The company also surrendered the FERC preliminary permit for the contemplated 100-buoy final phase.
- The Australian VWP project remained dependent on achievement of milestones, significant additional funding and other conditions under the amended ARENA grant agreement. Additional equity financing could dilute the company’s ownership of OPTA and VWP.
- Restricted cash supported letters of credit, including obligations related to Barclays, the New Jersey Board of Public Utilities and Oregon seabed equipment removal. Total restricted cash increased to $2.1 million.
- The company faces an inquiry by Spanish tax authorities concerning approximately $250,000 of claimed IVA input tax credits. It recorded no liability because management believed the credit was properly claimed.
- The company was involved in a commercial dispute concerning deployment damage to Oregon anchoring and mooring equipment; mediation was expected in late March 2014. Management had accrued its estimated outcome.
- A $600,000 deferred credit related to an emissions-credit option remained payable, with the sale period extended through December 31, 2017.
- Key business risks include continued losses and negative operating cash flow, dependence on government funding and subsidies, limited commercialization history, technology and project execution risk, customer concentration, regulatory delays, foreign-exchange exposure, competition, and the need for additional financing.
Investor verification checklist
- Verify the sustainability of liquidity given $8.1 million of nine-month operating cash burn and management’s stated need for additional financing.
- Assess the likelihood, timing and economics of commercialization of the PowerBuoy product lines, including dependence on government incentives.
- Review the status and funding conditions of the Australian VWP project and the suspended Oregon project.
- Examine the WavePort cost estimates, negative quarterly revenue and related contract-loss exposure.
- Confirm the impact of ATM equity issuance, February 2014 financing, potential dilution and remaining S-3 capacity.
- Monitor the Spanish IVA inquiry, Oregon commercial dispute, letters of credit and other restricted-cash obligations.
- Distinguish recurring operating performance from the one-time $1.7 million tax benefit and foreign-exchange gains.