Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended January 31, 2013, representing fiscal 2013 third quarter and year-to-date results. The financial statements are unaudited. The company develops and seeks to commercialize PowerBuoy systems and related ocean-wave energy products and services. Government agencies, particularly the U.S. Department of Energy and U.S. Navy, continued to represent a significant portion of revenue.
Financial Performance and Position
| Metric | Three months ended Jan. 31, 2013 | Three months ended Jan. 31, 2012 | Nine months ended Jan. 31, 2013 | Nine months ended Jan. 31, 2012 |
|---|---|---|---|---|
| Revenue | $0.9 million | $0.9 million | $3.2 million | $4.3 million |
| Gross profit (loss) | $(24,000) | $(11,000) | $92,000 | $30,000 |
| Operating loss | $(3.0) million | $(3.2) million | $(12.2) million | $(12.4) million |
| Net loss attributable to OPT | $(1.5) million | $(2.2) million | $(10.6) million | $(11.0) million |
| Loss per share | $(0.14) | $(0.21) | $(1.02) | $(1.07) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(8.2) million | $(9.7) million |
- Quarterly revenue declined 6%, while year-to-date revenue declined 26%, primarily because the U.S. Navy LEAP project was completed in fiscal 2012. Increased activity on Oregon, Spain, and Mitsui projects partly offset the decline.
- Quarterly gross margin was negative, while year-to-date gross margin was approximately 3%. Most contracts were cost-sharing arrangements that generally produce zero gross profit on the funded portion.
- Quarterly operating expenses decreased 8% to $3.0 million, reflecting a 57% reduction in product development costs that was partly offset by a 30% increase in selling, general and administrative costs.
- Year-to-date product development costs decreased 17% to $5.5 million, while selling, general and administrative costs increased 17% to $6.9 million, primarily due to business-development legal fees and Australian site-development expenses.
- The company recorded a $1.45 million income tax benefit from the sale of New Jersey net operating loss carryforwards. This benefit is a significant contributor to the reduction in reported net loss and is not recurring operating revenue.
- At January 31, 2013, cash and cash equivalents were $9.0 million, marketable securities were $14.1 million, and restricted cash was $1.4 million. Total cash, cash equivalents, restricted cash, and marketable securities were approximately $24.5 million.
- Total assets were $28.1 million, compared with $37.4 million at April 30, 2012. Total equity was $22.2 million, compared with $32.1 million.
- Total debt was $375,000, consisting of $100,000 current debt and $275,000 long-term debt. The company had no reported defaults upon senior securities.
- Accumulated deficit was $136.5 million at January 31, 2013, and the company has not been profitable since inception.
Material Changes Versus the Prior Comparable Period
- Revenue fell by $1.1 million, or 26%, for the nine-month period, primarily due to completion of the LEAP program and reduced autonomous PowerBuoy activity.
- Operating loss improved modestly by $147,000 year over year for the nine-month period, despite lower revenue, largely because of lower product development costs.
- Net loss attributable to OPT improved by $491,000 for the nine-month period, aided by the larger New Jersey tax-loss benefit.
- Operating cash usage improved by $1.5 million to $8.2 million, but remained substantial.
- Marketable securities declined by $8.3 million from April 30, 2012, and total liquidity declined materially from the prior year comparable balance.
- Negotiated backlog was $4.3 million at January 31, 2013, down from $7.8 million at January 31, 2012. Funded backlog was $4.3 million, compared with $5.8 million one year earlier. Most backlog was expected to be recognized over more than 12 months.
Guidance, Outlook, Risks, and Unusual Items
- Management believed existing cash, cash equivalents, and investments would fund anticipated working capital and capital expenditures through April 30, 2014. The company expected to continue seeking project financing, grants, subsidies, equity, debt, or credit facilities.
- A Form S-3 shelf registration filed in January 2013 became effective in February 2013. Future equity or convertible-security issuance could dilute existing shareholders; debt financing could impose senior claims and restrictive covenants.
- The company planned to deploy a Mark 3 PowerBuoy off Oregon but expected significant funding, regulatory, business, and operational requirements. In February 2013, FERC staff notified the company that the first Oregon PowerBuoy may be subject to FERC jurisdiction, potentially causing additional expenditures and delaying deployment beyond calendar 2013.
- The planned 19-megawatt Victoria, Australia project depended on an approximately A$66.5 million government grant, which remained subject to external funding milestones and agency review. The company engaged a financial adviser to pursue power purchase agreements and financing.
- The company warned that wave-generated electricity generally costs more than conventional electricity without subsidies. Commercial adoption therefore depends materially on government incentives, subsidies, external financing, and successful technology commercialization.
- Revenue concentration remained high: customers accounting for at least 10% of revenue represented 90% of quarterly revenue and 98% of nine-month revenue. Loss or reduction of a major customer could materially affect results.
- The company had a $600,000 deferred credit related to an emissions-credit option. The option period was extended to December 31, 2017; no eligible credits had been generated, and management did not believe generation before that date was probable.
- The company was involved in discussions concerning modifications to its delayed Spain construction agreement. If no modification were reached, the customer could potentially terminate the agreement and seek limited direct damages, although management did not expect a material adverse effect.
- Spanish tax authorities were reviewing an approximately $250,000 value-added-tax credit. The company believed the credit was properly claimed and had recorded no liability.
- Management stated that there were no material changes to the risk factors disclosed in the fiscal 2012 Form 10-K and concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether the company can convert its technology-development pipeline and backlog into commercially profitable product and maintenance revenue.
- The timing, cost, financing, and regulatory status of the Oregon PowerBuoy deployment, including the potential impact of FERC jurisdiction.
- The status of the Victoria, Australia grant, external funding milestones, power purchase agreements, and project financing.
- Available liquidity relative to continuing operating cash burn, planned development spending, and potential capital expenditures.
- The sustainability of reported tax benefits from New Jersey net operating loss sales.
- Customer concentration, backlog conversion, contract-loss exposure, and the effect of percentage-of-completion accounting on reported revenue.
- Potential dilution or increased leverage if additional equity, convertible securities, debt, or credit facilities are issued.