Ocean Power Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended October 31, 2012, filed December 14, 2012. The company develops and seeks to commercialize PowerBuoy systems and related services that generate electricity from ocean waves. Revenue has historically depended substantially on U.S. government and other development contracts, while management is seeking to expand commercial utility, industrial and maritime applications.
The company reports one operating segment. At October 31, 2012, it had 10,394,730 common shares outstanding as of November 30, 2012, and an accumulated deficit of $135.1 million.
Key Financial Metrics
| Metric | Three Months Ended October 31, 2012 | Three Months Ended October 31, 2011 | Six Months Ended October 31, 2012 | Six Months Ended October 31, 2011 |
|---|---|---|---|---|
| Revenue | $1.36 million | $1.52 million | $2.34 million | $3.43 million |
| Gross profit | $114,000 | $32,000 | $117,000 | $41,000 |
| Gross margin | 8% | 2% | 5% | 1% |
| Operating loss | $(4.93) million | $(4.05) million | $(9.24) million | $(9.16) million |
| Net loss attributable to OPT | $(4.75) million | $(3.88) million | $(9.09) million | $(8.88) million |
| Loss per share | $(0.46) | $(0.38) | $(0.88) | $(0.86) |
Six-month product development expense was $4.86 million, compared with $5.16 million in the prior-year period. Selling, general and administrative expense increased to $4.49 million from $4.03 million. Interest income declined to $90,000 from $246,000, reflecting lower invested balances and yields. The company recorded a six-month foreign exchange loss of $6,000, compared with a $20,000 gain in the prior-year period.
At October 31, 2012, cash and cash equivalents were $13.45 million, marketable securities were $11.62 million, and restricted cash was $1.36 million. Total cash, cash equivalents, restricted cash and marketable securities were approximately $26.4 million. Total assets were $30.32 million and total equity was $23.54 million.
Total debt was $400,000, consisting of $100,000 classified as current and $300,000 classified as long term. Current liabilities were $5.88 million, including $3.67 million of accrued expenses and $1.62 million of unearned revenue. The company had no income tax benefit because its deferred tax assets were fully offset by a valuation allowance.
Cash Flow and Liquidity
- Net cash used in operating activities was $6.30 million for the six months ended October 31, 2012, compared with $7.89 million in the prior-year period.
- Net cash provided by investing activities was $10.45 million, primarily reflecting maturities of marketable securities.
- Net cash used in financing activities was $59,000, primarily for debt repayment and treasury stock purchases.
- Cash and cash equivalents increased by $4.09 million during the six months, ending at $13.45 million.
- Management stated that existing cash, cash equivalents and investments were expected to fund anticipated working capital and capital expenditures through April 30, 2014. Management also stated that additional equity, debt or credit financing may be required if resources are insufficient.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased 10%, while six-month revenue decreased 32%, primarily because the U.S. Navy LEAP autonomous PowerBuoy project was completed in fiscal 2012.
- Quarterly operating loss increased 22% and quarterly net loss attributable to OPT increased 22%, mainly because product development expense rose 42%.
- Six-month operating loss increased 1% and six-month net loss attributable to OPT increased 2%, despite lower product development costs, because revenue declined and SG&A increased 11%.
- Gross margins improved but remained very low because most contracts were cost-sharing arrangements that produce little or no gross profit.
- Customer concentration increased: the U.S. Department of Energy represented 55% of six-month revenue, Mitsui Engineering & Shipbuilding represented 20%, and the European Union WavePort project represented 15%. These customers collectively represented 90% of six-month revenue.
- Negotiated backlog was $5.2 million at October 31, 2012, down from $8.8 million a year earlier. Funded backlog was $5.2 million, compared with $6.8 million in the prior-year period. Management expected most backlog to be recognized over the following 12 months.
Guidance, Outlook, Risks and Unusual Items
- The company received new orders from Mitsui Engineering & Shipbuilding and the U.S. Department of Homeland Security during the quarter.
- Management planned to deploy a 150kW PowerBuoy off Reedsport, Oregon, during calendar 2013. Deployment and commissioning were expected to require significant funds, and the company intended to seek additional project funding.
- The planned 19MW wave power project in Victoria, Australia, was supported by a potential A$66.5 million grant, but the grant was subject to milestones and required substantial additional financing. In November 2012, the company engaged a financial advisor to pursue project financing.
- Wave-energy electricity costs substantially exceeded prevailing electricity prices in many markets without subsidies or other incentives. Commercial adoption therefore depends significantly on government incentives, subsidies and project financing.
- Revenue recognition relies substantially on percentage-of-completion estimates. Because the company has a small number of contracts, changes in estimated costs, milestones or completion timing could materially affect reported revenue and earnings.
- The company had a $785,000 contract loss reserve included in accrued expenses. Management reported no material impairment of long-lived assets for the six months ended October 31, 2012.
- The company’s $600,000 deferred credit related to an option to purchase emissions credits was classified as noncurrent at October 31, 2012. In December 2012, the agreement was extended through December 31, 2017; the company did not expect to generate eligible credits before that date.
- On December 12, 2012, the company temporarily reduced the annualized base salaries of its Executive Vice Chairman and CEO from $475,000 to $420,000 and from $425,000 to $375,000, respectively, for January 1 through July 31, 2013. Each officer may receive fully vested options or restricted stock equal to the aggregate salary reduction.
- Management stated that there were no material changes to the risk factors disclosed in the fiscal 2012 Form 10-K. Legal matters arising in the ordinary course were not expected to have a material adverse effect.
Investor Verification Items
- Verify the company’s ability to convert its $5.2 million backlog into revenue and cash, particularly given customer concentration and the decline from the prior year.
- Assess whether available liquidity can support continuing operating losses and the planned Oregon deployment through April 30, 2014.
- Review the financing, milestone and grant conditions for the Australian 19MW project and the status of the related agency review.
- Evaluate whether the company can transition from government-supported and cost-sharing development work to profitable commercial product and maintenance revenue.
- Monitor contract-cost estimates, the $785,000 contract loss reserve and percentage-of-completion assumptions.
- Consider potential dilution or increased leverage if the company raises additional equity or debt financing.
- Verify the effects of the December 2012 emissions-credit extension and executive compensation amendments in subsequent filings.