Ocean Power Technologies, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2013. The supplied filing is an annual report, not a quarterly report; the “2012 Q4” metadata does not match the filing period. Comparative amounts are for fiscal year 2012.
Business Context and Reporting Period
Ocean Power Technologies develops and seeks to commercialize PowerBuoy systems that convert ocean-wave energy into electricity. Its products include utility-scale systems for grid or direct industrial use, autonomous systems for remote ocean applications, operations and maintenance services, and undersea power and data infrastructure.
- Utility Mark 3 PowerBuoy systems were being marketed with a peak-rated generator of 866 kW.
- Mark 4 development continued, with a planned peak-rated generator of 2.4 MW.
- Revenue remained primarily tied to government-supported development and cost-sharing contracts rather than commercial product sales.
- The company had 34 full-time employees at April 30, 2013, compared with 47 employees a year earlier.
Financial Performance and Position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $3.6 million | $5.7 million | Down 37% |
| Gross profit | $0.1 million | $0.1 million | Up 147% from a low base |
| Gross margin | 4% | 1% | Improved |
| Product development costs | $7.3 million | $8.3 million | Down 12% |
| SG&A | $9.1 million | $8.3 million | Up 10% |
| Operating loss | $16.3 million | $16.6 million | Slightly improved |
| Net loss attributable to OPT | $14.7 million | $15.1 million | Slightly improved |
| Basic and diluted loss per share | $1.42 | $1.47 | Improved |
| Net cash used in operating activities | $10.8 million | $13.9 million | Improved |
| Cash, marketable securities and restricted cash | $21.7 million | $33.2 million | Down $11.5 million |
| Accumulated deficit | $140.7 million | $126.0 million | Increased |
Revenue declined primarily because the U.S. Navy LEAP program and certain Mark 4 development work were substantially completed or reduced. The decline was partly offset by increased work for Mitsui Engineering & Shipbuilding and the Oregon project.
Most FY2013 projects were cost-sharing contracts. Under these arrangements, the funded portion of revenue generally produces little or no gross profit, while the company-funded portion is recorded as product development expense. Consequently, the 4% reported gross margin does not demonstrate commercial product profitability.
Liquidity consisted of $6.4 million of cash and cash equivalents, $14.0 million of marketable securities and $1.4 million of restricted cash at April 30, 2013. Debt totaled $0.35 million, consisting of a $0.10 million current portion and $0.25 million long-term portion. Management stated that available cash and marketable securities were expected to fund operations and capital requirements through at least July 31, 2014, but additional equity or debt financing would be required to execute the longer-term growth strategy.
Material Changes Versus the Prior Comparable Period
- Revenue decreased by $2.1 million, or 37%, to $3.6 million.
- U.S. Navy revenue fell from $1.6 million to $0.1 million following completion of the LEAP program.
- DOE revenue remained approximately $1.8 million and represented 51% of total revenue.
- Mitsui Engineering & Shipbuilding revenue increased to approximately $0.7 million from none reported in FY2012.
- Product development spending declined by $1.0 million, primarily because the Scotland project was completed.
- SG&A increased by $0.9 million, primarily from business-development legal fees and Australia project site-development costs.
- Operating cash burn improved by $3.1 million, but cash and marketable securities declined substantially because operating losses continued.
- Negotiated backlog declined to $3.8 million from $6.8 million; funded backlog declined to $3.8 million from $4.8 million. Most backlog was expected to be recognized over more than 12 months.
- Customer concentration shifted: DOE and the U.S. Navy represented 54% of FY2013 revenue versus 61% in FY2012. Customers outside the United States accounted for 41% of FY2013 revenue.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal revenue or earnings guidance. It stated that profitability and positive operating cash flow depend on commercializing PowerBuoy systems, increasing revenue and gross profit, controlling fixed costs and potentially reducing unfunded research and development.
- Financing risk: The company has incurred losses and negative operating cash flow since inception and expects to require additional financing. In January 2013 it filed an effective shelf registration for up to $40 million of securities. In June 2013 it entered into an ATM agreement permitting sales of up to $10 million of common stock; no shares had been sold under the agreement as of the filing date.
- Oregon project delay: FERC requirements may apply to deployment of the initial non-grid-connected Mark 3 buoy. Additional studies and reports could materially delay deployment beyond calendar 2013 and increase costs. Additional project-specific funding was expected to be sought.
- Australia project uncertainty: The planned 19 MW Victoria project depends on significant external financing, power purchase agreements and satisfaction of milestones under an A$66.5 million conditional government grant. The grant’s future status and proposed funding-deed changes remained under review.
- Commercialization risk: Wave-energy technology remained at an early commercial stage. The company had not deployed a multi-buoy array or demonstrated commercial-scale manufacturing and deployment, and wave-generated electricity generally cost more than conventional electricity without subsidies.
- Customer and contract concentration: Government agencies and a small number of counterparties accounted for most revenue. Revenue recognition uses percentage-of-completion accounting, making results sensitive to cost estimates, milestones, delays and contract modifications.
- Spain construction agreement: Negotiations with Iberdrola Cantabria regarding modification or cancellation remained unresolved. The customer could potentially terminate and seek limited direct damages if contractual conditions were met; management did not expect a material adverse effect.
- Other unusual items: The company recognized a $1.5 million income-tax benefit from selling New Jersey tax losses. It also recorded approximately $8,000 of patent impairment in FY2013. A $600,000 deferred credit related to emissions-credit rights was reclassified as noncurrent after the agreement was extended to December 31, 2017.
- Internal controls and audit: Management concluded that disclosure controls and internal control over financial reporting were effective as of April 30, 2013. KPMG issued an unqualified audit opinion.
Most Important Facts for Investors to Verify
- Whether the company obtained additional financing after filing and the resulting dilution or debt burden.
- Actual cash burn and liquidity runway relative to the stated July 31, 2014 funding horizon.
- Progress, funding and regulatory resolution for the Oregon deployment.
- Status of the A$66.5 million Australian grant, project financing and power purchase agreements.
- Whether revenue is transitioning from government-funded development contracts to profitable product sales and maintenance services.
- Changes in backlog, especially the funded portion and the portion tied to the Oregon project.
- Reliability, cost and performance evidence for Mark 3 and Mark 4 systems, including successful deployment of a multi-unit array.
- Resolution of the Iberdrola Spain agreement and the Oregon contractor/subcontractor dispute.
- Customer concentration, government appropriations and the effect of expiring or reduced renewable-energy subsidies.
- Potential dilution from the ATM facility, equity grants and approximately 1.36 million anti-dilutive options and restricted shares excluded from diluted loss-per-share calculations.