Ocean Power Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
The company develops and commercializes PowerBuoy systems and related marine-energy infrastructure that generate electricity from ocean waves. It also provides operations and maintenance services. The filing covers the three and six months ended October 31, 2011, within fiscal 2012; the financial statements are unaudited.
Revenue remains substantially dependent on government and grant-funded programs. The U.S. Navy, U.S. Department of Energy, UK Technology Strategy Board and European Union accounted for approximately 97% of six-month revenue.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2011 | Three months ended Oct. 31, 2010 | Six months ended Oct. 31, 2011 | Six months ended Oct. 31, 2010 |
|---|---|---|---|---|
| Revenue | $1.5 million | $1.9 million | $3.4 million | $3.2 million |
| Gross profit (loss) | $31,847 | $87,427 | $40,797 | $(126,412) |
| Gross margin | 2.1% | 4.7% | 1.2% | (3.9)% |
| Operating loss | $(4.0) million | $(5.7) million | $(9.2) million | $(12.0) million |
| Net loss attributable to OPT | $(3.9) million | $(5.5) million | $(8.9) million | $(11.8) million |
| Basic and diluted loss per share | $(0.38) | $(0.54) | $(0.86) | $(1.15) |
| Net cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(7.9) million | $(9.4) million |
Six-month operating expenses declined 23% to $9.2 million, primarily because product development costs decreased 33% to $5.2 million. Selling, general and administrative expenses decreased 3% to $4.0 million. Interest income declined 38% to $246,370 because invested balances and interest rates were lower.
At October 31, 2011, cash and cash equivalents were $5.8 million, current marketable securities were $29.6 million, restricted cash was $1.5 million, and noncurrent marketable securities were $3.0 million. Total cash, cash equivalents, restricted cash and marketable securities were approximately $39.9 million. Total current assets were $37.4 million against current liabilities of $5.5 million.
Total debt was $500,000, consisting of $100,000 current and $400,000 long-term debt. The debt is an interest-free recoverable NJBPU grant repayable over five years beginning in November 2011. The company repaid the remaining $89,378 owed under a separate New Jersey Economic Development Authority award in May 2011.
Stockholders’ equity was $38.0 million and accumulated deficit was $119.7 million at October 31, 2011. The company had 10,414,389 common shares outstanding as of November 30, 2011.
Material changes versus the prior comparable period
- Quarterly revenue declined 19% as LEAP and DWADS autonomous PowerBuoy work for the U.S. Navy neared completion.
- Six-month revenue increased 6%, primarily from higher activity on the PB500 and WavePort projects, partly offset by lower Oregon and DWADS activity.
- Gross profit improved from a six-month loss of $126,412 to profit of $40,797, although margins remained near break-even.
- Six-month operating loss improved 24% and net loss attributable to OPT improved 25%, mainly because product development spending decreased as several projects approached completion or entered testing.
- Operating cash use improved by $1.5 million year over year but remained substantial at $7.9 million.
- Cash and investments declined materially from the prior comparable balance-sheet date cited in management’s discussion, approximately $57.7 million at October 31, 2010 to $39.9 million at October 31, 2011.
- Negotiated backlog increased to $8.8 million from $7.5 million at October 31, 2010; funded backlog was $6.8 million versus $6.9 million. Management expected most backlog to be recognized within 12 months.
Outlook, risks, contingencies and unusual items
- Management stated that current cash, cash equivalents and investments were expected to fund working capital and capital expenditures at least through fiscal 2013. Additional equity, debt or credit financing may nevertheless be required, which could dilute shareholders or impose restrictive covenants.
- The company has never been profitable and stated that it cannot predict when profitability will be achieved. Commercialization of PowerBuoy systems remains subject to significant market, technical, funding and execution uncertainty.
- The company received a $3.0 million European Union grant for the WavePort project during the quarter; $1.1 million of the grant was recorded as unearned revenue.
- The Spain construction agreement with Iberdrola Cantabria remained under discussion. If no modification is reached, the customer may have termination rights and may seek specified direct damages, although management did not expect a material adverse effect.
- Approximately $785,000 of contract-loss reserves remained accrued. Revenue recognition uses percentage-of-completion estimates, and revisions to estimated costs, milestones or project timing could materially affect reported results.
- Customer concentration is substantial: the loss or reduction of a major government or grant-funded customer could materially affect results.
- Foreign-currency balances were approximately $4.1 million and were not hedged. Management estimated that a 10% currency movement could affect foreign exchange gains or losses by approximately $0.4 million.
- The company disclosed no material changes to the risk factors in its April 30, 2011 Form 10-K. Management concluded that disclosure controls were effective as of October 31, 2011.
Important facts for investors to verify
- Whether the $8.8 million backlog, including $6.8 million of funded backlog, converts to revenue on the expected schedule and at acceptable margins.
- Progress, final terms and potential exposure under the Iberdrola Spain construction agreement.
- Future funding requirements given recurring operating cash use and the company’s continued losses.
- Commercial traction beyond government-funded and cost-sharing contracts, particularly utility and other non-government customers.
- Whether the Oregon, PB500, WavePort and LEAP projects achieve technical milestones without material cost overruns.
- The company’s ability to maintain liquidity through fiscal 2013 without issuing potentially dilutive equity or higher-priority debt.