Ocean Power Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Ocean Power Technologies develops and seeks to commercialize PowerBuoy systems that generate electricity from ocean waves, including utility and autonomous systems, maintenance services, and marine-energy infrastructure. The company remains in the commercialization and product-development stage and has not been profitable since inception.
This filing covers the three and nine months ended January 31, 2012, representing the third quarter and first nine months of fiscal 2012. The financial statements are unaudited. The company reported 10,414,389 common shares outstanding as of February 29, 2012.
Financial Performance and Position
| Metric | Three Months Ended January 31, 2012 | Prior Period | Nine Months Ended January 31, 2012 | Prior Period |
|---|---|---|---|---|
| Revenue | $0.9 million | $1.5 million | $4.3 million | $4.8 million |
| Gross profit (loss) | $(0.01) million | $0.07 million | $0.03 million | $(0.06) million |
| Operating loss | $(3.2) million | $(3.8) million | $(12.4) million | $(15.8) million |
| Net loss attributable to OPT | $(2.2) million | $(3.4) million | $(11.0) million | $(15.1) million |
| Loss per share | $(0.21) | $(0.33) | $(1.07) | $(1.48) |
| Net cash used in operations | Not provided for the quarter | Not provided for the quarter | $(9.7) million | $(14.0) million |
- Third-quarter revenue declined 39%, primarily because LEAP was completed, DWADS was nearing completion, and billable activity declined on the Oregon 150kW project.
- Nine-month revenue declined 9%; lower autonomous PowerBuoy revenue more than offset higher activity on the PB500 and WavePort projects.
- Gross margin was approximately break-even: $(10,523) in the quarter and $30,274 for the nine months. Cost-sharing contracts generally produce zero gross profit because corresponding revenue and cost are recorded in the same period.
- Product development expense decreased 31% to $1.4 million in the quarter and 33% to $6.6 million for the nine months. Selling, general and administrative expense was $1.8 million in the quarter and $5.9 million for the nine months.
- Income tax benefits of $1.1 million in both the quarter and nine-month period resulted from the sale of New Jersey net operating loss carryforwards, rather than operating profitability.
- Cash and cash equivalents were $7.8 million at January 31, 2012, compared with $4.4 million at April 30, 2011. Current assets were $35.1 million and total assets were $42.2 million.
- Cash, cash equivalents, restricted cash, and marketable securities totaled approximately $37.8 million at January 31, 2012, compared with $52.8 million at January 31, 2011.
- Total debt was $475,000, consisting of $100,000 current debt and $375,000 long-term debt. The debt is interest-free and related to the NJBPU recoverable grant.
- Total liabilities were $6.2 million and total equity was $36.0 million at January 31, 2012. Accumulated deficit was $121.9 million.
Material Changes Versus the Prior Comparable Period
- Operating loss improved by $0.6 million in the quarter and $3.5 million for the nine months, mainly due to lower product development and other operating expenses.
- Net loss attributable to OPT improved by $1.2 million in the quarter and $4.1 million for the nine months, aided by lower operating expenses and a larger New Jersey tax-loss sale benefit.
- Interest income declined 36% in the quarter and 38% for the nine months because of lower invested balances and yields.
- Foreign exchange loss increased to $113,000 in the quarter from $38,000, but the nine-month loss improved to $93,000 from $206,000.
- Funded backlog increased to $5.8 million from $5.3 million, while total negotiated backlog increased to $7.8 million from $5.8 million. Management expected most backlog to be recognized over the following 12 months.
- Revenue concentration remained high: 96% of nine-month revenue came from the U.S. Department of Energy, the UK Technology Strategy Board, the U.S. Navy, and the European Union WavePort project.
Cash Flow, Liquidity, Outlook, and Risks
Operating cash use remained substantial despite improvement from the prior year. For the nine months, investing activities provided $13.6 million, principally from maturities of marketable securities, while financing activities used $170,000. Cash increased by $3.5 million from April 30, 2011, but the company continued to rely on its investment portfolio to fund operations.
Management stated that current cash, cash equivalents, and investments were expected to meet anticipated working-capital and capital-expenditure needs at least through fiscal 2013. If additional funding is required, the company may seek equity, debt, or a credit facility; financing may be unavailable or dilutive, and failure to obtain funding could require reductions in product-development and marketing activities.
- The company expects continued substantial investment in PowerBuoy development, manufacturing, sales, marketing, demonstrations, and commercialization.
- Management does not know when profitability will be achieved and expects operating cash use to continue unless commercialization produces positive cash flow.
- The Spain WavePort construction agreement remains subject to discussions regarding modifications. If no modification is reached, the customer could potentially terminate the agreement and seek specified direct damages. Management did not expect a material adverse effect.
- A $600,000 deferred credit related to an emissions-credit option was classified as current because the company did not expect to generate eligible credits before December 31, 2012. If the required credits are not generated, the company may have to return the option fee, subject to contractual reductions.
- The company had approximately $785,000 of accrued contract-loss reserves at January 31, 2012.
- Approximately $1.4 million of restricted cash secured letters of credit, bank guarantees, and the NJBPU grant arrangement. Barclays had issued approximately €266,000 of letters of credit.
- The company does not hedge foreign-exchange exposure. Management estimated that a 10% currency movement could affect foreign-exchange gains or losses by approximately $0.4 million.
- Results depend heavily on government funding and a small number of contracts. Delays, cost overruns, contract modifications, loss of customers, or failure to commercialize PowerBuoy systems could materially affect results.
- Disclosure controls and procedures were deemed effective as of January 31, 2012, and no material change in internal control was reported.
Investor Verification Checklist
- Verify the conversion of the $7.8 million total backlog into revenue and the proportion that is funded versus unfunded.
- Monitor cash burn, investment maturities, and whether liquidity remains sufficient through fiscal 2013.
- Assess progress, margins, and remaining obligations on the Oregon, PB500, WavePort, DWADS, and other PowerBuoy projects.
- Review the status and financial consequences of the Spain construction agreement and the $785,000 contract-loss reserve.
- Track customer concentration and dependence on U.S. and European government grants and contracts.
- Determine whether product commercialization can generate recurring product and maintenance revenue sufficient to offset ongoing development spending.
- Consider potential dilution or senior claims if additional equity or debt financing becomes necessary.