Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2011, the first quarter of fiscal 2012. Financial statements are unaudited. The company develops and commercializes PowerBuoy systems and related services that generate electricity from ocean waves.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $1.91 million | $1.37 million | Up 39% |
| Gross profit (loss) | $0.01 million | $(0.21) million | Improved to approximately break-even |
| Operating loss | $(5.11) million | $(6.27) million | Improved 18% |
| Net loss attributable to OPT | $(5.00) million | $(6.27) million | Improved 20% |
| Loss per share | $(0.49) | $(0.61) | Improved |
| Net cash used in operations | $(4.87) million | $(6.06) million | Lower cash use |
- Revenue growth reflected increased billable work on the PB500 utility PowerBuoy and the U.S. Navy LEAP autonomous PowerBuoy programs. This was partly offset by projects nearing completion, including the Scottish 150kW project and the Navy DWADS project.
- Product development expense declined 23% to $3.10 million, while selling, general and administrative expense was essentially unchanged at $2.02 million.
- Gross margin was approximately 0.5% in Q1 FY2012 versus negative 15.6% in the prior-year quarter. Cost-sharing contracts generally produce zero gross profit, and project cost overruns remain a risk.
- Cash and cash equivalents were $8.90 million at July 31, 2011. Current marketable securities were $25.09 million, noncurrent marketable securities were $7.52 million, and restricted cash was $1.59 million.
- Total cash, cash equivalents, restricted cash and marketable securities totaled approximately $43.1 million at July 31, 2011, versus $60.8 million at July 31, 2010.
- Total assets were $48.79 million and total liabilities were $7.04 million at July 31, 2011. Total debt was $500,000, consisting of $75,000 current and $425,000 long-term debt.
- Accumulated deficit was $115.84 million. The company has not been profitable since inception.
- Investing activities provided $9.59 million, primarily from maturities of marketable securities. Financing activities used $0.11 million, including $89,378 of debt repayment and $23,143 of treasury-stock purchases.
Material changes versus the prior comparable period
- Revenue increased by $0.54 million, or 39%, primarily from higher activity on PB500 and LEAP programs.
- Product development costs decreased by $0.93 million as the Scottish project entered completion, partially offset by higher spending on the Oregon 150kW project.
- Foreign exchange loss declined to $9,000 from $239,000.
- Interest income declined 49% to $121,000 because of lower invested balances and yields.
- Operating cash use improved by $1.20 million, but the company remained substantially cash-flow negative.
- Negotiated backlog increased to $7.1 million from $6.5 million at July 31, 2010; funded backlog decreased to $5.1 million from $5.9 million. Management expected most backlog to be recognized as revenue within 12 months.
- Customer concentration remained high: the U.S. Navy represented 60% of revenue, the Department of Energy 25%, and the U.K. Government’s Technology Strategy Board 12%.
Outlook, risks and unusual items
- Management stated that existing cash, cash equivalents and investments were expected to fund anticipated working capital and capital expenditures at least through fiscal 2013. Additional equity or debt financing may nevertheless be required, which could dilute shareholders or impose restrictive terms.
- The company expects continued substantial spending on technology development, commercialization, manufacturing, sales and marketing. It intends to fund much of its research and development through external sources, but may need to curtail development or self-fund it if outside funding is unavailable.
- The company deployed an autonomous LEAP PowerBuoy off New Jersey in August 2011 for ocean trials under a U.S. Navy contract.
- The Spain construction agreement with Iberdrola Cantabria remained subject to modification discussions. If no modification is reached, the customer may terminate under certain conditions and seek limited direct damages. Management did not expect a material adverse effect, but the outcome was uncertain.
- A $785,000 contract-loss reserve remained accrued at July 31, 2011.
- The company had a $600,000 deferred credit related to an option for carbon-emissions credits. If required credits are not available or are not sold as specified, repayment or liquidated damages may be required.
- Revenue recognition depends substantially on percentage-of-completion estimates. Because the company has a small number of contracts, revisions to estimated costs, milestones or completion dates could materially affect reported results.
- Foreign currency exposure is not hedged. Management estimated that a 10% currency movement could affect foreign exchange gains or losses by approximately $0.5 million.
- Management reported effective disclosure controls as of July 31, 2011 and no material changes to internal control over financial reporting. The filing stated that there were no material changes to the risk factors previously disclosed in the fiscal 2011 Form 10-K.
Important facts for investors to verify
- Whether the PB500, LEAP, Oregon and other development programs convert into sustainable commercial revenue and positive gross margins.
- The timing, funding status and potential termination risk of the $7.1 million backlog, including the $2.0 million unfunded portion.
- Cash burn and the duration of liquidity in light of ongoing quarterly losses and approximately $43.1 million of cash, restricted cash and marketable securities.
- Resolution and financial consequences of the Spain construction agreement and the adequacy of the $785,000 contract-loss reserve.
- Customer concentration and dependence on U.S. government and other government-funded programs.
- Potential dilution or increased leverage if additional financing becomes necessary.
- Progress of the August 2011 LEAP ocean trials and the company’s ability to commercialize utility and autonomous PowerBuoy systems.