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, along with related operations, maintenance, undersea infrastructure and marine-energy products. The company operates as one business segment and remains in the development and commercialization phase, with substantial historical dependence on government-funded development contracts.
This filing covers the three months ended July 31, 2013, the company’s fiscal 2014 first quarter. The financial statements are unaudited. The company had 10,356,946 common shares outstanding as of August 31, 2013.
Financial Performance and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $460,927 | $982,396 | Down 53% |
| Gross profit | $551 | $2,536 | Down 78% |
| Gross margin | Approximately 0.1% | Approximately 0.3% | Declined |
| Operating loss | $(3.8) million | $(4.3) million | Improved 11% |
| Net loss attributable to OPT | $(3.75) million | $(4.34) million | Improved 14% |
| Basic and diluted loss per share | $(0.36) | $(0.42) | Improved |
| Net cash used in operations | $(3.08) million | $(3.37) million | Improved |
- Product development costs declined 34% to $1.27 million, primarily because of reduced activity on the Oregon PowerBuoy project.
- Selling, general and administrative expense increased 7% to $2.55 million, primarily due to fees for establishing the at-the-market offering and Australian site-development expenses.
- Revenue was concentrated among three customers: the U.K. Technology Strategy Board, the European Union WavePort project and the U.S. Department of Energy, which together represented 99% of quarterly revenue.
- Most revenue arose from cost-sharing contracts, for which corresponding costs are recorded in cost of revenues and gross profit is generally zero.
Liquidity, Debt and Cash Flow
| Balance Sheet Metric | July 31, 2013 | April 30, 2013 |
|---|---|---|
| Cash and cash equivalents | $7.34 million | $6.37 million |
| Marketable securities | $10.00 million | $14.00 million |
| Restricted cash | $1.28 million | $1.37 million |
| Total liquidity including restricted cash | Approximately $18.6 million | Approximately $21.7 million |
| Total debt | $325,000 | $350,000 |
| Accumulated deficit | $(144.4) million | $(140.7) million |
| Total assets | $21.36 million | $24.83 million |
| Total equity | $14.55 million | $18.12 million |
Cash increased by $965,000 during the quarter. Operating cash use of $3.08 million was more than offset by $4.08 million of investing cash inflow, primarily from maturities of marketable securities. Financing cash use was $32,000, primarily for debt repayment and treasury-stock purchases related to employee tax withholdings.
Management stated that, based on cash and marketable securities at July 31, 2013, it expected to finance operations and capital requirements into the fourth calendar quarter of 2014. Management also stated that additional equity or debt financing would be required to complete its growth strategy.
Debt consisted of a $500,000 recoverable New Jersey grant repayable over five years. The remaining balance was $325,000, of which $100,000 was current and $225,000 was long-term. Restricted cash included $954,864 securing Barclays letters of credit and $325,000 securing the New Jersey grant.
Material Changes, Outlook and Risks
- Quarterly revenue fell because of reduced activity on the Oregon Mark 3 PowerBuoy project, lower billable work on Mark 4 development and completion of a Mitsui project phase in the prior-year period.
- Negotiated backlog was $3.5 million at July 31, 2013, down from $5.8 million a year earlier. Approximately $1.2 million related to the Oregon project, whose realization depended on regulatory resolution and additional funding.
- FERC determined that licensing, reporting and study requirements applied to the initial non-grid-connected Oregon buoy. The company did not further contest the determination, which is expected to delay deployment and increase costs. A subsequent $375,000 letter of credit was issued for expected removal of Oregon anchoring and mooring equipment.
- The planned 19 MW Australian wave-power project, with a 62.5 MW peak generation rating, depended on external financing milestones and review of a proposed amendment to an approximately A$66.5 million government grant.
- The company has not been profitable since inception and expects continued negative operating cash flow unless commercialization produces positive cash flow. Wave-energy economics remain dependent on subsidies and other government incentives because generation costs substantially exceed prevailing electricity prices in many markets.
- The company has an effective $40 million shelf registration and a $10 million at-the-market common-stock offering agreement. No shares were sold under the agreement during the quarter; only an immaterial amount had been sold by the filing date.
- Contingencies included discussions with Iberdrola regarding a delayed Spain construction agreement, a Spanish value-added-tax inquiry supported by €278,828 of letters of credit, and contractor and subcontractor claims concerning Oregon mooring-system deployment. Management believed these matters were accounted for or would not have a material adverse effect.
- Foreign-exchange exposure was not hedged. The company recorded a $21,770 foreign-exchange gain versus a $108,323 loss in the prior-year quarter.
- Management reported that disclosure controls were effective as of July 31, 2013, with no material change in internal control over financial reporting. No material changes were reported to the risk factors in the prior Form 10-K.
Investor Verification Items
- Verify the company’s cash-burn trajectory and whether financing is secured before the stated fourth-calendar-quarter-2014 liquidity horizon.
- Assess the probability, timing and funding of the Oregon deployment, including FERC compliance costs and the $375,000 removal-related letter of credit.
- Evaluate whether the Australian project can satisfy external funding milestones and retain access to the proposed government grant.
- Review backlog quality, customer concentration and the extent to which backlog is funded, cost-sharing or dependent on regulatory approvals.
- Monitor dilution risk from the $10 million at-the-market offering and the broader $40 million shelf registration.
- Review the Spain construction dispute, Spanish tax inquiry, Oregon commercial dispute and associated reserves or secured obligations.
- Determine whether future contracts can generate sustainable gross margins rather than the near-zero margins produced by current cost-sharing contracts.