Ocean Power Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended October 31, 2014, the company’s fiscal second quarter and first six months of fiscal 2015. Ocean Power Technologies develops and seeks to commercialize PowerBuoy systems that generate electricity from ocean waves. Revenue remains substantially dependent on government agencies and development contracts, while the company continues to pursue commercialization and product deployments.
Financial performance and liquidity
| Metric | Three months ended October 31, 2014 | Six months ended October 31, 2014 |
|---|---|---|
| Revenue | $1.75 million | $3.29 million |
| Gross profit (loss) | $(0.25) million | $(0.68) million |
| Gross margin | (14.3%) | (20.6%) |
| Operating loss | $(4.18) million | $(7.65) million |
| Net loss attributable to OPT | $(4.37) million | $(7.65) million |
| Loss per share | $(0.25) | $(0.44) |
| Net cash used in operating activities | Not separately provided | $(12.11) million |
- Revenue increased 277% for the quarter and 256% for the six-month period versus the comparable 2013 periods, primarily from DOE work, Mitsui Engineering & Shipbuilding work, and Oregon equipment removal activities.
- The company recorded a gross loss because estimated costs increased on its firm fixed-price MES contract. Most other projects were cost-sharing contracts that generally produce zero gross profit.
- Cash and cash equivalents were $6.24 million and marketable securities were $16.50 million at October 31, 2014, for total unrestricted cash and investments of approximately $22.8 million, compared with approximately $28.4 million at April 30, 2014.
- Restricted cash declined to approximately $0.6 million from approximately $7.3 million, largely following the return of ARENA funding and the reduction of Oregon-related letters of credit.
- Total debt was $0.2 million, consisting of $0.1 million current and $0.1 million long-term debt. Total liabilities were $4.21 million, and accumulated deficit was $159.3 million.
- Operating cash use increased from $6.48 million in the first six months of 2013 to $12.11 million in the first six months of 2014, significantly affected by the $4.71 million return of an ARENA advance payment.
Material changes versus the prior comparable period
- Six-month revenue rose from $0.92 million to $3.29 million, but gross results deteriorated from a $1,823 profit to a $676,924 loss.
- Six-month net loss attributable to OPT increased from $7.02 million to $7.65 million, while loss per share improved from $(0.67) to $(0.44) because of the higher share count.
- Product development expense decreased 60% to $1.14 million for the six-month period, primarily because of substantial completion of the Reedsport cost-sharing project.
- Selling, general and administrative expense increased 34% to $5.83 million, primarily because of shareholder litigation, related legal matters, consulting costs, and patent amortization.
- Foreign exchange results shifted from a $129,000 gain to a $222,000 loss for the six-month period.
- Shares issued and outstanding increased materially following fiscal 2014 equity offerings; 18,066,611 common shares were outstanding as of November 30, 2014.
Guidance, outlook, risks, and unusual items
- Management stated that existing cash and marketable securities were expected to fund capital requirements and operations through at least the fourth calendar quarter of 2015, but additional equity or debt financing will be required to execute the longer-term growth strategy.
- The company expected to deploy the next large PowerBuoy and the next smaller autonomous PowerBuoy during calendar 2015, subject to permitting, final checkout, contracting, and technical execution.
- Negotiated backlog was $1.7 million at October 31, 2014, down from $5.8 million a year earlier. Backlog was described as fully funded, but management cautioned that it is subject to modification, termination, delays, and changes in estimated costs.
- The Australian VWP project was determined to be no longer commercially viable. The company terminated the ARENA arrangement and returned approximately $5.18 million of initial funding plus approximately $102,000 of interest.
- The company removed an approximately €1.13 million EVE grant from backlog after changing the planned deployment from Spain to New Jersey; utilization of the grant remained uncertain.
- The company recorded a $185,000 favorable vendor settlement in other income during the six-month period.
- Four putative securities class actions were pending concerning public statements related to the terminated VWP project. The complaints sought unspecified damages and remained in preliminary stages.
- The former chief executive officer asserted a potential wrongful-termination claim but had not filed a claim as of the filing date. FINRA had completed its review and referred the matter to the SEC for any action it might deem appropriate.
- Key operating risks include continued losses and negative cash flow, dependence on government funding and a small number of customers, technology and deployment risk, permitting, scalability, cost overruns on fixed-price contracts, foreign exchange exposure, litigation, and the need for additional financing.
Most important facts for investors to verify
- Whether the company can meet its 2015 deployment and commercialization objectives and convert development activity into recurring product and service revenue.
- Whether cash consumption remains consistent with management’s forecast that funding extends through the fourth calendar quarter of 2015.
- The final cost and profitability outcome of the MES fixed-price contract and any additional contract-loss accruals.
- The status, potential exposure, and insurance coverage related to the VWP securities litigation, shareholder demands, former CEO matter, and SEC referral.
- Whether the EVE grant can be utilized and whether replacement government or commercial funding can offset reduced backlog.
- The impact of future equity financing, including dilution, given the company’s continuing losses and limited debt capacity.