Ocean Power Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended July 31, 2014, corresponding to the company’s fiscal first quarter of 2015. Ocean Power Technologies develops and seeks to commercialize PowerBuoy systems that generate electricity from ocean waves. Revenue historically has been substantially dependent on government-supported product development and cost-sharing contracts.
As of August 31, 2014, 17,584,257 common shares were outstanding. The company reported as a smaller reporting company and had one operating segment.
Financial Highlights
| Metric | Three months ended July 31, 2014 | Three months ended July 31, 2013 |
|---|---|---|
| Revenue | $1.54 million | $0.46 million |
| Gross profit (loss) | $(0.43) million | $0.001 million |
| Gross margin | (27.7%) | 0.1% |
| Operating loss | $(3.47) million | $(3.82) million |
| Net loss | $(3.35) million | $(3.80) million |
| Net loss attributable to OPT | $(3.28) million | $(3.75) million |
| Loss per share, basic and diluted | $(0.19) | $(0.36) |
| Net cash used in operating activities | $(3.17) million | $(3.08) million |
| Cash and cash equivalents at period end | $7.63 million | $7.34 million |
Revenue increased 234% year over year, primarily from completion of the European Union WavePort contract and increased billable work under the Mitsui Engineering & Shipbuilding contract. Cost of revenues increased 327% to $1.97 million, producing a gross loss. The MES fixed-price contract required an accrual for anticipated future losses after estimated completion costs increased.
Operating expenses were $3.04 million, down from $3.82 million, because product development costs included an $80,000 recovery compared with $1.27 million of costs in the prior-year period. Selling, general and administrative expense increased 23% to $3.12 million, primarily due to legal fees related to the Special Committee investigation, consulting fees and patent amortization.
Cash, marketable securities and restricted cash totaled approximately $32.5 million at July 31, 2014, including $24.9 million of cash and marketable securities and approximately $7.6 million of restricted cash. Total assets were $35.2 million and total equity was $24.8 million. Debt totaled $225,000, consisting of $100,000 current and $125,000 long-term debt.
Material Changes Versus the Prior Comparable Period
- Revenue rose by $1.08 million, or 234%, but gross profit declined to a $426,636 loss because of higher project costs and the anticipated MES contract loss.
- Net loss attributable to OPT improved by approximately $467,000, or 12%, despite the gross loss, principally because of lower product development spending and $185,000 of other income from a favorable vendor settlement.
- Operating cash burn increased modestly from $3.08 million to $3.17 million.
- Investing cash flow changed from $4.08 million provided in the prior-year period to $3.01 million used, reflecting the timing of marketable-security purchases and maturities.
- Cash and cash equivalents declined from $13.86 million at April 30, 2014 to $7.63 million at July 31, 2014, while marketable securities increased from $14.49 million to $17.24 million.
- The company completed significant fiscal 2014 equity financing: approximately $9.7 million of net ATM proceeds and approximately $10.8 million of net public-offering proceeds. No S-3 proceeds were received in the current quarter.
- Product development expense benefited from completion of the EU WavePort cost-sharing contract. The company shortened the estimated useful life of capitalized patent costs from approximately five years to one year, increasing amortization.
Guidance, Outlook, Risks and Unusual Items
- Management believed available cash and marketable securities would fund capital requirements and operations through at least the fourth calendar quarter of 2015, but stated that additional equity and/or debt financing would be required to complete its growth strategy.
- At July 31, 2014, negotiated backlog was $4.3 million, up from $3.5 million a year earlier and described as fully funded. Backlog is not necessarily indicative of future revenue because of contract modifications, termination rights, production delays and percentage-of-completion estimates.
- The Australian VWP wave-power demonstration project was determined to be no longer commercially viable. After the quarter, the company returned approximately $5.24 million of ARENA initial funding plus approximately $102,000 of interest. The funding had been recorded as restricted cash and an advance payment, not revenue.
- The company surrendered or was closing out its Reedsport, Oregon project because of higher-than-anticipated costs, technical risks, permitting uncertainty and complex FERC requirements. Anchoring and mooring equipment was removed in August 2014, with final site-clearance and regulatory reports pending.
- Four putative securities class actions were pending concerning public statements about the VWP Project. The complaints sought unspecified damages and remained in preliminary stages. The company also received shareholder demands for an independent investigation and inspection of books and records.
- The former chief executive officer was terminated effective June 9, 2014 and later indicated a potential wrongful-termination claim; no claim had been filed as of the filing date. David L. Keller served as interim CEO.
- The company provided documents to FINRA in response to an inquiry related to the Special Committee investigation. The filing stated that no outstanding requests from FINRA or other regulators existed at that time.
- Management concluded that disclosure controls and procedures were not effective as of July 31, 2014 for certain non-financial-statement and related disclosures. The filing stated that financial reporting controls were not adversely affected and described expanded review, external advisers and a new Disclosure Committee.
- Key operating risks include continuing losses and negative operating cash flow, dependence on government funding and subsidies, technology development and deployment risk, contract-cost estimates, customer concentration, permitting, foreign-exchange exposure, litigation, regulatory inquiries and the need for additional financing.
Most Important Facts for Investors to Verify
- Whether the company can maintain liquidity after returning the ARENA funding and while continuing to incur approximately $3 million or more of quarterly operating cash burn.
- The final cost and accounting impact of the MES contract loss accrual and whether future contract revisions could materially affect revenue or margins.
- The status and potential financial exposure of the four securities class actions, shareholder demands, former-CEO dispute and FINRA-related matters.
- Whether the $4.3 million backlog converts into revenue and cash without further delays, cancellations or adverse cost revisions.
- The company’s ability to commercialize PowerBuoy systems in markets where wave-generated electricity remains more expensive than conventional electricity without subsidies.
- Progress in remediating ineffective disclosure controls and the outcome of the Special Committee’s investigation into the VWP Project.