Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended January 31, 2015, compared with the corresponding periods ended January 31, 2014. The filing was submitted March 11, 2015. The company develops and seeks to commercialize PowerBuoy systems that generate electricity from ocean waves. The financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Jan. 31, 2015 | Three months ended Jan. 31, 2014 | Nine months ended Jan. 31, 2015 | Nine months ended Jan. 31, 2014 |
|---|
| Revenue | $328,511 | $199,622 | $3,616,827 | $1,124,157 |
| Gross profit (loss) | $(50,595) | $6,409 | $(727,519) | $8,232 |
| Gross margin | (15.4%) | 3.2% | (20.1%) | 0.7% |
| Operating loss | $(3,089,925) | $(2,551,097) | $(10,743,131) | $(9,786,959) |
| Net loss attributable to OPT | $(2,185,971) | $(739,790) | $(9,838,417) | $(7,760,317) |
| Basic and diluted loss per share | $(0.12) | $(0.06) | $(0.56) | $(0.71) |
- Quarterly revenue increased 65%, while nine-month revenue increased 222%, primarily from higher billable work for Mitsui Engineering & Shipbuilding, Oregon equipment removal, and completion of the European Union WavePort contract.
- Gross profitability deteriorated because increased estimated costs on the MES fixed-price contract produced a gross loss and required an accrual for anticipated future losses. Cost-sharing contracts generally produce zero gross profit.
- Nine-month product development expense declined 39% to $2.2 million, mainly because the Reedsport project was substantially completed. Selling, general and administrative expense increased 27% to $7.8 million, primarily from legal fees, consultants, and patent amortization.
- Nine-month foreign-exchange loss was $467,909, compared with a $152,575 gain in the prior-year period. A $185,000 favorable vendor settlement was recorded as other income.
- Income tax benefits of $1.1 million in each 2015 period arose from the sale of New Jersey net operating loss carryforwards and research and development credits; the filing states that no other material consolidated tax benefit was recognized.
Cash flow, liquidity, debt, and capital resources
| Balance-sheet item | Jan. 31, 2015 | Apr. 30, 2014 |
|---|
| Cash and cash equivalents | $19.9 million | $13.9 million |
| Marketable securities | $50,000 | $14.5 million |
| Cash, cash equivalents, and marketable securities | Approximately $19.9 million | Approximately $28.4 million |
| Restricted cash | $544,525 | $7.3 million |
| Total debt | $175,000 | $250,000 |
| Accumulated deficit | $(161.5 million) | $(151.6 million) |
| Total assets | $21.9 million | $38.1 million |
- Net cash used in operating activities was $14.8 million for the nine months ended January 31, 2015, versus $8.1 million in the prior-year period. The increase primarily reflected the $4.7 million return of the ARENA advance payment and higher operating losses.
- Investing activities provided $21.2 million, primarily from maturities of marketable securities and releases of restricted cash. Financing activities used $75,659, principally for debt repayment.
- Cash and cash equivalents increased by $6.0 million during the nine months, ending at $19.9 million. The company states that available cash and marketable securities should fund operations and capital requirements through at least the first calendar quarter of 2016.
- Management also states that additional equity and/or debt financing will be required to complete its future growth strategy. Approximately $18.2 million remained available under the $40 million Form S-3 shelf, although no S-3 proceeds were received during the nine-month period.
Material changes, outlook, and unusual items
- Negotiated backlog declined to $1.3 million at January 31, 2015 from $5.6 million a year earlier. The backlog was fully funded, but management expects it to continue to decline.
- The Australian VWP wave-power project was terminated as no longer commercially viable. The company returned approximately $5.2 million of ARENA grant funding plus approximately $102,000 of interest and removed the related EVE grant from backlog.
- The company intends to deploy and test the PB40 off New Jersey rather than Spain, subject to final permits and a suitable weather window. It also anticipated deploying the next APB-350 autonomous PowerBuoy during calendar 2015 and stated that commercial launch maturity could be reached around summer 2016, subject to successful testing.
- MES project activity was suspended pending a stage-gate review. Work could resume on or after April 2015, but scope, schedule, revenue, and backlog could be materially reduced depending on the review.
- The company appointed George H. Kirby as President and Chief Executive Officer effective January 20, 2015. Related-party consulting expense was $434,188 for the nine months, including payments to the former executive vice chairman and the former interim CEO.
- Four putative securities class actions remain pending concerning disclosures about the terminated VWP project. The company also received shareholder inspection demands, an SEC subpoena concerning the board special committee investigation, and an inquiry involving Spanish value-added tax. The filing does not provide a clear potential loss amount for these matters.
- Management identifies substantial risks from continuing losses and negative operating cash flow, dependence on government funding and incentives, technology and deployment performance, permitting, customer concentration, foreign exchange, key personnel, litigation, and the availability of additional financing.
- Management reported effective disclosure controls as of January 31, 2015 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether cash resources remain sufficient as projected through the first calendar quarter of 2016 and whether additional financing can be obtained without substantial dilution or restrictive debt terms.
- The outcome and revised scope of the MES stage-gate review and its effect on revenue, contract-loss reserves, and backlog.
- Whether the PB40 and APB-350 deployments receive permits, occur on schedule, and demonstrate commercially viable performance.
- The status and potential financial exposure of the securities litigation, SEC subpoena, shareholder demands, employment claims, and Spanish tax inquiry.
- The sustainability of revenue, which remains concentrated among a small number of government and strategic customers and is substantially dependent on development and cost-sharing contracts.
- The effect of contract-cost estimates and percentage-of-completion judgments, particularly given the recorded MES contract loss and the company’s limited number of projects.
