Ocean Power Technologies, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2014. The supplied filing is not a 2013 fourth-quarter filing; it is the fiscal 2014 annual report, filed July 29, 2014.
Business context
Ocean Power Technologies is developing and commercializing PowerBuoy systems that convert ocean-wave motion into electricity. Its two prototype product lines are utility-scale systems for grid or large-user applications and autonomous systems for remote, off-grid power. Revenue remains primarily derived from government-supported development and cost-sharing contracts rather than commercial product sales.
The company had 29 full-time and one part-time employee at April 30, 2014. It reported one operating segment and held 56 issued U.S. patents and nine U.S. patent applications.
Financial performance and liquidity
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Revenue | $1.50 million | $3.62 million | Down 59% |
| Gross profit (loss) | $(11,444) | $135,308 | Declined to a loss |
| Product development costs | $4.56 million | $7.33 million | Down 38% |
| SG&A | $9.36 million | $9.13 million | Up 3% |
| Operating loss | $(13.15 million) | $(16.32 million) | Loss narrowed |
| Net loss attributable to OPT | $(10.97 million) | $(14.68 million) | Loss narrowed 25% |
| Basic and diluted loss per share | $(0.91) | $(1.42) | Improved |
| Net cash used in operating activities | $6.50 million | $10.85 million | Use declined |
| Negotiated backlog at year-end | $4.9 million | $3.8 million | Increased |
Fiscal 2014 revenue was concentrated among Mitsui Engineering & Shipbuilding at 38%, the U.S. Department of Energy at 34%, the European Union at 15%, and the U.K. Government’s Technology Strategy Board at 12%. Cost-sharing contracts generally produce no gross profit because corresponding customer-funded revenue is recorded as cost of revenues.
At April 30, 2014, cash and cash equivalents were $13.9 million, marketable securities were $14.5 million, and restricted cash was $7.3 million. Total assets were $38.1 million and total liabilities were $10.0 million. Debt totaled $250,000, consisting of $100,000 current and $150,000 long-term debt. Management stated that unrestricted cash, cash equivalents and marketable securities of approximately $28.4 million were expected to fund operations through at least the third calendar quarter of 2015, but additional equity or debt financing would ultimately be required.
Material changes versus the prior period
- Revenue fell primarily because of the suspension of the Oregon PB150B2 project, lower billable development work, completion of a prior MES project, and reduced estimated contract value for WavePort.
- Product development spending decreased by $2.8 million, largely due to reduced Oregon project activity.
- A previously recorded $785,000 contract-loss reserve was reversed after management decided not to complete remaining work on the underlying project.
- The company raised approximately $20.5 million net through equity offerings: $9.7 million under its ATM facility and $10.8 million in a public offering of 3.8 million shares. The ATM facility issued 3.3 million shares.
- Shares issued increased substantially, contributing to dilution; 17.6 million common shares were issued at April 30, 2014 versus 10.4 million a year earlier.
- The company received approximately $5.2 million of initial ARENA grant funding for the Australian project, classified as restricted cash and an advance payment rather than revenue because of claw-back provisions.
- The Oregon project was discontinued because of permitting complexity, higher costs and technical risks. The company began permit surrender and equipment-removal activities.
- The company discontinued development of its undersea substation pod as non-core and concluded that the PB500 concept was not technically feasible or economically viable.
Outlook, commentary and risks
Management’s strategy is to improve PowerBuoy output, reliability, scalability and manufacturability; sell utility systems rather than own power stations; expand autonomous applications; use external funding for development; and build partnerships in North America, Europe, Australia and Japan. The company expected a decision from Mitsui Engineering & Shipbuilding in fiscal 2015 regarding potential Japanese ocean trials and expected to deploy the WavePort device in calendar 2015, subject to funding and site arrangements.
The company has never been profitable, has accumulated losses of $151.6 million, and expects continued negative operating cash flow until commercial product sales generate positive cash flow. Wave-energy electricity costs substantially exceeded prevailing electricity prices without subsidies, making commercial adoption dependent on technology improvements, economies of scale and government incentives.
In July 2014, Victorian Wave Partners determined that the Australian project was no longer commercially viable, notified ARENA of its intent to terminate the funding deed and return the grant funds received, including applicable interest. The filing also disclosed an internal investigation into the project and related public statements.
On June 9, 2014, Chief Executive Officer Charles Dunleavy was terminated for cause. David Keller became interim CEO, and Dunleavy later resigned from the board. Four putative securities class actions were filed after year-end concerning disclosures about the Australian project, and a shareholder demand letter alleged potential fiduciary-duty breaches. FINRA also requested documents concerning the internal investigation. The filing does not provide a clear estimate of potential monetary exposure.
Other significant risks include dependence on a small number of government and development customers, uncertain grant funding, technical and deployment failures, storm and marine hazards, permitting delays, competition, limited commercial operating history, potential equity dilution, foreign-exchange exposure, and the need for additional financing. Management reported that disclosure controls and procedures were not effective for certain non-financial and related disclosures, although internal control over financial reporting was assessed as effective.
Facts investors should verify
- Whether the ARENA grant was ultimately repaid, on what terms, and the financial impact of terminating the Australian project.
- The status, scope and potential cost of the internal investigation, FINRA inquiry, shareholder litigation and any related claims.
- Actual unrestricted liquidity after separating restricted ARENA, Oregon, New Jersey and bank-security cash.
- The company’s subsequent financing needs, equity issuance and dilution, given ongoing operating losses and management’s stated need for additional capital.
- Progress toward commercial deployment, including WavePort and potential MES/Japan trials, rather than relying on negotiated backlog alone.
- Whether PowerBuoy technology has achieved the reliability, output and cost levels necessary to compete without substantial subsidies.
- The effect of percentage-of-completion accounting, contract estimates and project cancellations on future revenue and backlog.