Ocean Power Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Ocean Power Technologies, Inc. provides offshore renewable power, data, communications, and engineering services for defense and security, offshore oil and gas, science and research, and offshore wind markets. Its offerings include the PB3 PowerBuoy, hybrid PowerBuoy, subsea batteries, maritime domain awareness solutions, and strategic consulting services through 3Dent Technologies.
The filing covers the three months ended July 31, 2021, the first quarter of fiscal 2022. The financial statements are unaudited and prepared under U.S. GAAP. The company is a smaller reporting company listed on the NYSE American under the symbol OPTT.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $272,000 | $169,000 | +$103,000 |
| Cost of revenues | $423,000 | $334,000 | +$89,000 |
| Gross loss | $(151,000) | $(165,000) | Improved by $14,000 |
| Engineering and product development | $1.971 million | $1.252 million | +$719,000 |
| Selling, general and administrative | $2.909 million | $1.987 million | +$922,000 |
| Operating loss | $(5.031 million) | $(3.404 million) | Worsened by $1.627 million |
| Net loss | $(3.079 million) | $(3.385 million) | Improved by $306,000 |
| Net loss per share | $(0.06) | $(0.22) | Improved |
| Cash used in operating activities | $(5.287 million) | $(2.737 million) | Use increased by $2.550 million |
Gross margin was approximately negative 55.5%, compared with negative 97.6% in the prior-year quarter. Operating margin was approximately negative 1,849%, compared with negative 2,014% in the prior-year quarter. Net margin was approximately negative 1,132%, compared with negative 2,003% in the prior-year quarter. The margin percentages are heavily affected by the company’s very low revenue base.
- Cash and cash equivalents were $77.720 million at July 31, 2021, compared with $83.028 million at April 30, 2021. Cash, cash equivalents, and restricted cash totaled $78.326 million.
- Total assets were $81.191 million and total liabilities were $3.426 million at July 31, 2021.
- Stockholders’ equity was $77.765 million, including an accumulated deficit of $237.975 million.
- The company had no outstanding PPP loan after forgiveness. It recognized an $891,000 gain on extinguishment during the quarter.
- Backlog was $400,000 at July 31, 2021, compared with $200,000 at April 30, 2021. The company expects to recognize the full backlog over the following twelve months.
- Revenue concentration remained high: EGP represented 55% of revenue and Valaris represented 33%. Strategic consulting services generated approximately $220,000 of revenue during the quarter.
Material changes versus the prior comparable period
- Revenue increased 61% to $272,000, primarily from higher EGP contract activity and new 3Dent projects.
- Cost of revenues increased because of higher deployment and material costs on the EGP contract, although the gross loss narrowed modestly.
- Engineering and product development costs increased 57%, reflecting higher product development spending, increased payroll and headcount, and the addition of 3Dent personnel.
- SG&A increased 46%, driven by higher consulting costs, equity compensation, professional fees, and risk-management insurance costs.
- Net loss improved despite a substantially higher operating loss because of the $891,000 PPP forgiveness gain and a $1.041 million income tax benefit related to the sale of New Jersey net operating losses and research credits.
- Operating cash use increased by $2.6 million, primarily due to higher project and employee-related costs and the $1.224 million settlement of employment litigation.
- No financing proceeds were received in the quarter, compared with $3.768 million of financing cash inflows in the prior-year quarter from the PPP loan and equity issuances.
- The company acquired 3Dent in February 2021 and continued expanding strategic consulting, software, data, and maritime-domain-awareness capabilities.
Outlook, management commentary, risks, and unusual items
Management stated that available cash was sufficient to fund planned expenditures through at least September 2022. The filing contains slightly different cash references: the balance sheet reports $77.720 million of cash and cash equivalents, while the MD&A cites approximately $78.1 million or $78.3 million depending on whether restricted cash is included.
The company expects continued investment in product development, sales, marketing, manufacturing, and commercialization. It planned initial offshore demonstrations of its maritime domain awareness system during the second and third quarters of fiscal 2022 and commenced a nine-month Department of Energy SBIR project in the second quarter of fiscal 2022.
- The company has a history of operating losses and negative operating cash flow and does not expect customer revenue to fund operations until commercialization progresses substantially.
- Future financing may be required. Additional equity financing could dilute existing stockholders, while debt or preferred securities could have senior rights or restrictive covenants.
- Commercialization, product reliability, power output, manufacturing scalability, customer adoption, long sales cycles, and strategic partnerships remain material uncertainties.
- Revenue is concentrated among a small number of customers, and backlog is small relative to operating expenses.
- COVID-19 previously caused contract cancellations, lease extensions, force majeure, and deployment delays; continuing effects remained a stated risk.
- The company paid $1.224 million to settle the Dunleavy employment litigation; that matter was closed. A Spanish tax penalty of approximately €279,870 had been paid, although an appeal remained pending.
- The company’s stock remained subject to NYSE American listing requirements, and the company identified listing maintenance as a risk.
- Share-based compensation expense was $390,000 for the quarter, compared with $116,000 in the prior-year quarter.
Most important facts for an investor to verify
- Whether revenue growth from EGP, Valaris, 3Dent, and strategic consulting can become recurring and materially larger than the current $272,000 quarterly base.
- The timing, scope, and commercial success of PB3, hybrid PowerBuoy, subsea battery, and maritime domain awareness deployments.
- The company’s quarterly cash burn and whether cash will remain sufficient through September 2022 without additional financing.
- The availability and remaining capacity of the Aspire equity facility and any future ATM or other equity financing, including potential dilution.
- The status of the DOE SBIR project, planned fiscal 2022 demonstrations, and EGP deployment and acceptance milestones.
- Customer concentration, contract backlog, contract loss reserves, and the risk that contracts may be delayed, modified, or terminated.
- The outcome of the Spanish tax appeal and any other pending or threatened litigation or contingencies.
- Whether the $1.041 million tax benefit and $891,000 PPP forgiveness gain are nonrecurring and therefore not indicative of underlying operating performance.