Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2018. The company develops and commercializes ocean-wave power systems, including PB3 PowerBuoy systems, for remote offshore power and communications applications. The filing was signed December 10, 2018.
Financial performance and position
| Metric | Three months ended October 31, 2018 | Three months ended October 31, 2017 | Six months ended October 31, 2018 | Six months ended October 31, 2017 |
|---|---|---|---|---|
| Revenue | $141,000 | $94,000 | $172,000 | $289,000 |
| Gross profit/(loss) | $(496,000) | $118,000 | $(608,000) | $96,000 |
| Gross margin | (352%) | 125.5% | (353%) | 33.2% |
| Operating loss | $(3.919) million | $(2.607) million | $(7.232) million | $(5.372) million |
| Net loss | $(3.890) million | $(2.577) million | $(7.130) million | $(5.240) million |
| Net loss per share | $(0.21) | $(0.20) | $(0.39) | $(0.42) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(7.615) million | $(6.680) million |
- Operating expenses were $3.423 million in the quarter and $6.624 million for the six months, including engineering and product development costs of $1.574 million and $2.722 million, respectively.
- Quarterly revenue increased 50% year over year, but six-month revenue declined 40%, primarily because prior-year projects with Mitsui Engineering & Shipbuilding and the Office of Naval Research had been completed.
- The six-month 2018 cost of revenues included a $0.2 million reserve for contract losses. Higher project spending and material costs contributed to the deterioration in gross margin.
- Cash, cash equivalents and restricted cash totaled $4.556 million at October 31, 2018, including unrestricted cash and cash equivalents of $3.851 million, compared with $12.225 million of combined cash and restricted cash at April 30, 2018.
- Total assets were $6.694 million and stockholders’ equity was $3.599 million at October 31, 2018. The accumulated deficit was $204.668 million.
- Total liabilities were $3.095 million. Capital lease obligations were approximately $5,000 current; the filing does not identify material conventional debt.
- Backlog was $1.0 million at October 31, 2018, compared with $0.7 million at April 30, 2018. Management expected approximately $0.5 million, or 52%, to be recognized over the following twelve months.
Material changes versus the prior comparable period
- Six-month revenue fell by $117,000, while cost of revenues increased by $587,000, changing gross profit of $96,000 into a gross loss of $608,000.
- Engineering and product development expense increased 31% to $2.722 million, driven by new product development, buoy builds for future contracts and personnel costs.
- Selling, general and administrative expense increased 15% to $3.902 million, primarily because of higher personnel costs.
- Six-month net loss increased 36% to $7.130 million, and operating cash use increased 14% to $7.615 million.
- Financing cash inflows were only $48,000 in the first six months of 2018, compared with $14.596 million in the prior-year period, which included public stock offerings.
- The company adopted ASC 606 effective May 1, 2018 using the modified retrospective method. The adoption reduced reported revenue and increased reported net loss by $51,000 for the quarter and $79,000 for the six-month period, primarily by delaying revenue recognition; management stated that the total economics of the underlying contracts were unchanged.
- The company entered into an Aspire Capital common-stock purchase agreement providing for potential purchases of up to $10.0 million over 30 months. It issued 428,571 shares as a commitment fee and had sold 200,000 shares for $68,000 as of October 31, 2018.
Outlook, liquidity, risks and unusual items
- Going concern: Management stated that available cash and restricted cash were expected to fund operations into the quarter ending April 30, 2019. Additional equity and/or debt financing is required to continue operations into fiscal 2020, and the filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Management projected fiscal 2019 operating expenses of approximately $14.5 million, including more than $6.3 million of product development spending. Spending could be reduced through personnel, research and development, and other operating-cost cuts if additional capital is not raised.
- The company continued commercialization efforts for PB3 PowerBuoy systems, including contracts with Eni, Premier Oil and Enel Green Power. It also planned subsea battery and hybrid PowerBuoy offerings, with potential marketing and customer quotations as early as the first quarter of calendar 2019.
- Revenue concentration was significant: Eni represented 84% of quarterly revenue and 72% of six-month revenue; Enel represented 16% and 13%, respectively. The company disclosed that it had only two revenue-producing contracts at the time of filing, with Premier Oil and Eni.
- NASDAQ notified the company that its stock had traded below the $1.00 minimum bid price for 30 consecutive business days. The initial compliance period ran through February 5, 2019, subject to applicable extension and appeal procedures.
- Pending contingencies included a former CEO arbitration demand seeking $5.0 million plus other relief and a Tide Runner Marine lawsuit seeking $2.825 million plus additional damages. No provisions were recorded because losses could not reasonably be estimated.
- The company recorded an estimated $177,000 penalty related to a Spanish income tax audit. A previously accrued $350,000 derivative-litigation liability was paid by the insurance carrier in May 2018, and that matter was closed.
- Other principal risks include continued operating losses, dependence on external financing, product commercialization and reliability, customer concentration, contract cost overruns, technology and deployment risks, competition, regulation, intellectual-property protection and possible NASDAQ delisting.
Most important facts for investors to verify
- Whether the company obtained sufficient financing after October 31, 2018 to address the disclosed going-concern uncertainty and extend operations beyond April 30, 2019.
- Whether PB3, subsea battery and hybrid PowerBuoy offerings achieved commercial deployments, customer acceptance and positive margins.
- The status and financial exposure of the former CEO arbitration and Tide Runner litigation.
- Whether the company regained NASDAQ’s minimum bid-price compliance or required a reverse split, extension or appeal.
- The conversion of the $1.0 million backlog into revenue and cash, including the effect of contract losses, modifications and customer concentration.
- Actual cash burn relative to management’s fiscal 2019 expense expectations and the extent of any subsequent cost reductions or equity dilution.