Ocean Power Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended July 31, 2017, the first quarter of fiscal 2018. Ocean Power Technologies develops and commercializes ocean-wave power systems, including the PB3 PowerBuoy, for remote offshore power, communications, defense, ocean observing, oil and gas, and related applications. The company remains in the commercialization and product-development stage, with revenue historically dependent substantially on government-supported development projects.
Financial Performance and Position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $195,000 | $202,000 |
| Gross profit/(loss) | $(22,000) | $75,000 |
| Operating loss | $(2.765 million) | $(3.080 million) |
| Net loss | $(2.663 million) | $(3.827 million) |
| Basic and diluted loss per share | $(0.22) | $(1.72) |
| Net cash used in operating activities | $(4.238 million) | $(2.921 million) |
| Net cash provided by financing activities | $7.180 million | $5.225 million |
Revenue was generated by Mitsui Engineering and Shipbuilding and the U.S. Department of Defense Office of Naval Research. Customer concentration remained high: MES represented 67% of revenue and ONR 33%.
Cost of revenue increased 71% to $217,000, producing a negative gross margin of approximately 11%. Product-development costs declined 33% to $1.102 million, while selling, general and administrative costs increased 8% to $1.641 million. The lower net loss principally reflected the absence of the prior-year $752,000 unrealized loss on warrant liabilities; Q1 FY2018 included a $37,000 unrealized warrant-liability gain and a $62,000 foreign-exchange gain.
At July 31, 2017, cash and cash equivalents were $11.414 million, marketable securities were $25,000, and restricted cash was $515,000. Total assets were $13.085 million, total liabilities were $2.999 million, and stockholders’ equity was $10.086 million. The company had $286,000 of warrant liabilities, $600,000 of deferred credits payable, and only limited capital-lease obligations; the filing does not report conventional funded debt.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly by 3%, but gross profit shifted to a $22,000 loss because cost of revenue increased faster than revenue.
- Product-development spending decreased by $534,000 due to delayed project starts, while SG&A increased by $122,000 because of higher employee costs and consulting fees.
- Operating loss improved by $315,000 and net loss improved by $1.164 million, largely because warrant valuation results changed from a $752,000 loss to a $37,000 gain.
- Operating cash burn increased by $1.317 million, primarily because accounts payable and accrued expenses declined by approximately $2.4 million.
- The company raised approximately $7.2 million net through a May 2, 2017 public offering of 6,192,750 common shares at $1.30 per share. Shares issued increased from 6.314 million at April 30, 2017 to 12.621 million at July 31, 2017, creating substantial dilution.
- Negotiated backlog declined from $0.3 million at April 30, 2017 to $0.1 million at July 31, 2017; the backlog was fully funded.
Outlook, Liquidity, Risks and Unusual Items
Management states that cash and marketable securities should fund operations into the quarter ending July 31, 2018, but the financial statements contain substantial doubt regarding the company’s ability to continue as a going concern. Additional equity and/or debt financing is required, and the company had no committed financing sources at the filing date. Management indicated that failure to raise capital or generate positive cash flow could require reductions in personnel, product development and other operating activities, or potentially cessation of operations.
The company expects approximately $12.3 million of fiscal 2018 operating expenses, including more than $5.5 million of product-development spending, although these amounts may be reduced if financing is unavailable. The PB3 PowerBuoy lease with MES was extended through September 2017, and the company continued work on its PB3 commercialization, PB15 development, ONR project, and strategic marketing relationships.
- A tentative shareholder derivative-litigation settlement was reached in August 2017, subject to final documentation and court approval. The company accrued a $350,000 loss contingency and recorded a corresponding insurance receivable because its insurer was expected to pay the full amount.
- An SEC investigation concerning the VWP project and the company’s April 2014 public offering remained ongoing. No loss provision was recorded.
- A Spanish income-tax audit remained pending; the company accrued an estimated $132,000 penalty.
- The company remains dependent on a small number of contracts and customers, and revenue recognition relies in part on percentage-of-completion estimates that may materially affect reported results.
- Technology reliability, ocean deployment performance, commercialization timing, market acceptance, competition, intellectual-property protection, regulatory requirements, customer concentration, foreign-exchange exposure, and future financing availability are significant risks.
Most Important Facts for Investors to Verify
- Whether the company obtained sufficient financing after July 31, 2017 to address the disclosed going-concern uncertainty and expected cash burn.
- The actual timing and economics of PB3 sales, leases, deployments, recoveries, and service contracts following the MES lease expiration or extension.
- Whether revenue diversification and backlog improved beyond the $0.1 million reported backlog and two principal revenue-producing contracts.
- The final court-approved outcome and insurance reimbursement related to the $350,000 derivative-litigation settlement.
- The status and potential financial impact of the ongoing SEC investigation and Spanish tax audit.
- The effect of the May 2017 equity offering, outstanding warrants, options and restricted stock on future dilution.