Ocean Power Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended July 31, 2020, the company’s fiscal first quarter of 2021. Ocean Power Technologies develops and commercializes marine power solutions, including the PB3 PowerBuoy, hybrid PowerBuoy, and subsea battery systems for remote offshore power, communications, surveillance, and related applications. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $169,000 | $202,000 | Down 16% |
| Cost of revenue | $334,000 | $367,000 | Down 9% |
| Gross loss | $(165,000) | $(165,000) | Flat |
| Gross margin | Approximately (98%) | Approximately (82%) | Lower |
| Engineering and product development | $1.252 million | $1.198 million | Up 5% |
| SG&A | $1.987 million | $1.697 million | Up 17% |
| Operating loss | $(3.404) million | $(3.060) million | Higher loss |
| Net loss | $(3.385) million | $(3.025) million | Higher loss |
| Basic and diluted loss per share | $(0.22) | $(0.50) | Improved due mainly to higher share count |
| Cash used in operating activities | $(2.737) million | $(3.605) million | Lower use |
Cash, cash equivalents, and restricted cash totaled $11.993 million at July 31, 2020, including $11.065 million of unrestricted cash and $928,000 of restricted cash. Total liabilities were $4.285 million, including an $890,000 Paycheck Protection Program loan, $1.253 million of operating lease liabilities, and $1.783 million of accrued expenses. The company had no warrant liability of significance. The accumulated deficit was $223.5 million.
Financing activities provided $3.768 million during the quarter, consisting primarily of $2.635 million from the Aspire equity facility, $243,000 from the A.G.P. at-the-market facility, and $890,000 from the PPP loan. Total outstanding common shares increased to 18.625 million at July 31, 2020 from 12.939 million at April 30, 2020, reflecting substantial equity issuance and dilution.
Material changes versus the prior comparable period
- Revenue decreased by $33,000, with 2020 revenue primarily from Enel Green Power and 2019 revenue primarily from Premier Oil and the U.S. Navy.
- Engineering and product development spending increased by $54,000 as new-product development spending increased, partly offset by lower buoy-build costs.
- SG&A increased by $290,000, primarily due to higher employee-related costs and a $154,000 additional provision related to the Spanish tax audit.
- Net loss increased by $360,000 despite lower operating cash use, reflecting higher operating expenses and the Spanish tax-related charge.
- Cash and restricted cash increased by $1.063 million, primarily because financing proceeds of $3.768 million exceeded operating cash use of $2.737 million.
- Backlog declined to $800,000 from $900,000 at April 30, 2020. Approximately 73%, or $600,000, was expected to be recognized as revenue over the following twelve months.
Guidance, outlook, risks, contingencies, and unusual items
- Going concern: Management stated that available cash and restricted cash were expected to fund operations into the quarter ending July 31, 2021, but additional equity or debt financing would be required to continue operations into fiscal 2022. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Operating outlook: Management anticipated fiscal 2021 operating expenses of approximately $14.0 million, including more than $6.9 million of engineering and product development spending. Cost reductions, including potential personnel and research-and-development reductions, may be implemented if additional capital is not obtained.
- COVID-19: The pandemic delayed deployment of the Enel Green Power PB3 project in Chile from April to September 2020, caused one customer to cancel part of a contract and extend an existing lease, and may continue to affect travel, customer activity, suppliers, manufacturing, deployments, and financing access.
- PPP loan: The $890,000 loan bears 1% interest. The company used all proceeds and believed they qualified for forgiveness, but no assurance was provided that the loan would be forgiven in whole or in part. If not forgiven and repaid over two years, estimated interest for the period was approximately $7,000.
- Spanish tax matter: A Spanish administrative tribunal upheld a penalty of approximately €280,000. The company recorded an additional $154,000 charge and had accrued $331,000 for the matter at July 31, 2020. The company was appealing to Spain’s National High Court.
- Employment arbitration: A former CEO sought $5.0 million plus interest and attorneys’ fees in arbitration. The final hearing day occurred July 15, 2020; post-hearing briefs were scheduled for September 22, 2020. No liability was accrued because a loss was not considered probable or reasonably estimable.
- Nasdaq listing: Nasdaq had notified the company of a minimum bid-price deficiency. On August 21, 2020, after the reporting date, the company reported that it had regained compliance following ten consecutive trading days above $1.00 per share.
- Customer concentration: Enel Green Power represented 67% of quarterly revenue, while Eni represented 17% and Premier Oil represented 16%. Loss of a significant customer could materially affect results.
- Commercialization risk: The company continues to incur significant development costs, has a limited operating history and recurring losses, and depends on successful commercialization, product reliability, customer adoption, strategic partnerships, and access to capital.
Most important facts for investors to verify
- Whether the company secures the additional equity or debt financing needed to support operations beyond the stated cash runway.
- Whether the PPP loan receives full or partial forgiveness and the resulting debt and interest obligations.
- Progress, revenue recognition, margins, and cash collection on the Enel Green Power Chile project and other customer contracts.
- Whether the company can expand beyond a small, concentrated customer base and convert its $800,000 backlog into revenue.
- The outcome and potential financial impact of the Spanish tax appeal and former-CEO arbitration.
- The extent of dilution from the Aspire and A.G.P. equity facilities and any future capital raises.
- Whether management’s fiscal 2021 expense expectations and product-development plans remain achievable while preserving liquidity.