Ocean Power Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended July 31, 2018, the first quarter of fiscal 2019. Ocean Power Technologies develops and commercializes wave-powered PowerBuoy systems, including the PB3 product, for remote offshore power, communications, monitoring, defense, oil and gas, and scientific applications. The company remains primarily in the commercialization and product-development phase.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $31,000 | $195,000 |
| Cost of revenue | $142,000 | $217,000 |
| Gross loss | $111,000 | $22,000 |
| Engineering and product development | $1.149 million | $1.102 million |
| SG&A | $2.052 million | $1.641 million |
| Operating loss | $3.312 million | $2.765 million |
| Net loss | $3.240 million | $2.663 million |
| Basic and diluted loss per share | $0.18 | $0.22 |
| Net cash used in operating activities | $3.793 million | $4.238 million |
Reported gross margin was approximately negative 358%, compared with approximately negative 11% in the prior-year quarter. Operating margin was approximately negative 10,684%, and net margin was approximately negative 10,452%; these percentages are distorted by very low revenue.
At July 31, 2018, cash and cash equivalents were $7.644 million, marketable securities were $25,000, and restricted cash was $718,000, for total cash, cash equivalents, restricted cash and marketable securities of approximately $8.4 million. Total assets were $9.784 million and stockholders’ equity was $7.080 million. Current liabilities were $2.559 million and total liabilities were $2.704 million. Capital lease obligations totaled $14,000 current; the filing does not identify material conventional debt.
Cash, cash equivalents and restricted cash declined from $12.225 million at April 30, 2018 to $8.362 million at July 31, 2018. The company used $30,000 in investing activities and $9,000 in financing activities during the quarter. Accumulated deficit was $200.8 million.
Material changes versus the prior comparable period
- Revenue decreased 84% to $31,000, primarily because the Mitsui Engineering & Shipbuilding and Office of Naval Research contracts had been completed in fiscal 2018.
- Gross loss increased to $111,000 from $22,000 despite lower cost of revenue.
- Engineering and product-development spending was broadly stable, while SG&A increased 25% to $2.052 million, driven primarily by higher personnel, professional-fee and patent costs.
- Net loss increased 22% to $3.240 million. The prior-year quarter included $7.221 million of net proceeds from common-stock issuance; no comparable financing proceeds were received in the current quarter.
- Operating cash use improved by $445,000, but cash declined substantially because the company continued to fund operations without sufficient revenue or financing proceeds.
- The company adopted ASC Topic 606 on May 1, 2018 using the modified retrospective method. Adoption reduced reported revenue and increased reported net loss for the quarter by $28,000, without a material effect on cash flows.
Outlook, commentary, risks and unusual items
Management estimated fiscal 2019 operating expenses of approximately $14.5 million, including more than $6.3 million of product-development spending. Management expected to fund operations through additional securities sales and limited revenue until positive operating cash flow, if ever achieved.
Negotiated backlog was $1.0 million at July 31, 2018, up from $0.7 million at April 30, 2018. Approximately 63%, or $0.6 million, was expected to be recognized over the following twelve months. Backlog is subject to contract modifications, termination, production delays and changes in estimates.
The company had two revenue-producing commercial contracts: a minimum 24-month Eni contract, including an 18-month PB3 lease and project management, and a Premier Oil PB3 lease contract. Management stated that current cash resources were expected to fund operations into at least the quarter ending April 30, 2019, but also stated that additional equity and/or debt financing would be required. The filing expressly reports substantial doubt about the company’s ability to continue as a going concern.
- On August 10, 2018, the company entered into an agreement under which Aspire Capital committed to purchase up to $10.0 million of common stock over 30 months. The registration statement became effective August 23, 2018; future issuances may dilute existing shareholders.
- On August 9, 2018, Nasdaq notified the company that its stock had traded below the $1.00 minimum bid price for 30 consecutive business days. The initial compliance deadline was February 5, 2019, creating a risk of delisting absent compliance or further action.
- Former CEO Charles Dunleavy filed an arbitration demand on August 28, 2018 seeking $5.0 million in compensatory and punitive damages, interest, fees and equitable relief. The company had not responded and had not accrued a provision.
- Tide Runner Marine sued for approximately $2.825 million plus additional damages and fees. The company denied the claims and asserted a $15,000 counterclaim; no loss provision was recorded because the amount was not reasonably estimable.
- The company estimated a $177,000 penalty related to a Spanish income-tax audit and recorded it in accrued expenses and SG&A.
- The company paid the remaining $200,000 balance of a deferred carbon-credit obligation on August 23, 2018, resolving that obligation.
Most important facts for investors to verify
- Whether the Aspire Capital facility produces sufficient financing and on what share-issuance terms and dilution impact.
- Actual cash burn, remaining liquidity and the timing and terms of any required future financing.
- Progress, deployment, revenue recognition and margins associated with the Eni and Premier Oil PB3 contracts.
- Whether the company achieves Nasdaq minimum-bid compliance or requires a reverse split or other listing remedy.
- Potential exposure from the Dunleavy arbitration, Tide Runner litigation and Spanish tax audit.
- Whether the $1.0 million backlog converts to revenue and cash as projected, given the company’s limited historical revenue and customer concentration.