Ocean Power Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Ocean Power Technologies develops and commercializes ocean-wave power systems, including the PB3 PowerBuoy, and is developing hybrid PowerBuoy and subsea battery products. The filing covers the fiscal second quarter and six months ended October 31, 2019; the comparable period is October 31, 2018.
During the period, the company continued product development and commercialization activities, including contracts with Enel Green Power, Premier Oil, the U.S. Navy and Eni. In September 2019, it entered into contracts with Enel Green Power subsidiaries for the sale of a PB3 and delivery of a turnkey integrated Open Sea Lab in Chile.
Financial condition and results
| Metric | Three months ended October 31, 2019 | Three months ended October 31, 2018 | Six months ended October 31, 2019 | Six months ended October 31, 2018 |
|---|---|---|---|---|
| Revenue | $204,000 | $141,000 | $406,000 | $172,000 |
| Gross loss | $(84,000) | $(496,000) | $(249,000) | $(608,000) |
| Operating loss | $(3.231 million) | $(3.919 million) | $(6.290 million) | $(7.232 million) |
| Net loss | $(3.189 million) | $(3.890 million) | $(6.214 million) | $(7.130 million) |
| Net loss per share | $(0.51) | $(4.20) | $(1.01) | $(7.78) |
- Second-quarter revenue increased 45%; six-month revenue increased 136%, primarily from new Enel Green Power, Premier Oil and U.S. Navy contracts.
- Gross margin improved to approximately negative 41% in the quarter and negative 61% for the six-month period, compared with approximately negative 352% and negative 353%, respectively, in the prior-year periods. The company nevertheless remained gross-loss-generating.
- Six-month engineering and product development expense declined 8% to $2.507 million, while selling, general and administrative expense declined 9% to $3.534 million.
- Cash used in operating activities was $6.418 million for the six months, compared with $7.615 million in the prior-year period. Investing cash use was $41,000, and financing provided $727,000.
- Cash, cash equivalents and restricted cash totaled $11.422 million at October 31, 2019, down from $17.159 million at April 30, 2019. Unrestricted cash and cash equivalents were $10.495 million.
- Total assets were $15.258 million and total liabilities were $4.510 million. The company reported no material funded debt; liabilities principally included operating lease liabilities, accrued expenses and contract liabilities. Operating lease liabilities totaled $1.413 million.
- Accumulated deficit was $215.998 million. Stockholders’ equity was $10.748 million, compared with $15.775 million at April 30, 2019.
- Remaining performance obligations, or backlog, were $2.4 million at October 31, 2019, compared with $0.9 million at April 30, 2019. The company expected to recognize approximately 100% of the October 31 backlog over the following twelve months.
Material changes versus the prior comparable period
- Revenue growth and lower cost of revenues reduced the quarterly gross loss by $412,000 and the six-month gross loss by $359,000.
- The quarterly net loss improved by $701,000, or 18%; the six-month net loss improved by $916,000, or 13%.
- Lower buoy-build spending reduced product development costs, partially offset by increased spending on new product development.
- Cash burn remained substantial despite the improvement in operating cash use. The company stated that its fiscal 2019 net burn rate was approximately $1.0 million per month.
- The company adopted the new lease standard on May 1, 2019, recording approximately $1.4 million of right-of-use assets and $1.5 million of lease liabilities at adoption.
- The company raised approximately $15.7 million in net proceeds from an April 2019 public offering, issued shares through its ATM facility, and entered into a new $10 million Aspire Capital equity purchase agreement in October 2019. These activities increased available liquidity but create potential dilution.
Guidance, outlook, risks and unusual items
- Management estimated fiscal 2020 operating expenses of approximately $14.4 million, including more than $7.4 million of engineering and product development spending.
- Based on cash and restricted cash at October 31, 2019, management expected to fund operations into the quarter ending July 31, 2020, but stated that additional equity and/or debt financing would be required to continue operations into fiscal 2021.
- The filing states that recurring losses, significant cash use and dependence on future financing raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for this uncertainty.
- Key risks include failure to commercialize PowerBuoys, inability to achieve profitability or positive cash flow, product performance and deployment risks, dependence on a limited customer base, financing and dilution risk, potential Nasdaq compliance issues, regulatory and permitting requirements, intellectual property protection and litigation.
- Customer concentration remained significant. For the six months, Enel Green Power represented 24% of revenue, Premier Oil 30%, Eni 19% and the U.S. Navy 17%.
- The company was defending a former-CEO arbitration claim seeking $5 million in compensatory and punitive damages plus interest and attorneys’ fees. No accrual was recorded because management did not consider a loss probable or reasonably estimable.
- The company recorded a $177,000 reserve for an anticipated penalty related to a Spanish income-tax audit. It also had a $199,000 contract loss reserve within accrued expenses at October 31, 2019.
- Nasdaq confirmed in May 2019 that the company had regained compliance with the minimum stockholders’ equity requirement and continued listing.
Most important facts for investors to verify
- Whether the company can secure the additional financing required before its projected liquidity horizon and avoid a forced reduction or cessation of operations.
- Whether the $2.4 million backlog converts into revenue on schedule and at acceptable margins.
- Progress, acceptance and profitability of the PB3 sale to Enel Green Power and the related Chile deployment.
- Monthly cash burn, fiscal 2020 spending reductions, and the rate at which unrestricted cash is declining.
- Potential dilution from the ATM facility, Aspire Capital agreement, outstanding warrants and other equity-linked instruments.
- Developments in the former-CEO arbitration, Spanish tax audit and other contractual or contingent liabilities.
- Customer concentration and the company’s ability to expand beyond a small number of government, energy and oil-and-gas customers.