Ocean Power Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Ocean Power Technologies develops and commercializes ocean-wave energy systems, including the PB3 PowerBuoy, hybrid PowerBuoy and subsea battery solutions. The company serves offshore oil and gas, defense, scientific, communications and other remote-power applications.
This filing covers the three months ended July 31, 2019, the first quarter of fiscal 2020. The financial statements are unaudited and presented under U.S. GAAP. The company had 5,771,134 common shares outstanding as of September 10, 2019.
Financial performance and key metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $0.202 million | $0.031 million | 552% increase |
| Cost of revenue | $0.367 million | $0.142 million | 158% increase |
| Gross loss | $0.165 million | $0.111 million | Loss increased |
| Gross margin | (81.7%) | (358.1%) | Improved |
| Operating expenses | $2.895 million | $3.201 million | 10% decrease |
| Operating loss | $3.060 million | $3.312 million | 8% improvement |
| Net loss | $3.025 million | $3.240 million | 7% improvement |
| Basic and diluted loss per share | $0.50 | $3.57 | Improved; affected by share-count increase |
| Cash used in operating activities | $3.605 million | $3.793 million | 5% improvement |
Revenue was generated principally from Eni, Premier Oil and the U.S. Navy. Customer concentration remained significant: Premier Oil represented 47% of revenue, the U.S. Navy 26% and Eni 14%.
Cash, cash equivalents and restricted cash totaled $13.487 million at July 31, 2019, including $13.332 million of unrestricted cash and $0.155 million of restricted cash. Cash and equivalents declined from $16.660 million at April 30, 2019. Total assets were $16.159 million and total liabilities were $3.331 million.
The company reported no conventional borrowings in the provided filing. Liabilities included $1.461 million of operating lease obligations recognized upon adoption of the new lease standard, comprising $0.208 million current and $1.253 million long-term. Accumulated deficit was $212.809 million.
Material changes versus the prior comparable period
- Revenue increased by $171,000, primarily because of contracts with Eni, Premier Oil and the U.S. Navy.
- Cost of revenue increased by $225,000 because of higher upfront spending and material costs on new revenue-generating projects.
- Engineering and product development expense was broadly stable at $1.198 million versus $1.149 million.
- Selling, general and administrative expense declined by $355,000 to $1.697 million, primarily because of lower personnel costs and professional fees.
- Operating cash burn improved modestly, but remained substantial at $3.605 million for the quarter.
- Shares used in the loss-per-share calculation increased to 6.04 million from 0.91 million, reflecting significant equity issuance and warrant exercises; all share and per-share data were retrospectively adjusted for a one-for-twenty reverse stock split effective March 11, 2019.
- The company adopted ASC Topic 842 on May 1, 2019, recording approximately $1.4 million of right-of-use assets and $1.5 million of lease liabilities and eliminating deferred rent and an unamortized lease incentive receivable.
Guidance, outlook, risks and unusual items
Management expects fiscal 2020 operating expenses of approximately $14.4 million, including more than $7.4 million of engineering and product development spending. Management expects to fund operations through customer revenue and additional securities offerings, but states that additional equity and/or debt financing will be required to continue operations into fiscal 2021.
Management believes existing cash resources will fund capital requirements and operations into the quarter ending July 31, 2020. Nevertheless, the filing states that substantial doubt exists regarding the company’s ability to continue as a going concern because of recurring losses, operating cash usage and dependence on additional financing. The company had approximately $1.0 million of monthly net cash burn during fiscal 2019.
Negotiated backlog was $0.7 million at July 31, 2019, down from $0.9 million at April 30, 2019. The company expects approximately 100% of the remaining performance obligations to be recognized as revenue over the following twelve months, although backlog may change because of contract modifications, terminations and project delays.
In April 2019, the company raised approximately $15.7 million of net proceeds in a public offering involving common stock, prefunded warrants and common warrants. It had also sold approximately $0.96 million of stock under its 2019 ATM facility as of July 31, 2019. These financings provide liquidity but create dilution risk. The Aspire Capital facility had reached its available share limit.
Material risks include the ability to commercialize the PowerBuoy products, achieve profitability, secure additional financing, maintain Nasdaq listing, manage customer concentration, meet product reliability and survivability targets, complete new-product development, protect intellectual property and resolve litigation and regulatory matters.
The company is defending a former CEO’s arbitration claim seeking $5 million plus interest, attorneys’ fees and equitable relief. No provision was recorded because a loss was not considered probable or reasonably estimable. The company also recorded a $177,000 estimated penalty related to a Spanish income-tax audit. Nasdaq confirmed in May 2019 that the company had regained compliance with the minimum shareholders’ equity requirement and continued listing.
Most important facts to verify
- Whether additional financing can be obtained before the company’s projected cash runway ends and on acceptable terms.
- Whether revenue growth converts into positive gross margins and materially reduces the recurring operating cash burn.
- The timing, profitability and commercial status of Premier Oil, Eni, U.S. Navy and other customer projects.
- The potential dilution from outstanding prefunded warrants, common warrants, options and future equity offerings.
- The status and ultimate cost of the former CEO arbitration and the Spanish tax audit.
- Whether the $0.7 million backlog is converted into revenue within the expected twelve-month period.
- Progress toward commercialization of the PB3, hybrid PowerBuoy and subsea battery products, including reliability, deployment and customer-acceptance results.