Ocean Power Technologies, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2019, compared with fiscal 2018. The requested “2018 Q4” does not match the filing’s annual reporting period.
Business Context
Ocean Power Technologies develops and commercializes autonomous offshore power and communications systems, primarily the PB3 PowerBuoy®, which converts ocean-wave motion into electricity. Target markets include oil and gas, defense and security, science and research, and communications. The company also developed hybrid PowerBuoy® and subsea battery products targeted for initial deployments in fall 2019.
Fiscal 2019 represented a continued transition from research and development toward commercialization. New or continuing work included contracts and feasibility studies with Eni, Premier Oil, Enel Green Power, the U.S. Navy, and a leading oil and gas operator.
Financial Performance and Liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $0.632 million | $0.511 million | +24% |
| Cost of revenue | $1.303 million | $0.763 million | +71% |
| Gross profit/(loss) | $(0.671) million | $(0.252) million | Worsened |
| Engineering and product development | $4.984 million | $4.320 million | +15% |
| SG&A | $7.616 million | $6.988 million | +9% |
| Operating loss | $(13.271) million | $(11.560) million | Worsened |
| Net loss | $(12.246) million | $(10.157) million | Worsened 21% |
| Net loss per share | $(9.52) | $(13.24) | Not directly comparable due to share issuance and reverse split |
| Cash used in operating activities | $(12.140) million | $(10.696) million | Higher use |
| Cash provided by financing activities | $17.183 million | $14.582 million | Higher proceeds |
| Cash, cash equivalents and restricted cash | $17.159 million | $12.225 million | +40% |
The company had an accumulated deficit of $209.8 million at April 30, 2019. Total liabilities were $2.6 million and stockholders’ equity was $15.8 million. The filing does not identify material conventional debt; liquidity was funded principally through equity issuances.
Management estimated fiscal 2020 operating expenses of approximately $14.4 million, including more than $7.4 million of product development spending. Based on available cash, management expected funding to extend into the quarter ending July 31, 2020, but stated that additional financing would be required.
Material Changes Versus Prior Period
- Revenue increased by $121,000, primarily from Eni, Premier Oil, Enel Green Power and U.S. Navy-related work. Revenue concentration shifted from MES and the Office of Naval Research in fiscal 2018 to Eni and Premier Oil in fiscal 2019.
- Commercial contracts represented 92% of fiscal 2019 revenue, compared with 86% in fiscal 2018. Eni represented 54% and Premier Oil 33% of fiscal 2019 revenue.
- Cost of revenue grew faster than revenue, producing a larger gross loss, primarily because of upfront spending and material costs on newer contracts.
- Product development spending increased as the company advanced PB3 builds and developed the hybrid PowerBuoy® and subsea battery products.
- Operating cash use increased to $12.1 million. Equity financing generated approximately $17.2 million, including approximately $15.7 million from an April 2019 public offering.
- The company completed a one-for-twenty reverse stock split effective March 11, 2019; all share and per-share data were retroactively restated.
- Nasdaq listing compliance issues related to bid price and stockholders’ equity were addressed through the reverse split and April equity offering. Nasdaq confirmed continued listing in May 2019.
- The company adopted ASC 606 using the modified retrospective method. Adoption reduced fiscal 2019 reported revenue by $118,000 and increased net loss by $118,000, without changing cash flow.
Guidance, Outlook, Risks and Unusual Items
- The independent auditor included an explanatory paragraph stating that recurring losses, the accumulated deficit and dependence on additional financing raised substantial doubt about the company’s ability to continue as a going concern.
- Management expects continued operating cash use unless product commercialization produces positive cash flow. It may reduce personnel, research and development, and other costs if financing or product sales are insufficient.
- Backlog was $0.9 million at April 30, 2019; approximately 81%, or $0.7 million, was expected to be recognized over the following twelve months. Backlog may change because of contract modifications, terminations, production delays and accounting estimates.
- Commercialization remains subject to uncertain customer demand, lengthy sales cycles, technical performance, manufacturing scale-up, deployment and maintenance costs, permitting, environmental approvals, and competition from batteries, solar, fossil-fuel systems and larger technology providers.
- Customer and geographic concentration is significant: 92% of fiscal 2019 revenue came from customers outside the United States, and two customers accounted for 87% of revenue.
- Pending contingencies included an employment arbitration claim seeking $5 million, for which no loss was accrued because the amount could not reasonably be estimated. A Tide Runner-related lawsuit was settled for $200,000 and dismissed.
- The company recorded a $177,000 estimated Spanish tax penalty related to a tax audit. The filing also disclosed a $1.9 million operating lease commitment balance of future minimum payments.
- Fiscal 2019 included a $195,000 noncash gain from the change in fair value of warrant liabilities and an $850,000 income tax benefit from selling New Jersey net operating losses and research credits.
Most Important Facts to Verify
- Whether the company can raise additional capital before projected liquidity runs out and on terms that do not cause substantial dilution.
- Whether PB3, hybrid PowerBuoy® and subsea battery products achieve repeatable commercial deployments and acceptable margins.
- Progress, funding and revenue conversion from Eni, Premier Oil, Enel Green Power, U.S. Navy and other customer programs.
- Actual cash burn, fiscal 2020 spending reductions, and the company’s ability to reach positive operating cash flow.
- Customer concentration, backlog conversion and the timing and profitability of remaining performance obligations.
- Resolution and potential financial exposure from the Dunleavy arbitration, Spanish tax audit and other contingencies.
- Future equity issuance, warrant exercises and the resulting dilution to common stockholders.