Ocean Power Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended October 31, 2017, representing fiscal 2018 second quarter and first half. Ocean Power Technologies develops and commercializes wave-energy systems, including the PB3 PowerBuoy, for remote offshore power and communications applications. The company remains primarily in the commercialization and product-development phase.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2017 | Three months ended Oct. 31, 2016 | Six months ended Oct. 31, 2017 | Six months ended Oct. 31, 2016 |
|---|---|---|---|---|
| Revenue | $94,000 | $170,000 | $289,000 | $372,000 |
| Gross profit | $118,000 | $45,000 | $96,000 | $120,000 |
| Product development costs | $978,000 | $1.308 million | $2.080 million | $2.944 million |
| Operating loss | $2.607 million | $2.986 million | $5.372 million | $6.066 million |
| Net loss | $2.577 million | $966,000 | $5.240 million | $4.793 million |
| Net loss per share | $0.20 | $0.25 | $0.42 | $1.51 |
| Net cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $6.680 million | $6.284 million |
The six-month gross margin was approximately 33%; the quarter showed an unusual gross profit of $118,000 on $94,000 of revenue because reported cost of revenues was a negative $24,000 following contract-cost estimate changes. Operating losses remained substantial, and the company has an accumulated deficit of $192.6 million.
At October 31, 2017, cash and cash equivalents were $16.318 million, marketable securities were $25,000, and restricted cash was $512,000. Total assets were $18.110 million and total liabilities were $3.110 million. Capital lease obligations totaled $41,000; the filing does not identify material conventional debt. Stockholders’ equity was $15.0 million.
Cash increased primarily from equity financing. Financing activities provided $14.596 million during the first six months, including $14.647 million of net proceeds from common-stock issuances. Cash, cash equivalents and restricted cash increased from $8.909 million at April 30, 2017 to $16.830 million at October 31, 2017.
Material changes versus the prior comparable period
- Quarterly revenue declined 45% to $94,000; six-month revenue declined 22% to $289,000, primarily because the MES and ONR contracts were nearing completion.
- Quarterly net loss increased to $2.577 million from $966,000, largely because the prior-year period benefited from a $2.017 million unrealized gain on warrant liabilities. The six-month net loss increased 9% to $5.240 million.
- Product development spending decreased 25% in the quarter and 29% for the six-month period, reflecting fewer development projects and the absence of certain prior-year deployment and retrieval costs.
- Six-month selling, general and administrative expense increased 5% to $3.388 million, primarily from higher employee-related costs, partly offset by lower stock compensation.
- The company issued 6.193 million shares in May 2017 for approximately $7.2 million of net proceeds and 5.739 million shares in October 2017 for approximately $7.4 million of net proceeds, materially increasing the share count and diluting existing holders.
- Negotiated backlog declined from $0.3 million at April 30, 2017 to zero at October 31, 2017.
Guidance, outlook, risks and unusual items
- Management expects cash and marketable securities to fund operations into at least the quarter ending April 30, 2019, but states that additional equity or debt financing will be required. The company has no committed financing sources.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management indicated that fiscal 2018 operating expenses may be approximately $12.3 million, including more than $5.5 million of product development spending, subject to possible reductions if additional capital is not obtained.
- The PB3 PowerBuoy lease with Mitsui Engineering and Shipbuilding concluded in September 2017 after deployment in Japan. The company is pursuing additional sales, leases, services and strategic partnerships while continuing PB3 cost, reliability and power-output improvements and development of the higher-power PB15.
- Revenue is highly concentrated: MES represented 75% of six-month revenue and ONR represented 25%. The company had only two revenue-producing contracts identified in its risk disclosures, and both were nearing completion.
- A tentative shareholder-derivative litigation settlement requires a $350,000 payment, fully expected to be covered by insurance; the company recorded both a litigation payable and insurance receivable.
- An SEC investigation concerning the VWP project and a prior public offering remains ongoing. No loss provision has been recorded because the outcome cannot be estimated.
- The company recorded a $132,000 estimated penalty related to a Spanish income-tax audit. A $600,000 deferred credit payable also remains current and is expected to be returned because qualifying emissions credits were not generated.
- Warrant liabilities were $255,000 at October 31, 2017 and generated a $68,000 unrealized gain for the six-month period. This noncash fair-value item materially affects comparisons of reported net loss.
Most important facts for investors to verify
- Whether the company can obtain additional financing before its cash runway expires and on terms that do not cause excessive dilution or add restrictive debt.
- Whether PB3 commercialization produces recurring product, lease and services revenue sufficient to offset ongoing operating cash burn.
- The status, timing and potential financial impact of the SEC investigation and shareholder litigation settlement.
- Actual cash burn relative to management’s stated fiscal 2018 expense expectations and the April 30, 2019 liquidity outlook.
- Customer concentration, contract renewals or replacements, and the absence of negotiated backlog at October 31, 2017.
- The effect of warrant fair-value changes, stock issuances and other non-operating items on reported earnings and per-share results.