Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended January 31, 2016; filed March 11, 2016. The supplied metadata identifies “2015 Q3,” but the filing covers the third quarter of fiscal 2016. Financial statements are unaudited.
Business Context and Reporting Period
Ocean Power Technologies is developing and commercializing PowerBuoy systems that generate electricity from ocean waves. The company has shifted its strategy toward autonomous, grid-independent applications serving ocean observing, offshore wind, defense and security, oil and gas, communications, and aquaculture markets. Government agencies historically represented a significant portion of revenue, while the company continues to invest heavily in product development and has not yet achieved a final commercial product offering.
The company focused development efforts on the APB350 PowerBuoy. The DOE contract’s final stage was completed during the quarter. The APB350 A1 underwent deployment, retrieval, maintenance, and repair activities, with further redeployment planned. The legacy PB40 was retrieved early after unexpected performance data indicated likely failures in float-braking components; management does not plan to redeploy it.
Key Financial Metrics
| Metric | Three months ended Jan. 31, 2016 | Three months ended Jan. 31, 2015 | Nine months ended Jan. 31, 2016 | Nine months ended Jan. 31, 2015 |
|---|---|---|---|---|
| Revenue | $5,203 | $328,511 | $605,281 | $3,616,827 |
| Gross loss | $0 | $(50,595) | $0 | $(727,519) |
| Product development expense | $1,752,001 | $1,082,628 | $5,412,445 | $2,227,060 |
| SG&A expense | $1,690,420 | $1,956,702 | $5,419,358 | $7,788,552 |
| Operating loss | $(3,442,421) | $(3,089,925) | $(10,831,803) | $(10,743,131) |
| Net loss attributable to OPT | $(1,957,969) | $(2,185,971) | $(9,146,771) | $(9,838,417) |
| Loss per share | $(1.05) | $(1.25) | $(5.07) | $(5.63) |
- Cash and liquidity: Cash and cash equivalents were $9.4 million at January 31, 2016, compared with $17.3 million at April 30, 2015. Marketable securities were $50,000, producing cash plus marketable securities of approximately $9.5 million. Restricted cash was $377,101.
- Cash flow: Net cash used in operating activities was $8.1 million for the nine months ended January 31, 2016, compared with $14.8 million in the prior-year period. Investing activities provided $112,936 and financing activities provided $126,001.
- Debt: Total debt was $75,000, all classified as current, compared with $150,000 at April 30, 2015. The company also reported a $600,000 noncurrent deferred credit related to an emissions-credit option.
- Balance sheet: Total assets were $10.6 million and total liabilities were $3.8 million. Stockholders’ equity was $6.8 million, down from $15.7 million at April 30, 2015. Accumulated deficit was $173.9 million.
- Backlog: Negotiated backlog was approximately $0.7 million at January 31, 2016, down from $0.9 million at April 30, 2015. Management expected backlog to continue declining in the near term.
- Revenue concentration: The U.S. Department of Energy represented 100% of quarterly revenue and 33% of nine-month revenue. The European Union represented 67% of nine-month revenue.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue fell 98% to $5,203; nine-month revenue fell 83% to $605,281, primarily because prior-year billable work under completed or reduced-scope contracts did not recur.
- Product development expense increased 62% in the quarter and 143% for the nine-month period, largely due to PowerBuoy deployments, retrievals, repairs, and autonomous-market development.
- Quarterly SG&A declined 14%, while nine-month SG&A declined 30%, reflecting lower Australian site-development costs, patent amortization, consulting costs, and certain legal costs.
- Operating loss increased slightly for the quarter but was broadly stable for the nine-month period. Net loss attributable to OPT improved by 10% for the quarter and 7% for the nine months, primarily because of higher income tax benefits and lower SG&A.
- The company sold $19.7 million of New Jersey net operating loss carryforwards and research and development credits, generating a $1.7 million income tax benefit, compared with a $1.1 million benefit in the prior-year period. This benefit is not recurring operating revenue.
- In October 2015, the company entered a new ATM offering. During the quarter it sold 95,024 shares at an average price of $2.13 per share, receiving approximately $199,000 net of costs. Additional equity financing may dilute existing stockholders.
- The company completed a one-for-10 reverse stock split in October 2015 and reduced authorized common shares to 50 million. Share and per-share data were retrospectively adjusted.
- The company acquired the remaining 11.8% noncontrolling interest in its Australian subsidiary in September 2015 for nominal consideration, resulting in no noncontrolling interest at January 31, 2016.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Liquidity outlook: Management believed existing cash and marketable securities would fund operations and capital requirements into the quarter ending October 31, 2016. The company stated that additional equity and/or debt financing is required to continue operations as a going concern. No committed financing sources were in place.
- Commercialization outlook: Management projected that the APB350 could reach a maturity level in calendar 2016 supporting a commercial launch to early adopters, but acknowledged that commercialization remains uncertain.
- Customer and contract risk: The MES contract was under stage-gate review and activity had been suspended. The scope, schedule, or continuation of the project could change, materially affecting revenue and backlog. In March 2016, the company entered a letter of intent with MES for funded pre-work and negotiations regarding APB350 deployment.
- Technology and deployment risk: The PB40 experienced likely braking-system component failures, and the APB350 required multiple maintenance and repair events. Product reliability, durability, scalability, permitting, and deployment remain significant risks.
- Litigation: The company faced consolidated securities class actions, two consolidated derivative actions, a shareholder lawsuit concerning director-removal provisions, and suspended employment-related claims involving a former CEO. The company recorded no provision for potential losses because outcomes and exposure could not be reasonably estimated.
- SEC investigation: An SEC subpoena concerning the terminated Australian VWP Project remained outstanding. The investigation was ongoing, and no provision was recorded for potential losses, penalties, or other consequences.
- Australian project: The VWP Project was terminated after management determined it was no longer commercially viable. Prior grant funding and interest were returned to ARENA; the project no longer provided a source of expected future revenue.
- Foreign exchange: The company recorded a nine-month foreign exchange loss of $194,266 and did not hedge its foreign-currency exposure.
- Internal controls and personnel: Management concluded disclosure controls were effective. The controller resigned during the quarter, and duties were reassigned rather than filled by a full-time replacement.
Investor Verification Items
- Verify the company’s current cash runway, quarterly cash burn, and ability to obtain financing before the stated October 31, 2016 liquidity horizon.
- Assess whether APB350 sea trials demonstrate sufficient reliability, endurance, power output, and commercial readiness for the projected 2016 launch.
- Monitor the status and final scope of the MES letter of intent and stage-gate review, as well as changes in the company’s approximately $0.7 million backlog.
- Review the financial and legal consequences of the ongoing SEC investigation and shareholder and derivative litigation, for which no loss provisions were recorded.
- Evaluate dilution and stock-price risks associated with the ATM program and the proposed $15 million Form S-3 shelf registration.
- Separate recurring operating performance from the $1.7 million tax benefit generated by monetizing New Jersey tax attributes.