Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended January 31, 2018, compared with the corresponding periods ended January 31, 2017. The filing was signed March 6, 2018. The company develops and commercializes wave-energy systems, primarily the PB3 PowerBuoy™, for remote offshore power and communications applications.
Financial performance and position
| Metric | Three months ended Jan. 31, 2018 | Three months ended Jan. 31, 2017 | Nine months ended Jan. 31, 2018 | Nine months ended Jan. 31, 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0.221 million | $0.289 million | $0.593 million |
| Gross profit/(loss) | $0 | $(0.142) million | $0.096 million | $(0.022) million |
| Product development costs | $1.318 million | $0.950 million | $3.398 million | $3.894 million |
| SG&A | $1.576 million | $1.617 million | $4.964 million | $4.859 million |
| Operating loss | $(2.894) million | $(2.709) million | $(8.266) million | $(8.775) million |
| Net loss | $(1.663) million | $(2.117) million | $(6.903) million | $(6.910) million |
| Net loss per share | $(0.09) | $(0.37) | $(0.48) | $(1.84) |
Liquidity: At January 31, 2018, cash and cash equivalents were $14.369 million, marketable securities were $0.025 million, and restricted cash was $0.536 million. Total assets were $16.709 million and total liabilities were $3.286 million. Stockholders’ equity was $13.423 million, compared with $5.447 million at April 30, 2017.
Cash flow: Net cash used in operating activities was $8.177 million for the nine months, versus $7.552 million in the prior-year period. Investing activities used $0.554 million, primarily for leasehold improvements and equipment. Financing activities provided $14.584 million, principally from common-stock issuances. Cash, cash equivalents and restricted cash increased $5.996 million to $14.905 million.
Debt and obligations: Capital lease obligations totaled $0.032 million. Other material obligations included $0.600 million of deferred credits payable, $0.241 million of warrant liabilities, and $0.350 million accrued for a proposed derivative-litigation settlement.
Material changes versus the prior comparable period
- Quarterly revenue declined to zero because the MES and ONR contracts were completed in the second quarter of fiscal 2018. Nine-month revenue fell 51% to $0.289 million.
- Nine-month gross profit improved to $0.096 million from a $0.022 million loss, reflecting lower contract costs, although quarterly gross profit was zero.
- Quarterly product development spending increased 39% to $1.318 million due to construction of two buoys, new projects, and higher overhead. Nine-month product development spending decreased 13% because the prior-year period included PB3-A1 redeployment and PB40 mooring-anchor retrieval costs.
- SG&A was broadly stable for the quarter and increased 2% for the nine-month period.
- Net loss was substantially improved in the quarter but essentially unchanged for the nine-month period. The improvement included a $1.119 million income-tax benefit from selling New Jersey net operating losses and research credits, compared with $0.698 million in the prior-year quarter and nine-month period.
- The company raised approximately $7.4 million net in an October 2017 best-efforts public offering and had issued 18.425 million common shares as of January 31, 2018, versus 6.314 million at April 30, 2017. This materially increased the share count and diluted existing holders.
- Negotiated backlog declined to $0.1 million from $0.3 million at April 30, 2017.
Outlook, commentary, risks and unusual items
- Management stated that existing cash, cash equivalents and marketable securities were expected to fund operations at least through the quarter ending April 30, 2019, but the filing continues to identify substantial doubt about the company’s ability to continue as a going concern.
- The company requires additional equity and/or debt financing and had no committed financing sources. Failure to obtain funding could require reductions in personnel, product development, selling and administrative activity, or cessation of operations.
- Management expected fiscal 2018 operating expenses of approximately $12.3 million, including more than $5.5 million of product development spending, subject to potential reductions if additional capital is not raised.
- The PB3 PowerBuoy completed a commercial lease and deployment with Mitsui Engineering and Shipbuilding in Japan in September 2017. In January 2018, the company entered into an approximately $0.1 million, three-month Premier Oil feasibility study for North Sea decommissioning applications.
- Product development is focused on PB3 cost reduction, reliability, energy output, life extension, mooring flexibility and customer applications. Development of the higher-power PB15 has been curtailed.
- Customer concentration remained significant: MES represented 75% of nine-month revenue and the U.S. Department of Defense Office of Naval Research represented 25%; quarterly revenue was zero.
- The SEC investigation concerning the VWP project and the company’s April 2014 public offering remained ongoing. The company had not recorded a loss provision for the investigation.
- Four consolidated derivative lawsuits related to the terminated VWP/ARENA project were subject to a proposed settlement requiring corporate-governance changes and a $350,000 payment by the company’s insurer; court approval was still pending.
- A Spanish income-tax audit remained unresolved, with a $0.132 million estimated penalty accrued. The company also recorded a $0.350 million litigation receivable corresponding to the proposed insured settlement.
- The company adopted ASU 2016-09 and early adopted the restricted-cash standard ASU 2016-18. It expected to adopt the new revenue standard, ASC 606, on May 1, 2018 using the modified retrospective method, but had not completed its impact assessment.
Investor verification points
- Verify the timing and terms of required future equity or debt financing, including potential dilution under the effective $30 million shelf registration.
- Assess whether PB3 sales, leases and services can replace completed development contracts and generate sustainable positive cash flow.
- Review the going-concern disclosure, cash-burn trend, and actual liquidity relative to management’s April 30, 2019 funding estimate.
- Track backlog, Premier Oil and ONR-related work, and the company’s ability to convert feasibility and development projects into commercial deployments.
- Monitor the SEC investigation, derivative-litigation settlement approval, Spanish tax audit, and any resulting cash or governance effects.
- Evaluate customer concentration and the absence of quarterly revenue, as well as the effect of percentage-of-completion estimates on reported revenue and margins.