Business Context and Reporting Period
Ocean Power Technologies, Inc. develops and commercializes PB3 PowerBuoy™ systems that convert ocean-wave motion into electricity for remote offshore power and communications applications. Target markets include oil and gas, ocean observing, defense and security, and communications.
This Form 10-K covers the fiscal year ended April 30, 2018, with fiscal 2017 as the comparable period. The request metadata references 2017 Q4, but the filing is an annual report for fiscal 2018 rather than a quarterly filing.
Fiscal 2018 activity focused on commercializing the PB3, completing the MES Japan deployment, advancing Eni and Premier Oil opportunities, and narrowing product-development efforts primarily to the PB3. The Company had 35 full-time employees and relocated to a larger 56,000-square-foot facility in Monroe Township, New Jersey.
Key Financial Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $0.511 million | $0.843 million | Down 39% |
| Cost of revenue | $0.763 million | $0.938 million | Down 19% |
| Gross loss | $(0.252) million | $(0.095) million | Loss widened |
| Product development costs | $4.320 million | $5.029 million | Down 14% |
| SG&A | $6.988 million | $6.563 million | Up 6% |
| Operating loss | $(11.560) million | $(11.687) million | Slightly improved |
| Net loss | $(10.157) million | $(9.486) million | Loss widened 7% |
| Basic and diluted loss per share | $(0.66) | $(2.23) | Improved due primarily to higher share count |
| Cash used in operating activities | $(10.696) million | $(10.038) million | Use increased |
| Cash provided by financing activities | $14.582 million | $11.947 million | Higher equity financing |
| Cash and cash equivalents | $11.499 million | $8.421 million | Up $3.078 million |
| Cash, cash equivalents and restricted cash | $12.225 million | $8.909 million | Up $3.316 million |
| Accumulated deficit | $197.538 million | $187.370 million | Increased $10.168 million |
| Backlog | $0.7 million | $0.3 million | Increased |
Fiscal 2018 gross margin was approximately negative 49%, operating margin approximately negative 2,262%, and net margin approximately negative 1,989%, reflecting the Company’s very limited revenue base and substantial development and corporate costs.
Debt was not a significant funding source. Capital lease obligations totaled $23,000 at April 30, 2018, with no long-term capital lease balance, while warrant liabilities were $201,000. The Company disclosed no committed debt or equity financing arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue declined by $332,000 as MES and ONR contracts were completed during the second quarter, only partly offset by new Eni and Premier contracts.
- Revenue mix shifted from primarily MES and U.S. government work to Eni, MES, Premier Oil, and ONR. Commercial contracts represented 86% of fiscal 2018 revenue versus 80% in fiscal 2017.
- Customer concentration remained high: Eni represented 33% of revenue, MES 43%, Premier 10%, and ONR 14%.
- Product development spending declined by $709,000 as the Company reduced work associated with the redesigned PB3 and preliminary PB15 development.
- SG&A increased by $425,000, primarily from higher employee costs, partly offset by lower stock compensation expense.
- Operating cash burn increased to $10.696 million from $10.038 million, despite lower product-development spending.
- The Company raised approximately $14.6 million net through equity offerings during fiscal 2018, including approximately $7.2 million from a May 2017 offering and $7.4 million from an October 2017 offering. This materially increased the share count and diluted existing holders.
- Property and equipment increased to $712,000 from $170,000, primarily due to leasehold improvements and equipment for the new facility.
Outlook, Guidance, Risks, Contingencies, and Unusual Items
- Going concern: KPMG’s audit report includes an explanatory paragraph stating that recurring losses, the accumulated deficit, and dependence on additional financing raise substantial doubt about the Company’s ability to continue as a going concern. Management estimated that available cash and marketable securities would fund operations into the quarter ending April 30, 2019, including a $0.6 million payment due by August 30, 2018.
- Fiscal 2019 spending outlook: Management anticipated operating expenses of approximately $14.5 million, including more than $6.3 million of product-development spending, but stated that spending could be reduced through personnel, research and development, and other cost reductions if additional capital was not raised.
- Commercialization: Management considers the PB3 commercially ready for early adopters, but the Company has limited commercial production experience, has not deployed a multi-buoy array, and has not yet demonstrated sustained positive cash flow from product sales or leases.
- Customer and contract risk: Revenue depends on a small number of contracts, many of which use percentage-of-completion accounting. Contract modifications, delays, milestone failures, cost-estimate changes, or cancellations could materially affect revenue and losses.
- Subsequent commercial activity: In March 2018, the Company entered into a minimum 24-month Eni agreement, including an 18-month PB3 lease. In June 2018, it entered into a Premier Oil PB3 lease agreement with an initial three-month trial and potential extensions. The Eni buoy build was reported as 90% complete at the end of June 2018, with planned shipment in August 2018.
- Litigation: A derivative litigation settlement required $350,000 of accrued fees and costs, offset by a $350,000 insurance receivable. A June 2018 Tiderunner Marine lawsuit seeks approximately $2.825 million plus other damages; no provision was recorded because the loss could not be reasonably estimated.
- Tax contingency: The Company reversed a prior $132,000 Spanish tax penalty but recorded an estimated $177,000 penalty related to questions regarding historical European Commission grant recognition.
- SEC investigation: The SEC notified the Company on April 30, 2018 that it had concluded its investigation and did not intend to recommend an enforcement action.
- Accounting: The Company adopted the restricted-cash cash-flow guidance retrospectively and adopted stock-compensation amendments with an approximately $11,000 equity adjustment. It planned to adopt the new revenue standard in fiscal 2019 and had not finalized the impact, although management preliminarily expected no material effect.
- Financing and dilution: The Company expects to continue relying primarily on equity or other external financing. Additional financing may be unavailable or costly and could materially dilute existing shareholders.
Most Important Facts to Verify
- Whether the Company secured sufficient financing after April 30, 2018 to address the disclosed going-concern uncertainty and expected fiscal 2019 cash burn.
- Actual revenue, gross margin, cash burn, and contract profitability from the Eni and Premier Oil deployments.
- Whether the Eni PB3 deployment and Premier Oil trial were completed on schedule and generated extensions, purchases, or recurring service revenue.
- The status and ultimate financial exposure from the Tiderunner Marine lawsuit and the Spanish tax audit.
- Whether PB3 reliability, maintenance intervals, energy output, and cost competitiveness have been demonstrated at commercial scale.
- Future equity issuance, warrant exercises, restricted-stock grants, and resulting dilution relative to the 18.4 million shares issued at April 30, 2018 and 18.37 million shares outstanding as of July 5, 2018.
- Whether backlog increased beyond $0.7 million and converted into funded revenue, recognizing that backlog is subject to modification, termination, production delays, and percentage-of-completion estimates.