Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended October 31, 2016; filed December 9, 2016. The financial statements are unaudited. The company develops and seeks to commercialize ocean-wave energy systems, principally the PB3 PowerBuoy, for autonomous offshore applications.
Financial performance and position
| Metric | Three months ended Oct. 31, 2016 | Three months ended Oct. 31, 2015 | Six months ended Oct. 31, 2016 | Six months ended Oct. 31, 2015 |
|---|---|---|---|---|
| Revenue | $170,000 | $494,000 | $372,000 | $600,000 |
| Gross profit | $45,000 | $0 | $120,000 | $0 |
| Gross margin | 26.4% | 0.0% | 32.2% | 0.0% |
| Operating loss | $(3.0) million | $(3.0) million | $(6.1) million | $(7.4) million |
| Net loss attributable to OPT | $(965,000) | $(3.0) million | $(4.8) million | $(7.2) million |
| Loss per share | $(0.25) | $(1.71) | $(1.51) | $(4.08) |
- Operating expenses: Six-month product development expense was $2.9 million, down 20%; selling, general and administrative expense was $3.2 million, down 13%. The company expects fiscal 2017 operating expenses of approximately $12 million.
- Unusual item: A $2.0 million quarterly and $1.3 million six-month noncash gain from changes in the fair value of warrant liabilities materially reduced reported net loss. Warrant liabilities were $548,000 at October 31, 2016.
- Cash flow: Net cash used in operating activities was $6.3 million for the six months, compared with $7.0 million in the prior-year period. Investing activities provided $32,000, while financing activities provided $12.1 million.
- Liquidity: Cash and cash equivalents were $12.5 million, marketable securities were $25,000, and restricted cash was $306,000 at October 31, 2016. Total assets were $16.4 million and total liabilities were $6.7 million.
- Debt: The NJBPU recoverable grant had been fully repaid; the balance sheet showed $75,000 of debt and capital lease obligations, primarily current obligations. A separate $600,000 deferred credit payable remained noncurrent.
- Equity and dilution: Shares issued increased to 6.32 million from 2.35 million at April 30, 2016, primarily from equity offerings. The accumulated deficit was $182.7 million.
Material changes versus the prior comparable period
- Six-month revenue declined 38% to $372,000, reflecting the transition from prior DOE and European Union work to the newer Mitsui Engineering and Shipbuilding agreement.
- Quarterly revenue declined 66%, although the company recorded positive gross profit versus break-even gross profit in the prior-year quarter. Prior-year cost-sharing contracts generated zero gross profit.
- Operating loss improved 18% for the six months because of lower product development and SG&A spending.
- Net loss improved 33% for the six months, but the improvement included the noncash warrant fair-value gain and does not indicate positive operating cash generation.
- The company raised approximately $12.2 million net through June, July and October 2016 equity offerings. The October offering generated approximately $6.9 million net from the sale of 2.76 million shares at $2.75 per share.
- Backlog increased from negligible at April 30, 2016 to approximately $700,000 at October 31, 2016; management stated it was fully funded.
Outlook, commentary, risks and contingencies
- Going concern: Management stated that available cash and marketable securities were expected to fund operations into at least the quarter ending January 31, 2018, but the filing also states that substantial doubt exists regarding the company’s ability to continue as a going concern. Additional equity and/or debt financing is required, and no committed financing sources were available.
- Commercialization: The PB3 was deployed off New Jersey for testing and validation. A six-month PB3 lease and engineering agreement with Mitsui Engineering and Shipbuilding, valued at approximately $976,000, was expected to run from March through August 2017 and include deployment near Kozushima Island, Japan.
- Development: The company continued PB3 reliability, power-output and survivability work and initiated preliminary development of the PB15, which management described as having a targeted peak rating of 15 kW.
- Customer concentration: Mitsui Engineering and Shipbuilding represented 95% of quarterly revenue and 97% of six-month revenue. Loss or reduction of this relationship could materially affect results.
- Litigation: A securities class-action settlement required $500,000 from the company, $2.5 million from its insurer and issuance of 380,000 common shares. The court approved the settlement on November 15, 2016, after the reporting date. Related derivative actions remained stayed or consolidated, and other shareholder litigation remained unresolved.
- Regulatory matters: An SEC investigation concerning the VWP Project and the April 2014 public offering was ongoing. The company also reported Spanish tax inquiries and an income-tax audit, with no related loss provisions recorded.
- Principal risks: Continued operating losses and cash burn, dependence on additional financing, uncertain commercialization and technology performance, limited revenue history, customer concentration, potential dilution, litigation and regulatory exposure, and dependence on maintaining its NASDAQ listing.
- Subsequent liquidity item: On November 7, 2016, the company received approximately $700,000 through New Jersey’s Business Tax Certificate Transfer Program.
Investor verification points
- Reconcile the stated cash runway with the company’s approximately $900,000 monthly net burn rate and projected fiscal 2017 operating expenses of approximately $12 million.
- Assess whether the Mitsui agreement and approximately $700,000 backlog can develop into recurring commercial revenue rather than one-time engineering or demonstration activity.
- Separate cash operating performance from the reported net-loss improvement caused by the noncash warrant fair-value gain.
- Quantify the effect of the 2016 equity offerings, warrants and 380,000-share litigation settlement on future dilution and warrant liability volatility.
- Monitor the ongoing SEC investigation, derivative litigation, Spanish tax matters and any additional potential liabilities not reserved in the financial statements.
- Verify PB3 testing, deployment, reliability and customer acceptance milestones, including the planned Japan deployment.
- Confirm the availability and terms of future financing, since management states that additional capital is necessary and no committed financing sources existed.