Ocean Power Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Ocean Power Technologies develops and commercializes PowerBuoy systems that convert ocean-wave motion into electricity for remote offshore applications, including defense, ocean observation, communications, oil and gas, and offshore wind. The filing covers the three and nine months ended January 31, 2017, the company’s fiscal third quarter, and was filed March 7, 2017.
Management is focused on commercializing the PB3 PowerBuoy, validating reliability and power output, developing customer applications, and advancing the preliminary design of the higher-capacity PB15. Revenue remains concentrated in a small number of contracts and government agencies have historically represented a significant portion of revenue.
Financial Performance and Liquidity
| Metric | Three Months Ended January 31, 2017 | Three Months Ended January 31, 2016 | Nine Months Ended January 31, 2017 | Nine Months Ended January 31, 2016 |
|---|---|---|---|---|
| Revenue | $0.221 million | $0.005 million | $0.593 million | $0.605 million |
| Gross profit (loss) | $(0.142) million | $0 | $(0.022) million | $0 |
| Gross margin | (64.3%) | 0.0% | (3.7%) | 0.0% |
| Operating loss | $(2.709) million | $(3.442) million | $(8.775) million | $(10.831) million |
| Net loss attributable to OPT | $(2.117) million | $(1.958) million | $(6.910) million | $(9.146) million |
| Net loss per share | $(0.37) | $(1.05) | $(1.84) | $(5.07) |
| Cash used in operating activities | Not separately reported | Not separately reported | $(7.552) million | $(8.076) million |
Operating expenses were $2.567 million in the quarter and $8.753 million for the nine-month period. Nine-month product development expense declined 28% to $3.894 million, while selling, general and administrative expense declined 10% to $4.859 million. The nine-month results included a $1.161 million gain from the change in fair value of warrant liabilities and a $0.698 million income tax benefit from selling New Jersey net operating losses and research credits.
At January 31, 2017, cash and cash equivalents were $11.110 million, marketable securities were $0.025 million, and restricted cash was $0.299 million. Total current assets were $12.095 million against current liabilities of $4.597 million. Total debt and capital lease obligations were $0.066 million. The company had an accumulated deficit of $184.794 million and total stockholders’ equity of $7.792 million.
Management stated that available cash and marketable securities were expected to fund operations into the quarter ending January 31, 2018. However, the filing states that substantial doubt exists about the company’s ability to continue as a going concern and that additional equity and/or debt financing will be required.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased to $0.221 million from $0.005 million, primarily from Mitsui Engineering & Shipbuilding and the Department of Defense Office of Naval Research. Nine-month revenue was essentially unchanged at approximately $0.6 million.
- The company recorded a quarterly gross loss of $0.142 million and a nine-month gross loss of $0.022 million, principally because of increased costs on the MES project.
- Quarterly operating loss improved by $0.733 million, and nine-month operating loss improved by $2.056 million, largely due to lower product development and administrative costs.
- Quarterly net loss increased 8% despite the lower operating loss, primarily because the quarter included a $0.104 million warrant fair-value loss and a lower tax benefit than the prior year.
- Nine-month net loss attributable to OPT improved by $2.236 million, aided by lower operating expenses, a $1.161 million warrant fair-value gain, and lower foreign-exchange losses.
- Cash increased by $4.380 million from April 30, 2016, primarily because $11.958 million of net financing cash inflows offset $7.552 million of operating cash use.
- The company raised approximately $12.2 million net through equity offerings during the nine months, including offerings in June and July 2016 and a public offering of 2.76 million shares in October 2016. Shares outstanding increased to 6,313,996 from 2,352,100 at April 30, 2016, creating substantial dilution risk.
- Backlog increased from negligible at April 30, 2016 to approximately $0.5 million at January 31, 2017; management stated that it was fully funded.
Outlook, Commentary, Risks, and Unusual Items
Management reported that the commercial PB3 was deployed off New Jersey in July 2016, retrieved in December 2016 after testing, refurbished, and shipped to Japan for deployment under the MES lease beginning in February 2017. Accelerated life testing of the commercial PTO was ongoing without reported failures through the filing date. A pre-commercial PB3-A1 successfully supported marine-mammal monitoring and ocean-observation payloads and was being upgraded toward commercial status.
The company entered into a September 2016 ONR contract of approximately $0.2 million, a November 2016 joint marketing agreement with Sonalysts, and a February 2017 joint application-engineering and marketing agreement with HAI Technologies. These arrangements were described as business-development initiatives and do not establish material revenue guidance.
The filing provides no forecast for revenue or profitability. It states that fiscal 2017 operating expenses are anticipated to be approximately $12.0 million; $8.8 million had been incurred through the first nine months. Management may reduce personnel, research and development, and other operating costs if additional capital is not raised.
- Going concern: recurring operating losses, an accumulated deficit of $184.8 million, approximately $0.9 million of monthly net cash burn excluding specified unusual items, and no committed financing sources create substantial liquidity risk.
- Commercialization risk: the company must demonstrate reliable, scalable, cost-effective PowerBuoy products and secure additional customers beyond its limited current contracts.
- Revenue concentration: MES represented 83% of nine-month revenue and ONR represented 17%; loss or delay of either customer could materially affect results.
- Warrant volatility: warrant liabilities were $0.653 million at January 31, 2017 and are remeasured each reporting period, creating non-cash earnings volatility.
- Litigation: the securities class action settlement was finalized, including a $0.5 million company cash payment, a $2.5 million insurer payment, and issuance of 380,000 common shares. Derivative litigation remains consolidated and stayed, while other shareholder and employment matters remain unresolved.
- Regulatory matters: an SEC investigation concerning the VWP project and the April 2014 public offering remained ongoing. A Spanish income-tax audit also remained open, with no loss provision recorded.
- Contingency: the company has a $0.6 million deferred credits payable obligation related to an emissions-credit arrangement extended through December 31, 2017.
Important Facts for Investors to Verify
- Whether the company secures additional financing before available liquidity is exhausted and on what terms.
- Actual cash burn, remaining runway, and whether the January 31, 2018 liquidity estimate remains valid.
- Commercial deployment, operating performance, customer acceptance, and revenue generation from the PB3 and MES lease.
- Whether revenue diversifies beyond MES and ONR and whether the $0.5 million backlog converts into recognized revenue.
- Progress toward positive gross margins and reduced dependence on equity financing.
- Potential dilution from future equity offerings, outstanding warrants, options, and restricted stock.
- Developments in the SEC investigation, derivative litigation, shareholder litigation, Spanish tax audit, and related potential financial exposure.