Ocean Power Technologies, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2016. The filing is an annual report, not a 2015 fourth-quarter filing. Comparative figures are for fiscal 2015. The company develops and seeks to commercialize autonomous PowerBuoy systems that generate electricity from ocean waves for remote offshore applications.
Business Context and Reporting Period
- The company shifted its strategy toward autonomous, grid-independent applications, including oil and gas, ocean observing, defense and security, offshore wind, communications, and aquaculture.
- The current product, the PB3, is a redesigned autonomous PowerBuoy with a stated peak power rating of three kilowatts. Commercialization remained at an early stage.
- Fiscal 2016 work included continued DOE-funded technology development, PB3-A1 testing and deployments, and efforts to establish commercial relationships.
- The company had 29 full-time and one part-time employee at April 30, 2016.
Financial Performance and Position
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Revenue | $704,820 | $4,105,424 | Down 83% |
| Cost of revenues | $667,869 | $4,671,403 | Down 86% |
| Gross profit (loss) | $36,951 | $(565,979) | Improved |
| Gross margin | 5% | (14%) | Improved |
| Product development costs | $7.1 million | $4.1 million | Up 70% |
| SG&A | $6.7 million | $9.6 million | Down 30% |
| Litigation settlement expense | $1.1 million | — | New item |
| Operating loss | $14.9 million | $14.3 million | Worsened 4% |
| Net loss attributable to OPT | $13.1 million | $13.1 million | Approximately unchanged |
| Net loss per share | $7.25 | $7.50 | Improved |
| Net cash used in operating activities | $10.9 million | $17.2 million | Improved |
- Revenue consisted primarily of development and cost-sharing work. Fiscal 2016 revenue was approximately $0.4 million from the European Union, $0.2 million from the DOE, and $0.1 million from Mitsui Engineering & Shipbuilding.
- Customer concentration remained significant: the EU represented 58% of revenue, the DOE 28%, and MES 14% in fiscal 2016.
- The company reported an accumulated deficit of $177.9 million at April 30, 2016 and has not been profitable since inception.
- Cash and cash equivalents were $6.7 million, marketable securities were $75,000, and restricted cash was $299,543. Cash, cash equivalents, restricted cash, and marketable securities totaled approximately $7.1 million, compared with $17.9 million at April 30, 2015.
- Total assets were $10.4 million and total liabilities were $6.8 million. Debt and capital lease obligations totaled approximately $136,000, excluding the $600,000 deferred credits payable.
- Backlog was negligible at April 30, 2016, compared with $0.9 million at April 30, 2015.
Material Changes Versus the Prior Comparable Period
- Revenue fell sharply because major billable work under prior MES and other development contracts was completed or reduced, while few replacement revenue contracts were added.
- Product development spending increased substantially, primarily because of PB40 and PB3-A1 deployment and retrieval costs and development work for autonomous applications.
- SG&A declined due to the absence of Australian site-development costs, lower patent amortization and lower recruiting and consulting costs.
- The company recorded a $1.1 million litigation settlement charge consisting of a planned $500,000 cash contribution and approximately $596,600 of common stock consideration.
- Operating cash burn improved from $17.2 million to $10.9 million, but remained substantial relative to available liquidity.
- In October 2015, the company completed a one-for-10 reverse stock split and reduced authorized common shares to 50 million. All share and per-share data were retroactively restated.
- The company acquired the remaining 11.8% noncontrolling interest in its Australian subsidiary in September 2015, resulting in wholly owned Australian operations.
Liquidity, Outlook, Risks and Unusual Items
- Going concern: KPMG included 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 at least the quarter ending January 31, 2017.
- Management expected fiscal 2017 operating expenses of approximately $12 million, including more than $5 million of product development spending, but stated that spending could be reduced through personnel, research and development, and other cost cuts.
- The company had no committed sources of debt or equity financing and expected to seek additional capital. Additional equity financing could materially dilute existing stockholders.
- In June 2016, after year-end, the company raised approximately $1.6 million net through the sale of 417,000 shares and warrants to purchase 145,952 additional shares. The warrants have a $6.08 exercise price and become exercisable in December 2016.
- The company had one primary revenue-producing contract with MES, valued at $975,587, for engineering services and a six-month PB3 lease expected to begin in March 2017. MES may cancel all or a separable portion for convenience with 30 days’ notice.
- The proposed securities class-action settlement required $3.0 million in cash, of which the company would pay $500,000 and its insurer $2.5 million, plus 380,000 common shares. Final court approval was pending at the filing date.
- The SEC investigation relating to the former Australian project and the April 2014 public offering remained ongoing. The company had not recorded a provision for potential losses.
- Other unresolved matters included derivative lawsuits, shareholder demands, employment-related claims, a Spanish tax inquiry and income-tax audit. The filing states that potential losses generally could not be reasonably estimated, except for the proposed securities settlement.
- Technical and commercialization risks include limited commercial operating history, failure or underperformance of deployed systems, unproven array deployment, dependence on external manufacturers and deployment contractors, permitting requirements, customer concentration, competition from established battery, solar and fossil-fuel solutions, and uncertain market adoption.
- Revenue recognition is judgmental because the company generally uses percentage-of-completion accounting and has a small number of contracts; changes in cost estimates, milestones or customer acceptance could materially affect reported revenue.
Most Important Facts for Investors to Verify
- Whether the company obtained sufficient financing after April 30, 2016 and whether subsequent financing materially diluted shareholders.
- Whether the MES contract and anticipated March 2017 PB3 lease commenced, continued, and generated expected cash receipts.
- Whether the PB3 achieved reliable commercial operation and customer acceptance after the reported validation deployments.
- Whether the proposed securities settlement received final court approval and whether additional litigation exposure remained.
- Any enforcement action, penalties or other consequences arising from the SEC investigation.
- Actual cash burn, liquidity runway, backlog and revenue mix, given the sharp fiscal 2016 revenue decline and negligible year-end backlog.
- Whether the company achieved recurring commercial revenue sufficient to reduce dependence on government-funded development contracts.