Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended January 31, 2019, filed March 11, 2019. The company develops and commercializes wave-energy PowerBuoy systems, including the PB3, for remote offshore power and communications applications. It also pursued subsea battery systems, a hybrid PowerBuoy and related support services.
Financial Performance and Position
| Metric | Three Months Ended January 31, 2019 | Three Months Ended January 31, 2018 | Nine Months Ended January 31, 2019 | Nine Months Ended January 31, 2018 |
|---|---|---|---|---|
| Revenue | $0.268 million | $0 | $0.440 million | $0.289 million |
| Gross profit/(loss) | $(0.132) million | $0 | $(0.740) million | $0.096 million |
| Gross margin | (49.3%) | Not meaningful | (168.2%) | 33.2% |
| Operating loss | $(3.522) million | $(2.894) million | $(10.754) million | $(8.266) million |
| Net loss | $(2.611) million | $(1.663) million | $(9.741) million | $(6.903) million |
| Net loss per share | $(0.14) | $(0.09) | $(0.52) | $(0.48) |
- Operating expenses were $3.390 million in the quarter and $10.014 million for the nine-month period, including engineering and product development costs of $1.382 million and $4.105 million, respectively, and selling, general and administrative costs of $2.008 million and $5.909 million.
- The company recorded income tax benefits of $0.850 million in both the quarter and nine-month period from selling New Jersey net operating loss carryforwards and research and development tax credits.
- Cash used in operating activities was $9.850 million for the nine months, compared with $8.177 million in the prior-year period. Investing cash use was $0.029 million; financing activities provided $0.440 million.
- Cash, cash equivalents and restricted cash totaled $2.728 million at January 31, 2019, down from $12.225 million at April 30, 2018. Unrestricted cash and cash equivalents were $2.220 million.
- Total assets were $4.577 million and total liabilities were $3.128 million. Stockholders’ equity was $1.449 million, below the $2.5 million Nasdaq continued-listing equity requirement cited by management.
- Debt was not a significant source of financing. Capital lease obligations were approximately $1,000 current, and the company had no material conventional debt reported.
- Accumulated deficit was $207.279 million at January 31, 2019.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased 52% to $0.440 million, primarily from Eni, Premier Oil and Enel projects, while prior-year revenue came primarily from Mitsui Engineering & Shipbuilding and the Office of Naval Research.
- Revenue growth was more than offset by a $0.987 million increase in cost of revenues, producing a nine-month gross loss compared with prior-year gross profit.
- Engineering and product development expense increased 21%, and SG&A increased 19%, reflecting new product development, buoy builds, personnel, investor relations, professional fees and marketing.
- Nine-month net loss increased 41%, from $6.903 million to $9.741 million.
- The company adopted ASC 606 effective May 1, 2018 using the modified retrospective method. Adoption reduced reported nine-month revenue and increased net loss by $0.130 million; it reduced quarterly revenue and increased quarterly net loss by $0.051 million. Cash flow was not affected.
- Negotiated backlog increased to $0.9 million at January 31, 2019 from $0.7 million at April 30, 2018. Approximately 61%, or $0.5 million, was expected to be recognized over the following twelve months.
Liquidity, Financing and Going Concern
- Management stated that available cash and restricted cash would fund operations into the quarter ending April 30, 2019, but the company requires additional equity and/or debt financing to continue operations into fiscal 2020.
- The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for the outcome of this uncertainty.
- Under its Aspire Capital agreement, the company could sell up to $10.0 million of common stock over 30 months. By January 31, 2019, it had sold 800,000 shares for aggregate market value of $0.301 million, at an average price of $0.38 per share, and issued 428,571 shares as a commitment fee.
- Under a January 2019 ATM facility with A.G.P./Alliance Global Partners, the company sold 819,538 shares for approximately $0.274 million at an average price of $0.33 per share, before approximately $8,900 of commissions. The facility permits aggregate offerings of up to $25 million.
- Additional equity financing would dilute existing stockholders; debt financing could impose senior claims and restrictive covenants.
Outlook, Management Commentary and Risks
- Management expected fiscal 2019 operating expenses of approximately $14.5 million, including more than $6.3 million of product development spending. Spending could be reduced through personnel, research and development and other cost reductions if financing is not obtained.
- The company continued commercial efforts involving Eni, Premier Oil and Enel Green Power, and announced relationships or initiatives involving Saab Seaeye, NEC Energy Solutions and the U.S. Navy.
- New offerings under development included subsea lithium-ion battery systems, a liquid-fueled hybrid PowerBuoy and expanded support services. Management anticipated marketing and quoting these offerings as early as the first half of calendar 2019.
- Revenue was highly concentrated: Eni represented 53% of quarterly revenue and 60% of nine-month revenue; Premier Oil represented 47% and 35%, respectively. The company had only two revenue-producing contracts identified as active in its risk disclosures: Eni and Premier Oil.
- Key risks include failure to commercialize PowerBuoys, continuing operating losses and cash burn, dependence on additional financing, technology reliability and deployment risk, customer concentration, competition, regulatory and permitting issues, intellectual property protection and reliance on key personnel.
- Nasdaq notified the company that it had not regained compliance with the $1.00 minimum bid-price requirement. The company appealed to a Nasdaq Hearings Panel, which stayed suspension while the appeal was pending. After the reporting period, stockholders approved and the board initiated a one-for-twenty reverse stock split, reported as effective March 12, 2019.
- Subsequent to quarter-end, the company agreed to settle the Tide Runner litigation for payments totaling $200,000. The filing states that the settlement was recorded in accrued liabilities at January 31, 2019. The company also faced a $5 million employment arbitration demand from a former chief executive, for which no provision was recorded because the loss could not reasonably be estimated.
- A Spanish tax audit could result in an estimated $0.177 million penalty, which was accrued. The previously accrued $0.350 million shareholder derivative litigation matter was resolved through insurance payment.
Most Important Facts to Verify
- Whether the company obtained sufficient financing after January 31, 2019 to address the stated going-concern uncertainty and fund operations into fiscal 2020.
- The status of the Nasdaq listing appeal, compliance with the minimum bid-price and stockholders’ equity requirements, and the implementation and effect of the one-for-twenty reverse split.
- Whether Eni, Premier Oil and other customer projects convert the $0.9 million backlog into sustainable, positive-margin revenue.
- The actual cash burn rate, remaining availability under the Aspire Capital and ATM facilities, and dilution from subsequent equity issuances.
- The resolution and cash impact of the Dunleavy arbitration, Tide Runner settlement, Spanish tax audit and other contingencies.
- Commercial readiness, customer adoption, reliability and unit economics of the PB3, subsea battery and hybrid PowerBuoy offerings.