Ocean Power Technologies, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2017. The filing is an annual report, not a quarterly report for Q4 2016; the comparable period is fiscal 2016.
Business Context and Reporting Period
Ocean Power Technologies 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.
- The PB3 is rated for up to 3 kW of peak power and up to approximately 150 kWh of nominal energy storage.
- The company completed additional PB3 validation, deployed a commercial PB3 off Japan in April 2017 under a six-month lease with Mitsui Engineering & Shipbuilding, and completed preliminary design work on the higher-output PB15 product.
- As of April 30, 2017, the company had 29 full-time and one part-time employee.
Key Financial Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Revenue | $0.843 million | $0.705 million | +20% |
| Cost of revenues | $0.938 million | $0.668 million | +40% |
| Gross profit (loss) | $(0.095) million | $0.037 million | Declined |
| Product development costs | $5.029 million | $7.051 million | -29% |
| SG&A | $6.563 million | $6.747 million | -3% |
| Operating loss | $(11.687) million | $(14.858) million | Improved |
| Net loss attributable to OPT | $(9.486) million | $(13.129) million | Improved 28% |
| Basic and diluted loss per share | $(2.23) | $(7.25) | Improved |
| Net cash used in operating activities | $(10.038) million | $(10.930) million | Improved |
Fiscal 2017 gross margin was approximately negative 11%; the company remained substantially unprofitable because operating expenses far exceeded revenue. A $1.491 million gain from the change in fair value of warrant liabilities and a $0.698 million income tax benefit reduced the reported net loss. The tax benefit resulted from the sale of New Jersey net operating losses and credits, not from operating profitability.
Liquidity, Capitalization and Debt
- Cash and cash equivalents were $8.421 million at April 30, 2017, compared with $6.730 million at April 30, 2016. Marketable securities were $25,000.
- Total cash, cash equivalents, restricted cash and marketable securities were approximately $8.9 million at year-end.
- Restricted cash totaled $488,000, including $154,000 securing the new Monroe Township facility lease and $334,000 supporting bank guarantees.
- Total liabilities were $4.626 million and stockholders’ equity was $5.447 million.
- Debt and capital lease obligations totaled approximately $58,000, with $35,000 current and $23,000 long-term. The NJBPU recoverable grant was fully repaid during fiscal 2017.
- Fiscal 2017 financing activities generated $11.947 million, primarily from equity and warrant-related offerings. The company subsequently raised approximately $7.2 million of net proceeds in a May 2, 2017 equity offering.
- The company reported a net operating cash burn of approximately $900,000 per month during fiscal 2017, including product development spending.
Material Changes Versus Fiscal 2016
- Revenue increased modestly, primarily from the MES agreement and a new Office of Naval Research contract. Revenue mix shifted from the EU WavePort project and DOE work in fiscal 2016 to MES and ONR in fiscal 2017.
- MES represented 80% of fiscal 2017 revenue and ONR represented 20%, compared with MES at 14%, the EU at 58% and DOE at 28% in fiscal 2016.
- Cost of revenues grew faster than revenue, producing a gross loss in fiscal 2017 versus a gross profit in fiscal 2016.
- Product development spending declined by $2.022 million as the company completed or discontinued utility-scale projects and focused on PB3 commercialization.
- The prior-period $1.097 million litigation settlement expense did not recur in fiscal 2017. The related securities class action settlement was finalized, including a $0.5 million company cash payment, insurer payments of $2.5 million and issuance of 380,000 shares.
- Shares outstanding increased materially through equity offerings, settlement shares and equity compensation. The May 2017 offering further increased potential dilution.
- Backlog increased from negligible at April 30, 2016 to $0.3 million at April 30, 2017, and was fully funded, but remains small relative to operating needs.
Guidance, Outlook, Risks and Unusual Items
- Management estimated fiscal 2018 operating expenses of approximately $12.3 million, including more than $5.5 million of product development spending, although it could reduce costs through personnel, research and development, and other operating cuts.
- Including the May 2017 financing, management believed available funding would support operations into the quarter ending July 31, 2018. The independent auditor included a going-concern explanatory paragraph, and management stated that additional financing is required.
- The company has incurred losses since commencing operations, had an accumulated deficit of $187.4 million at April 30, 2017, and has not demonstrated sustained commercial profitability or positive operating cash flow.
- Commercialization remains dependent on customer adoption, successful deployment and reliability of the PB3, cost reductions, manufacturing scale-up, permitting and additional financing. The company has not deployed a multiple-PowerBuoy array.
- The MES contract, which included the Japan lease, could be cancelled for convenience on 30 days’ notice. The company depends on a small number of customers and does not have a significant recurring commercial revenue base.
- An SEC investigation concerning the former Australian VWP project and the April 2014 public offering remained ongoing. No loss provision was recorded because the outcome could not be estimated.
- Consolidated derivative litigation related to the terminated VWP-ARENA project remained stayed, and other shareholder and employment claims remained unresolved. The company stated that potential losses could not reasonably be estimated.
- A $132,000 estimated penalty related to a Spanish income tax audit was recorded in fiscal 2017 SG&A.
- The company entered into a seven-year lease for a substantially larger Monroe Township, New Jersey facility, expected to support increased manufacturing capacity and relocation by the end of 2017.
Most Important Facts for Investors to Verify
- Whether the PB3 can generate repeatable commercial revenue and achieve acceptable reliability, operating life and lifecycle cost savings.
- The status, economics and renewal prospects of the MES Japan lease and the ONR project, as well as the company’s ability to diversify beyond these customers.
- Actual cash burn, remaining liquidity and the timing and terms of future equity or debt financing.
- The impact of the May 2017 equity offering, warrants, options and other securities on dilution and future financing capacity.
- The resolution and potential cost of the SEC investigation, derivative litigation, shareholder demand and Spanish tax matters.
- Whether the new facility produces the expected manufacturing throughput and cost improvements.
- Whether the company can continue as a going concern without substantially reducing operations or obtaining additional capital.