Business Context and Reporting Period
Ocean Power Technologies, Inc. develops and seeks to commercialize PowerBuoy systems that generate electricity from ocean waves. The company is focused on autonomous, grid-independent applications including ocean observing, offshore wind, defense and security, oil and gas, communications, and aquaculture. This unaudited Form 10-Q covers the three months ended July 31, 2015, the first quarter of fiscal 2016, with comparison to July 31, 2014.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $105,666 | $1,540,528 | Down 93% |
| Gross profit (loss) | $0 | $(426,636) | Improved by $426,636 |
| Product development expense | $2,482,788 | $(80,055) | Increase of approximately $2.6 million |
| SG&A expense | $1,906,945 | $3,122,972 | Down 39% |
| Operating loss | $(4,389,733) | $(3,469,553) | Loss increased 27% |
| Net loss attributable to OPT | $(4,162,041) | $(3,282,752) | Loss increased 27% |
| Basic and diluted loss per share | $(0.24) | $(0.19) | Lower earnings per share |
| Net cash used in operating activities | $(3,118,368) | $(3,167,540) | Improved by approximately $49,000 |
| Cash and cash equivalents | $14,237,253 | Not provided in the filing excerpt for the comparable date | Down from $17,335,734 at April 30, 2015 |
Gross margin was approximately 0% in Q1 FY2016 versus approximately negative 28% in Q1 FY2015. The company remained unprofitable and had an accumulated deficit of $168.9 million at July 31, 2015.
Balance Sheet, Debt and Liquidity
- Total assets were $15.9 million at July 31, 2015, compared with $18.9 million at April 30, 2015.
- Total liabilities were $4.7 million, including $3.6 million of accrued expenses, $125,000 of debt, and a $600,000 deferred credit liability.
- Total debt declined from $150,000 at April 30, 2015 to $125,000 at July 31, 2015; $100,000 was current and $25,000 was long term.
- Restricted cash totaled approximately $461,000, including amounts supporting letters of credit, bank guarantees, and a New Jersey grant repayment arrangement.
- Operating cash consumption remained significant. Cash and cash equivalents declined by $3.1 million during the quarter to $14.2 million; marketable securities were zero at July 31, 2015.
- Management stated that available cash and marketable securities were expected to fund capital requirements and operations into the quarter ending October 31, 2016. The company also stated that it had no committed sources of additional debt or equity financing.
Material Changes Versus the Prior Comparable Period
- Revenue fell sharply because the European Union WavePort contract was completed in fiscal 2015 and billable activity under the Mitsui Engineering & Shipbuilding contract was reduced while the project underwent a stage-gate review.
- Product development expense increased substantially, principally due to work on the PB40 deployment and the redesigned APB350. The prior-year period included a recovery of previously incurred product development costs related to the WavePort project.
- SG&A declined by approximately $1.2 million, primarily because of lower legal and investigation expenses, lower Australian site-development costs, reduced patent costs, and lower third-party consulting expenses.
- Other income increased to $251,000, reflecting a refund of Australian research and development expenditures, compared with a $185,000 favorable vendor settlement in the prior-year period.
- Backlog declined to approximately $0.8 million from $0.9 million at April 30, 2015. Management expected backlog to continue declining in the near term; the reported backlog was fully funded.
- The company deployed the legacy PB40 off New Jersey in late July and retrieved it approximately three weeks later after unexpected performance data indicated likely failures in float-braking components. Retrieval costs were expected to be recorded in the quarter ending October 31, 2015.
Guidance, Outlook, Commentary and Risks
- Management expected substantial continuing investment in product development, commercialization, sales, marketing, and manufacturing activities, with continued negative operating cash flow until product and service commercialization generates positive cash flow.
- The company expected significant in-ocean testing of the redesigned APB350 and targeted commercial-launch readiness and initial product demonstrations by approximately summer 2016. These statements are forward-looking and remain subject to development and testing risks.
- The DOE project had passed a March 2015 stage-gate review with an all-green assessment, and the company was executing the next stage focused on reliability, cost, manufacturability, and scalability.
- The MES contract was suspended pending a stage-gate review. A reduced project scope could materially affect future revenue and backlog.
- A $1.0 million Spanish grant was not included in backlog and was expected likely to expire unused on December 31, 2015 because the company had no planned Spain deployment.
- The company required additional equity and/or debt financing but had no committed financing sources. Failure to obtain financing could require reductions in product development, selling, general and administrative activities, or other operations. Equity financing could dilute existing holders.
- The company received an NASDAQ minimum-bid-price deficiency notice and transferred from the NASDAQ Global Market to the NASDAQ Capital Market. The compliance period was extended to January 11, 2016. Stockholder approval was being sought for a potential reverse stock split in a range of 1-for-5 to 1-for-12; failure to regain compliance could result in delisting.
- Shareholder class-action and derivative litigation related to the terminated Australian VWP/ARENA project remained pending, and the company had not accrued a loss because the potential exposure could not be reasonably estimated.
- The SEC was investigating the VWP project after issuing a subpoena. The company was cooperating and had not recorded a provision for potential losses.
- The terminated VWP project resulted in the return of approximately $5.2 million of initial grant funding and approximately $102,000 of interest during fiscal 2015.
Important Facts for Investors to Verify
- Whether APB350 development, testing, and the anticipated summer 2016 commercialization timeline were achieved.
- The outcome of the MES stage-gate review and its effect on revenue, backlog, and future cash receipts.
- Actual cash burn and whether the stated liquidity runway remains valid as development spending continues.
- Availability and terms of future financing, including the practical limitation on use of the S-3 shelf and potential equity dilution.
- Whether the company regained NASDAQ minimum-bid-price compliance or completed a reverse stock split before the January 11, 2016 deadline.
- The resolution and potential financial exposure from the shareholder litigation, derivative actions, SEC investigation, and Spanish IVA matter.
- The technical cause and financial impact of the PB40 braking-system failure and related retrieval costs.
- The company’s ability to convert government-supported development activity into recurring product and maintenance revenue.