by Debra Fiakas CFA
For Ocean Power Technologies (OPTT: Nasdaq) the sea is more a utility than Whitman’s source of romantic miracles. The company has developed a wave turbine to capture the energy in ocean waves and turn it into electrical power. Last month the company was successful in convincing investors of the merits of its ‘ocean utility’ technology, raising $8.2 million through the sale of common stock.
Branded as the ‘PowerBuoy’, Ocean Power’s product line is headed by its PB3system that has the capacity to generate up to three kilowatts of peak power. An onboard power storage system has the capacity to store up to 150 kilowatt hours. The PB3 is intended for users with remote off-shore installations such as ocean observatories, oil and gas wells, or communications systems. Currently oil and gas companies or scientific groups rely on a mix of power sources to power remotely located systems, such as batteries, gas generators, solar panels, or fuel cells.
The Ocean Power management thinks they have a good pitch to tell customers. Each of the established power sources has limitations, such as reliability, short length of service or high cost. Ocean Power has been working on reducing the production costs of its PB3system so that it offers a low cost of operation over a longer useful life. The PB3 also offers remote, real-time communication capability so that operators can gain access to vital data gathered at its systems site without having to make an expensive, time consumer trip. The PowerBuoy is also more easily deployed with conventional ocean going equipment.
The extra capital puts Ocean Power in a better position to move aggressively on its target markets and finally achieve profitability. Aside from a few development contracts with the U.S. government, the company has not yet recorded revenue from the sale of its PowerBuoys. At the end of July 2017, Ocean Power reported cash balances of $11.4 million after having used $4.2 million to support operations for the previous three months. Based on that pace in spending, it is estimated that the company now has approximately $15.0 million in cash to support operations.
Ocean Power already has a number of relationships that can be translated into customers, drawing first from a string of development partners and equipment testers. Indeed, at the end of July 2017, there was backlog of $100,000 in fully funded orders.
Discussion of Ocean Power in terms of backlog represents a seminal change for its investors. The company has successfully proven its technology and has now moved on to the next challenge – proving competitive vigor in its end markets. The shift in focus can also be observed in operating expenses reported for the quarter ending July 2017. Total expenses declined to $2.8 million compared to $3.1 million in the same quarter of the previous year, with the decrease attributed to a 33% reduction in spending on product development. Selling, general and administrative expenses increased by 8%.
Unfortunately, Ocean Power’s backlog is composed only of government-sponsored development contracts. It does not yet hold a contract for the sale of a PowerBuoy.
It might be the conundrum over backlog that has made it difficult for investor to form a view on Ocean Power. The offering was met with considerable enthusiasm, driving the stock price to a high of $2.54 on the offering day before it closed at $2.00. Since then the stock has struggled, falling back down below its 50-day moving average price. At the present price level, the stock would seem to be a bargain for investors who accept the potential in ocean power and have confidence in Ocean Power management to execute on a winning market strategy.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.