Ocean Power Technologies, Inc. Q2 FY2021 Earnings Call

Good morning, everyone, and welcome to the Ocean Power Technologies Second Quarter Fiscal Year 2021 Conference Call. A webcast of this call is available on the company's website at www.oceanpowertechnologies.com. This conference call is being recorded and will be available for replay after its completion. Joining me today are George Kirby, President and Chief Executive Officer, and Matthew Shafer, Chief Financial Officer and Treasurer. After our prepared remarks, we will take questions. On December 7, 2020, OPT released its earnings press release and filed its quarterly report on Form 10-Q for the quarter ending October 31, 2020, with the Securities and Exchange Commission. All OPT public filings can be found on the SEC website at sec.gov or in the Investor Relations section of the OPT website. Please be aware that management's prepared remarks may include forward-looking statements protected under the Private Securities Litigation Reform Act of 1995. These statements are indicated by words or phrases such as may, will, expect, anticipate, and similar expressions. They are based on assumptions made by management about future conditions, which can involve risks and uncertainties that could lead to actual results differing significantly from those implied in the forward-looking statements. Some of these factors include future financial performance, expected cash flow, efforts to reduce costs and enhance operational efficiencies, anticipated growth in sales volume, success in key markets, competition, partnership opportunities, delivery and deployment of PowerBuoys, increasing PowerBuoys' output, projected costs, hiring key personnel, and building customer relationships. For further discussion of these risks and uncertainties, please refer to our most recent Form 10-K and other filings with the SEC. We do not undertake any obligation to update our forward-looking statements to reflect events or circumstances discussed in this call.

Thank you, and good morning, everyone. I'll review our business operations and provide an update on our operational activities and developments during the second quarter of fiscal year 2021 and up to today. Then Matt will review our financials. And after that, we'll open the line for questions. All of us continue to navigate an ever-shifting business landscape created in part by the worldwide COVID-19 pandemic. OPT remains focused on working with customers to develop solutions to meet their challenges. One of those challenges has been deploying a PB3 PowerBuoy and Open Sea Lab for Enel Green Power off the coast of Chile. International travel concerns and restrictions have delayed the deployment, which was initially planned for earlier this year. We recently announced that we're working with SeaTrepid, an experienced marine services and subsea robotics solutions company based in Louisiana. SeaTrepid has a suitable vessel and experienced crew working in Chile, and their personnel are training on technical procedures and installation requirements with our project team to advance a planned December deployment. This will be the first-ever third-party installation of a PowerBuoy solution without the in-person hands-on participation of OPT personnel, tapping into marine operators with work currently underway such as SeaTrepid, can have a positive impact on project costs and execution risk. OPT recently signed two important PB3 PowerBuoy related contracts. One is with a defense contractor, Adams Communication & Engineering Technology or ACET. The other is with DeepStar, an oil and gas industry consortium focused on advancing technologies to meet the needs of its members, which include companies such as Chevron, ExxonMobil, Occidental, Shell and Total. The work with ACET will evaluate the integration of a 5G communication solution with our PB3 PowerBuoy in support of subsea and aerial drone connectivity for the U.S. Navy's Naval Postgraduate School Sea Land Air Military Research Initiative. We believe that establishing a secure autonomous offshore 5G communications platform can have far-reaching maritime defense applications. Our work with DeepStar and Total as our sponsor will examine the operational requirements of utilizing OPT's PB3 PowerBuoys and subsea batteries to provide autonomous, zero-carbon power and control for subsea oil and gas production equipment at water depths up to 3,000 meters. We're continuing to advance the commercialization of our new products with the demonstration of our hybrid PowerBuoy and OPT's marine surveillance solution, both of which have been deployed off the coast of New Jersey. And we're further expanding our European presence with the addition of oil and gas industry veteran, Jorge Franco, who recently joined OPT as a regional sales representative based in Spain. During the quarter, OPT also executed a new common stock purchase agreement with Aspire Capital to sell up to $12.5 million in common stock to Aspire Capital over a term of 30 months. This agreement provides flexibility to access capital on a cost-effective basis. And as part of our growth strategy, in November, we filed a shelf registration statement on Form S3 with the SEC, under which, we entered into a new at-the-market facility, providing us with the capability to offer and sell up to $50 million worth of OPT's common stock over the next three years. With that, let me turn the call over to Matt to discuss the financials.

Thank you, George, and good morning, everyone. Now I'll turn to the quarter. We recorded revenue of $100,000 for the second quarter of fiscal 2021, which was a decrease of $100,000 as compared to the same period in the prior year. Revenue for the three months ended October 31, 2020, was primarily derived from the Enel Green Power project, while revenue for the same period in the prior year was mainly from projects with Premier Oil and the U.S. Navy. The net loss for the second quarter of fiscal 2021 decreased by $200,000 as compared to the first quarter of fiscal 2020, which was mainly attributable to decreased spending on product development. We recorded revenue of $300,000 for the six months of fiscal 2021, which was a decrease of $100,000 as compared to the same period in the prior year. Revenue for the first six months ended October 31, 2020, was primarily derived from the Enel Green Power project, while revenue for the same period in the prior year was mainly from projects with Premier Oil and the U.S. Navy. The net loss for the first six months of fiscal 2021 increased by $200,000 as compared to the first six months of fiscal 2020, which was mainly attributable to increased selling, general and administrative costs, partly offset by decreased spending on product development. Turning now to the balance sheet. Total cash, cash equivalents and restricted cash was $15.8 million as of October 31, 2020. Net cash used in operating activities decreased by $700,000 during the second quarter of fiscal 2021 to $5.7 million as compared to the second quarter of fiscal 2020, primarily due to lower cash spending on both customer projects and product development costs in the current year period. And lastly, since the end of the second quarter, the company's total cash, cash equivalents and restricted cash balances increased to $26.3 million, mainly as a result of sales of shares in the company's common stock through its then existing ATM. This increased capital allows OPT to look forward confidently in delivering on anticipated market demand for at least the next 12 months. With that, I'll turn it back to George.

Thanks, Matt. Operator, we're ready to open up the line for questions.

Our first question today is from Robert Silvera from R.E. Silvera & Associates.

In your statement here, you say the expanded sales footprint, coupled with the product solution suite and cash balance positions OPT to be able to deliver on anticipated market demand. Could you broaden the description of what you mean by anticipated market demand, say, within the next 12 months?

Sure. I'll do my best. In the past, we've talked about the gestation period for any one of the opportunities that we're pursuing. So speaking with potential customers, a lot of these take time. For instance, the two studies that we secured, we have been speaking to those customers for quite a while, and they came to fruition. Likewise, we have a pretty robust pipeline. We've talked about that in the past. And we have expectations to be able to close different items on that pipeline. So in looking at our strategy to go after opportunities such as multiproduct or multisolution opportunities, we knew that we needed to position in advance to be able to deliver for our customers. So we're pretty happy and proud of the fact that we've been able to find great talent in different parts of the world to help us really connect with these customers, especially during the pandemic. It makes it a lot easier and more effective than trying to run sales from New Jersey, as you can imagine. And likewise, just simply having access to capital, if and when we need to deliver on a large order. It not only makes us feel confident, it makes our prospective customers feel confident as well, and that's important.

Sure. But can you frame it with a dollar amount that you might anticipate within the next year? You have some projections?

Yes, that would be a forward-looking statement. I'm unable to do that.

That's okay. We realize that those kind of statements have risk involved, and they can vary greatly, but you must have some sort of a framework on what you might think that you could close different opportunities with an actual sales dollar number? Perhaps some color on that, George.

Yes, Robert, we absolutely do have that framework internally. In fact, we have a pretty good idea of what we're going to be closing. I will tell you that we are marketing all of our products and solutions. So that's not just the PB3 PowerBuoy, but it's also the hybrid, the subsea batteries. It also includes the marine surveillance system. And I'll also tell you that our team has done a really great job further diversifying the markets that we're selling into or attempting to sell into. So it's not just oil and gas. We are really making an effort to expand our footprint within the defense community, which you can see from this agreement with ACET. And also, we're looking at other focus areas, such as the illegal fishing market or industry if you would.

How are you coming with that one? I was curious, you've been at that one for a while in Asia, right?

Correct.

How does progress look on that?

I believe we are making progress. We are enhancing our relationships, particularly with our sales representative in Indonesia. However, our focus extends beyond Indonesia to other countries in Southeast Asia. Our internal market studies indicate a growing demand not only in that region but also globally for solutions that safeguard fisheries. Recently, the U.S. Coast Guard linked illegal fishing to Homeland Security, highlighting the financial and trafficking issues associated with it, which directly ties back to our national security and has become a key concern for the U.S. Coast Guard. Similarly, we recognize the connections among the various sectors we are targeting, such as defense, illegal fishing, and marine protected areas. They are all related.

And they are talking to us. It's not just that they have interest, but they are actually communicating with us on these issues.

They are communicating. We are discussing different project opportunities there. I would say there's a lot of activity going on in that area. Matt, did you have something you want to add?

Yes, I just wanted to mention, Robert, that we have personnel actively working in the field now. We have expanded our sales team, as noted in some press releases. Gilar is out there with them, and we are observing a significant increase in opportunities where we require on-the-ground support. I wanted to highlight that as well.

When you said Gilar, is that a company or an individual?

Gilar is our sales representative located in Jakarta, yes. We put a press release out on him because we really want not just the capital markets, but also our customers and our vendors and everyone to know the type of talent that we're bringing into the organization. When you look at Gilar, he comes with a background, having worked with and for the Indonesian Government in different capacities, mainly the fisheries. So he's very well connected. He's educated in the United States. And he's very plugged in from Day 1, very productive. And likewise, with our recent announcement of Jorge Franco located in Southern Europe. He's not only plugged into all of our existing customers in Italy, for instance, but also has a lot of experience in South America. So we're bringing people into the organization that are productive as soon as their feet hit the ground in our company.

The reason I asked about him particularly is because there is an LNG company in the shipping industry that is Golar. And they're not the same thing, are they?

No. No.

That's why I questioned it. You're dealing with a person, not another company that is involved in LNG, transportation, et cetera.

That's right.

Our next question is from Peter Ruggiere from Dawson James.

Got a couple of questions for you. That was a lot of informative stuff you just spoke about. Have you been dealing with or talking with Microsoft about these underwater data centers, like battery systems to charge them up?

I can't speak to specific companies that we're speaking to. But yes, we are not only familiar, but have had discussions about data centers as well as the lines that run subsea that require power and data and so forth. There's a very burgeoning market there.

On the new representative you hired in Italy who previously worked at Halliburton, are you planning to deploy the system that was intended for there before COVID? Is it in the process of being moved, or will they construct an entirely new system and order multiple buoys?

Yes. I can't speak to that right now, Peter.

Okay. I'd like to see the cash position up that much. You haven't had that much cash in a while. Based on that cash, how much does it cost to make a PB3.

A PB3 costs anywhere between $500,000 to $700,000 to make at sell price.

Yes. And Peter, this is Matt. Yes, on that, that would be for the base standard cost for the PB3. In addition to that, there are different ancillary components that we add-on and solutions, as George was describing earlier, our marine surveillance solution is one of them. So there are different payload features that can be added to the PB3 on top of that base cost. And those prices vary.

We're approaching a year since the feasibility study in the Gulf of Mexico was completed over 1.5 years ago, and you received the approval to move on to the next phase last December. Where do we currently stand with that?

The study that was announced in April for surveillance in the Gulf of Mexico, an exclusion zone monitoring, we are still in discussions with that particular customer. Naturally, things have changed with the fruition of COVID-19, but we continue to talk to them about not only that opportunity but other opportunities, Peter.

Okay. There's another question I had. Someone asked me, when you decommission oil wells, when you do that, is there a deadline to decommission them, a time frame where it has to be done?

There is often a deadline for decommissioning, which varies depending on the region. For instance, regulators in the North Sea are generally stricter about requirements compared to those in the Gulf of Mexico, where the requirements differ. In Brazil, there is also regulatory activity regarding several wells that need to be plugged, abandoned, and monitored throughout that process. The whole decommissioning process can vary significantly, taking anywhere from immediately after the well is shut down to three to five years, depending on the operator's strategy.

Okay. Regarding the 5G project with the Navy, how many buoys and systems will be involved? I'm trying to understand how that will work and what the overall plan is.

Understood. So 5G isn't about necessarily the range that you can communicate. It's more around bandwidth; it's more around latency. So when an operator is trying to control either an aerial drone or a subsea drone from land in very remote parts of the world, there's something called latency that causes them to have a pause between when they send a command to the drone and when the command is actually executed. And it makes operating those devices very difficult. So what 5G does is it eliminates a significant amount of that latency, and it also opens bandwidth up. And that's why we believe the Navy and the Naval Postgraduate School are very interested in an autonomous system that has 5G on it in order to control these different devices from land. In order to extend range, you could have multiple buoys with multiple 5G systems on those buoys to create a repeater system. That's really part of what the study is about, is to look at these different scenarios and report back to the Navy in order to determine what next steps would be? What a configuration would look like for a particular mission that they have in mind.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you, operator. Before we conclude the call, I do want to take just a moment to reflect on what's been a challenging year. Literally, everyone around the world has been affected in some way by the coronavirus pandemic, not only in business but also in our day-to-day existence. I want to express my most profound appreciation to OPT's staff, who continue to display remarkable resilience in the face of unforeseen personal and professional challenges. We've all made adjustments. And as a team, we've continued to operate and grow our business and give back to the community. I remain quite confident that we'll persevere and succeed through the upcoming months and into the New Year. Thank you, operator.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.