Ocean Power Technologies, Inc. Q1 FY2022 Earnings Call

Good morning and welcome to the Ocean Power Technologies First Quarter Fiscal Year 2022 Conference Call. A webcast of this call is also available on the company's website at www.oceanpowertechnologies.com. As a reminder, this conference call is being recorded and will be available for replay after its completion. Today, Phil Stratmann, President and Chief Executive Officer; and Matthew Shafer, Senior Vice President, Chief Financial Officer and Treasurer, are on the call. On September 13, 2021, OPT issued its earnings press release and filed its quarterly report on Form 10-Q for the quarter ended July 31, 2021, with the Securities and Exchange Commission. All OPT public filings are available on the SEC website or in the Investor Relations section of the OPT website. Please note that management's prepared remarks may contain forward-looking statements that are within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by certain words or phrases and are based on assumptions made by management regarding future circumstances over which the company may have little or no control and involve risks and uncertainties and other factors that may cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. For a further discussion of these risks and uncertainties, please refer to our most recent Form 10-K and subsequent filings with the SEC. We disclaim any obligation or intent to update the forward-looking statements in order to reflect events or circumstances discussed in this call. Now I am pleased to introduce Dr. Philipp Stratmann. Please go ahead, sir.

Thank you and good morning. Today, I will review OPT's business operations and provide an update on activities and developments during the first quarter of fiscal year 2022 and up to today. Then Matt will review our financials before we open the line for questions. I'm proud to say OPT is making excellent progress as we continue to move toward our future as an ocean data and power services and solutions provider. As central as our PowerBuoy technologies are to our solutions, we're keenly aware that these products alone will not fully satisfy most customers. OPT must provide more than just autonomous low- to zero-carbon power platforms on their own. We are working to provide meaningful solutions that help solve the complex challenges operators are facing at sea, from the needs of offshore energy developers and providers to defense and security organizations and more. To this end, we are working with experienced software and robotics developers at Fathom5 and Greensea to create a leading-edge proprietary cloud-based Maritime Domain Awareness platform that features both expandable sensor and analytic capabilities, as well as military-grade cybersecurity. As part of the development process, we are readying the initial versions of the solution for an at-sea trial off the coast of New Jersey. We've received the necessary permits for the locations where we expect to deploy PB3 and hybrid PowerBuoys with the equipment that make up our Maritime Domain Awareness solution packages. This will allow us to optimize the platform's performance and provide prospective customers with opportunities to see the system at work. In addition to our focus on services, we will continue to develop PowerBuoy products. Through a Small Business Innovation Research award, the U.S. Department of Energy's investment in our next generation of wave energy conversion devices drives the innovation necessary to tackle the challenges facing the operators in the marine environment. Moving our Mass-on-Spring Wave Energy Converter system forward is integral to our competitive strategy. We are seeing the benefits of last fiscal year's acquisition of 3Dent Technology as our strategic consulting services area is experiencing steady growth. An expanding client base is providing a steady stream of diverse consulting projects for our Houston-based team, and we're cultivating additional interest in these services. OPT has been at the forefront of ocean energy development, and we are continuing to innovate as we anticipate the needs of the ever-evolving markets we serve and seek to serve. We will best accomplish that goal by pairing our in-house knowledge and expertise with the best available strategic parties and additional inorganic growth if and when it makes sense. With that, let me turn the call over to Matt to discuss the financials.

Thank you, Philipp, and good morning, everyone. Revenue for the first quarter of fiscal year 2022 was $300,000 compared to $200,000 in the first quarter of fiscal year 2021 primarily as a result of the revenue from strategic consulting services from the 3Dent acquisition. The net loss for the first quarter of fiscal year 2022 was $3.1 million compared to $3.4 million for the first quarter of fiscal year 2021. This decrease was mainly attributable to a $900,000 gain on the extinguishment of the company's PPP loan after the SBA granted its forgiveness during the quarter and an income tax benefit of $1 million received during the quarter. These gains were partially offset by increases in the quarter for product development and administrative costs. Turning now to the balance sheet. Total cash, cash equivalents and restricted cash was $78.3 million as of July 31, 2021. Net cash used in operating activities was $5.3 million for the first quarter of fiscal 2022, representing an increase of $2.6 million over the first quarter of fiscal year 2021, mainly as a result of higher project and employee-related costs and the settlement of litigation during the quarter. With that, I'll turn it back to Philipp.

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

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

Steve, could you give me some clarification on the litigation payable of $1.2 million? Can you clarify on that?

Yes. So this is Matt. Good to hear from you again. Yes, that's basically...

It's Robert, by the way, not Ronald.

Yes, I knew that.

Ronald is the owner of the company.

Okay. I was trying to figure out who that was. But I knew you were Robert, and it's good to hear from you again. I know you call in each quarter for the past few quarters. Thank you. Yes. So that's from a prior CEO of the company, Charles Dunleavy. There was a settlement that the company finally had with the former CEO, which was disclosed in all of our past 10-Ks over the past several years.

Right. But now it's actually paid or it's still due to be payable?

No, that was paid. And so now that's behind us.

Okay. Because it reads as litigation payable, it sounds like it has to yet be paid, instead of litigation paid or something like that. Okay, that's the thing, as long as it's done with. Now could you give us some clarification on the status of projects, for instance, the project off of the coast of Chile?

Sure. Yes, I'll be happy to answer some of the questions around that. I mean as we mentioned on our previous calls and disclosed in our filings, the buoy off the coast of Chile is installed, and the buoy is operating as designed for the field where it's being deployed in. We are doing some maintenance work on some of the ancillary equipment that the buoy is powering. Obviously, given that it's winter in the Southern Hemisphere, there are some weather delays on some of those issues. But every time where the windows open up, we're going out there to do fixes onto the seabed equipment.

Okay. So it is functioning as designed and the customer is happy?

From the conversations I have with the customer, I can't speak for them, and I can't predict what they're going to do. But you have seen that they've made public statements about the project and that they are highly supportive of the project and what may come next. And certainly, in conversations we are having, this is part of our go-forward strategy and demonstrating to the industry that the buoys can fuel and power a broad range of sensors. So it starts moving into this whole ocean data as a service market for us.

Good. How about other projects?

We have received a grant from the Department of Energy that will support our future developments. Our strategy is shifting to utilize our product as platforms to provide power as a service, which will ultimately lead to ocean data as a service. This has initiated several advanced discussions with customers around the world, encouraging us to explore opportunities beyond the traditional oil and gas and offshore markets. 3Dent is experiencing steady growth, and I am particularly excited about the new contracts it is securing from customers outside of the traditional base. Additionally, the work we are doing is leading to further discussions following the completion of projects such as the ACET and DeepStar studies.

Okay. Any feeling whatsoever for future sales next quarter, next half?

I can't provide an exact number for future sales, leases, or services. However, I am very encouraged by the direction of our discussions and the overall trend in the industry.

So you see growth?

Absolutely, specifically with the shift that we are performing towards looking at the PowerBuoys that we have as platforms to fuel solutions and services, which I think we're evidencing through the work we're doing with Fathom5 and Greensea. I'm very encouraged by the discussions that are occurring around that.

Our next question today is coming from Peter Ruggiere from Dawson James.

I have a few questions. I've been with this company for a long time and would like to know the status of the decommissioning of oil wells in the Gulf of Mexico. Where do we stand on that at this point? I actually have several questions.

Yes. Thanks for the question, Peter. Okay. Now if you...

The question is about the process of decommissioning an oil well, including how long it takes, the number of wells involved, how they are capped, and what your capability is in this area, which I was trying to clarify.

So we don't do decommissioning of wells. We are not an oilfield services company. Our efforts around decommissioning are either along the lines of what we did for what was then known as Premier Oil and now Harbour Energy in the North Sea, where we can provide monitoring services for exclusion zones around subsea assets that have been plugged and abandoned and precutting. Or it can be once a well has been plugged, we can provide monitoring services for said wells to ensure that there's no seepage that occurs. But the actual decommissioning work itself is entirely outside of our remit.

Okay. I see your spending is increasing. Is that due to hiring more employees? What does that consist of?

Yes, Peter, this quarter's increased spending is primarily related to the settlement and payment of the litigation matter. However, beyond that one-time item, we are also investing more in the Maritime Domain Awareness, including the software solution and our work with GreenSea and Fathom5, as well as hiring additional personnel to support these initiatives.

How close are you to securing a solid order? You previously worked with various companies, including Mitsui Engineering and Enel, and collaborated with Premier Oil and Eni. Yet, you still haven't generated significant revenue from these efforts. I'm trying to understand what's causing the delay. How near are you to winning something? You have the Navy involved. I have been part of this company for a long time, and it's clear you have sufficient funds right now, which is great. The question is, what will you do with the $78 million?

No, I think where we are, and as I mentioned before, is we are really pivoting the company away from a pure product play and providing the buoys as stand-alone systems and moving into power as a service and ocean data as a service. To that extent, we're expanding on the work we've done with Eni, EGP, and Harbour Energy, and also with the Navy. And we're building upon that in order to put together a solution that we can utilize and bring into the market. And as I mentioned earlier, that is leading to some very intriguing discussions that we're having with customers around the globe that are actually primarily outside of the oil and gas and traditional energy industry. And that's where we see the largest growth. I would also add that as we did with 3Dent, we will continue to look at inorganic growth opportunities as and when they come along, make sense in terms of valuation and further add to the execution of the strategy that we've built out.

Are you referring to the PowerBuoy being used for illegal fishing and monitoring services with the data? What about underwater data centers, like those from Microsoft? Is that part of what you're discussing?

When I discuss ocean data, what we're focusing on is enhancing the edge computing capabilities on the buoy itself. Operating far offshore without additional infrastructure means we are in a low-bandwidth, high-latency environment. Currently, we are working with Greensea and Fathom5 to develop the ability to reconfigure the buoys to function as gateway nodes, enabling integration with a variety of sensors for better communication. Regarding submerged data centers at the edge, we haven't explored powering these since most are connected directly to onshore via cables. Nonetheless, similar to decommissioning wells, there is potential for monitoring exclusion zones around these sites to prevent accidental interference, such as dredging fishing nets over seabed assets.

Okay. So you're basically on an entirely different strategy right now?

Our strategy is centered around three main components, with the primary focus on providing ocean data as a service. Utilizing our PowerBuoys, we can deliver ocean data services through our buoy platforms. Additionally, we continue to offer power as a service, using both our own platforms and integrating with other systems when necessary. This approach was demonstrated in the DeepStar study. Supporting all of this are our consulting services, which allow us to assist customers early in their project lifecycle, even before they realize they may need buoys. We believe this strategy allows us to serve customers who might not see buoys as a primary power source while still deploying our platforms to meet their diverse needs and ensuring they have access to the hyperlocal data collection essential for integrating with their existing systems.

Okay. Are you still doing stuff with the underwater submersibles like Saab Seaeye and that side of the market? Or...

Absolutely. If you consider the work we've done for the Naval Postgraduate School, it exemplifies our capability to offer both power as a service for recharging subsea assets and to enter the ocean data as a service market. This allows us to combine the collection of subsea data with computing capabilities on the buoy, enabling data transmission back to shore bases. Therefore, conversations with AUV and USV companies are progressing rapidly for us.

Next question is coming from a private investor.

So you just mentioned you guys are pivoting as a company, right? My question is, how has the total addressable market changed over the last few months, I would say maybe even a year, with this move towards ocean data as a service and power as a service? Can you touch base on how that's changed over the last 6 to a year?

Sure. I think the general shift in the industry has been towards one of data as a service and as power as a service in general. In addition to that, I think the fact that we are in the UN decade of ocean science and the changes in the administration politically here in the United States of America is really enabling a major growth spurt for kind of the ocean data industry overall. So we're very encouraged by that. We're very encouraged by what we're seeing in terms of companies coming into the market with very interesting sensor products. And the pivot that we are carrying out enables us to work with these sensor companies and with other partners that are out there and sell through them and with them through the customer base even if that customer base would have never considered a buoy in the first place. So I think that makes for a very interesting addressable market, which is not constrained by the notion of metal or steel that sits on the seabed.

So basically, you're saying that the total addressable market has increased significantly because of those platforms, right? That wasn't something that you could have anticipated a year ago. Now, with the change in government and new policies, you believe this is where the growth will come from?

Yes, I believe this is precisely where our growth will originate. The ocean data as a service, along with actionable intelligence and predictive analytics derived from offshore data combined with existing data, will drive this growth. This is why we are collaborating with Fathom5 and Greensea—not only to enhance the computing capabilities on the buoy but also to create a cyber-secure cloud platform. This platform will allow us to integrate hyperlocal ocean data with third-party information to deliver predictive analytics that others can utilize.

I have one last question for you. Regarding R&D, what would you identify as your top three priorities in the R&D budget right now? Looking ahead to the next year or two, what are the top three areas of the business that you will be focusing that budget on?

Yes. Our primary focus is on building, testing, and demonstrating version 1.1 of our Maritime Domain Awareness solution, while also rolling out the software update for version 2.0 on those buoys. This includes live testing of the MDA solutions off the coast of New Jersey at three already permitted sites, with deployments expected to begin in the next two to three weeks. Additionally, we are developing our next-generation power conversion system, the Mass-on-Spring Wave Energy Converter, or MOSWEC, which will serve as a new platform for harnessing wave power without any external moving parts. These are two significant initiatives we have underway. The third is working on interfaces to integrate other industry sensors and payloads. To grow in the ocean data as a service market, we need to be a host platform that facilitates the easy integration of new sensors as they are developed.

No, yes, that makes sense. Yes. And that's pretty much it. I'm hoping that you can achieve more sales. Oh, and actually, one last question. How are we progressing with the hiring? I know we were looking to bring someone on to work in the government side of the business. How is that going?

Yes. So what we have done, we've engaged an external advisory firm that is helping us navigate the D.C. ocean policy-specific landscape. This isn't a think tank or a partisan body but rather a kind of a strict policy and sales advisory firm. And we are in advanced discussions and stages of reconfiguring our sales and business development team to capitalize on the government and defense market.

Next question today is coming from a private investor.

A question, what's the typical sales cycle time for both the PowerBuoy and the data services?

There isn't a typical sales cycle time as it varies by industry. We have ongoing discussions. If we overlook the consulting services aspect, which usually involves urgent requests, many of our conversations in the oil and gas sector revolve around specific projects, such as needing a solution for a brownfield site in the North Sea within 12 to 16 weeks. When it comes to government, the planning tends to be more long-term, focusing on large procurements and the necessary studies before qualifying to provide equipment later. The cycles can range from a few weeks to several months, depending on the customer. We experienced some setbacks due to the resurgence of the Delta variant over the summer, which led to the postponement of several planned face-to-face meetings and restricted travel. Overall, the timelines are usually weeks to months, with foreign governments often adhering to different cycles. We are also collaborating with advisory firms to ensure we address these cycles effectively.

With about over $230 million invested of shareholder dollars and virtually no sales, when are you guys going to execute on sales and profits with the losses on a run rate of minus $20 million, when are you going to produce just $20 million in profit just to break even?

Well, as I mentioned, that's one of the reasons we're executing the strategic shift. The idea of simply placing buoy after buoy out there is not very appealing to the customer. So we are diligently working on the pivot and transitioning into lower-overhead markets initially, such as ocean data as a service, while also incorporating additional services and solutions into our portfolio to enhance the growth we aim to achieve.

Additionally, it's important to focus on our company culture and the transformation from a research and development, product-based organization to a data and power service provider. We are aiming to capitalize on these areas as we make these shifts rapidly. In 2015, we underwent a strategic pivot, transitioning from large-scale, grid-connected power to autonomous power. We recognize the necessity to adjust the company in response to the evolving total addressable market that is moving towards data and power as a service. Thus, we are progressing quickly with the market changes.

Our next question today is coming from Jeffrey Campbell from Alliance Global Partners.

Two questions. One, in response to something you just said a minute ago and you mentioned lower-overhead markets, I wonder, does this imply that you might fund the capital cost to place buoys into strategic locations as a platform to then sell data as a service after that investment?

Jeff, good to hear from you. It is not something that is firmly in our plans right now. But as I mentioned in response to one of the earlier questions, we are working with other larger partners in the industry that certainly have an interest in, call it, predeploying data collection devices in the ocean to then monetize the data that's being collected and putting that out to their customer base. So even if we are not looking at financing that directly ourselves, we are certainly in discussions with partners in order to carry out such measures.

Okay. And my other question, so I was just wondering, we've had a lot of prismatic, theoretical discussions about it. So I just wondered if maybe you could pull it together by giving us an example of a primary use case for your vision of data as a service once your capabilities are fleshed out.

Yes, absolutely. For instance, consider the problem of illegal fishing. We can collaborate with partners in the industry by deploying our platforms that support the MDA solution near no-take zones in the ocean to actively monitor these areas. By incorporating data from satellite providers, as well as weather data and fishing ground movements, we can start alerting our platform to monitor specific quadrants where illegal fishing activities are more likely to occur, and we can sell that advanced data to customers. Additionally, we reserve the right to monetize any other data collected from those buoys. This highlights the plug-and-play capability of our sensors. While monitoring illegal fishing, we can also gather important data for climate science and sell that information to research institutions and governments. This approach allows us to utilize a single platform and device at a location and monetize the data it collects multiple times across a variety of customers.

Okay. And just as a follow-up to that, should we assume that the primary customer for the illegal fishing data that you use as an example would be a government?

It would be government or kind of government-sanctioned security organizations that are contracted by government to carry out enforcement activities. And to a lesser degree, just because of financial constraints on their side, it could also be NGOs that have been tasked to protect certain marine protected areas in the remote parts of the world.

Our next question today is coming from Joe Dirge, a private investor.

A question. Do we have an update on the DeepStar project, one? And number two, was the buoy off the coast of New Jersey, I see you had the permits, I mean, was that launched? That's all.

The DeepStar study was completed this fiscal quarter, and we are currently discussing potential next steps with the involved operators. This progress depends, to some extent, on the adoption speed of all-electric trees and tiebacks in the Gulf of Mexico. Additionally, the DeepStar study has revealed other applications, such as well monitoring, that we are exploring. Regarding the project off the coast of New Jersey, we have obtained the necessary permits. The first test buoy completed an in-water dump test at the end of last week, likely on Wednesday or Thursday. In about two to three weeks, depending on weather conditions, the first buoy will be deployed off New Jersey, followed closely by the second and third buoys. During this demo deployment, we will deploy versions 1.0 and 1.1 of the Maritime Domain Awareness system on these buoys and implement improvements to enhance the product. We will also conduct live water demonstrations with various assets passing by after releasing additional software updates and eventually swap in more power-generating buoys. This approach includes wet testing for the MOSWEC device as well. It is essential as a provider of offshore services that we thoroughly demonstrate all our equipment in the environments where they are intended to be used.

So, it’s safe to say that in the next 2 months, there will be 3 buoys off the coast of New Jersey?

I think that is a fair statement to make.

And how far are they launched off the coast?

I think the 3 sites are 5 nautical miles apart from each other, and I believe the buoys are about 5-ish nautical miles each from the shoreline.

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

Thank you. After just a few months as CEO, I do want to restate how proud I am to have been asked to lead this next chapter of OPT's development and how excited I am to be in a position to execute the company's ambitious plans. OPT has a strong team in place from our executive leadership to every department that makes up the company. As a result, we are aggressive in our pursuit of growth whilst remaining agile and responsive to the needs of the marketplace. To serve our diverse set of clients, we are aligning our knowledge with other parties to bring the best possible outcomes to our customers and believe we're setting up for a long future of delivering customer and shareholder value.

Thank you for your participation today. This concludes today's teleconference and webcast. You may now disconnect your line at this time.