Ocean Power Technologies, Inc. (OPTT) Q2 2022 Earnings Call Transcript

Good day and thank you for standing by. Welcome to the Second Quarter Fiscal Year 2022 Conference Call for Ocean Power Technologies, Inc. As a reminder, this call is being recorded and would be available on the company’s website shortly after its completion. I would now like to hand the conference over to your speaker today, Joseph DiPietro, Controller and Treasurer. Please go ahead.

Good morning and thank you for joining us on this call. A webcast of this call is also available on our website at www.oceanpowertechnologies.com. Joining me on the call today are Dr. Philipp Stratmann, President and Chief Executive Officer; and Bob Powers, our newly appointed Senior Vice President and Chief Financial Officer. Following our prepared remarks, we will have a question-and-answer session. After the market closed yesterday, we issued our earnings press release and filed our quarterly report on Form 10-Q for the quarter ended October 31, 2021. All of our public filings are available on the SEC website at sec.gov, or within the Investor Relations section of our website. This call will include 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, uncertainties, and other factors that may cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. Additional information about these risks and uncertainties can be found in our most recent Form 10-K and subsequent filings with the SEC. We disclaim any obligation or intent to update the forward-looking statements made in order to reflect events or circumstances discussed on this call. Now, I am pleased to introduce Dr. Philipp Stratmann.

Thank you and good morning. We have a lot to update you on this morning as we had a busy second quarter and start to our third quarter in executing our strategy to become the global leader in data and power as a service within our oceans and seas. This is an exciting time for Ocean Power Technologies. Some quick highlights of our progress included further growth of our strategic consulting services, the advancement of our maritime domain awareness solution, and the acquisition of marine advanced robotics, a leading company that manufactures autonomous water vehicles. We have quickly established the necessary beachheads to deliver consistent, reliable, and most importantly actionable data intelligence to our global customers. Before I get too far into our strategy and business update, I would like to take a moment to introduce Bob Powers, our new Senior Vice President and Chief Financial Officer. As you saw in our press release on Monday, he started with us a few days ago, and we could not be more excited about Bob joining our team. He brings expertise in driving financial excellence and executing strategy within a broad range of companies and industries and has extensive experience with M&A activities. Bob possesses strong financial acumen, is proactive, and a clear communicator, and he will bring great leadership to OPT; all the top requisites we were looking for. We are fortunate to have him. With that, I would like to introduce you to Bob Powers. Bob?

Thank you, Philipp. It's my pleasure to be here today and share with our investor community how excited I am to join this innovative company. Early in the recruiting process, it became clear that my experience and skillset would allow me to hit the ground running and make an immediate impact at OPT. My background includes more than 25 years of financial experience for a number of public and private companies. Most recently, I was CFO at Constellation Advisors, a private equity-owned provider of outsourced back office operations and compliance services. There are many reasons why I decided to take this opportunity. Although I've worked in companies of various sizes, I truly enjoy the action, fast pace, and high degree of openness to change that exist in smaller companies. I believe at OPT I have the opportunity to do something special. Nearly 70% of the world is comprised of oceans, and OPT is a company looking to tap into that enormous resource to better connect our oceans with those who operate there. The company's strategy ties nicely into the critical and very timely topic of sustainability, and I became convinced the market potential is massive. It is very appealing to be part of that at such a critical stage. I look forward to being a strong partner to Philipp and the organization and executing the company's strategic vision. I also look forward to speaking with many of you over the coming months and earn your trust quickly. I will now turn things back over to Philipp.

Thanks Bob. It is great to have you on board to help us execute our strategy and drive shareholder value. While we welcome Bob, I also want to take a moment to thank Scott Salantrie, who served as Interim CFO the past few months and provided us with substantial support as we filled this important executive role. Scott has provided strong leadership, wise counsel, and steady guidance over the past few months, and we thank him for that. We wish him well as he returns to being semi-retired. I will now turn my comments to the performance of our business as we continue to evolve from being solely a manufacturer of wave energy devices to becoming a multi-faceted offshore data, power, and engineering services organization. I will organize my comments around our three core service areas which also serve as the foundation of our growth strategy. Our vision is to have our data as a service segment provide constant data information to our customers. This started in earnest with the work we did for Harbor Energy in the North Sea in 2019. Since then, we've been developing a maritime domain awareness solution to introduce edge computing and artificial intelligence modules that can be delivered to customers via cyber secure cloud environments. For instance, our data as a service can provide governments with key activity data to protect our shores as part of national security measures. We expand this segment with the acquisition of marine advanced robotics in mid-November. This was a cash and stock deal and has an earnout provision over the next two years. We paid $11 million at closing, including $4 million in cash. We expect this deal to be immediately accretive for the balance of fiscal 2022. MAR designs and manufactures unique autonomous surface vessels utilizing the patented wave adaptive modular wave technology, or WAM-V, for short. These stable and portable ultralight vehicles are incredibly useful for a multitude of applications such as marine survey missions, active patrolling of waters, and maintaining safe borders. We believe there are substantial synergies to be gained with OPT's focus on maritime domain awareness and integration with our PowerBuoy products that can extend the length and scope of missions at sea. MAR has three sizes of commercially available vehicles providing our customers with multiple options depending on their needs. MAR has a strong customer base, a pipeline of product sales, and robotics service projects. We're looking to use OPT's resources, including our 56,000 square foot manufacturing and warehouse facility, to scale up their capacity to meet the demand for WAM-Vs for industrial security and research. Our acquisition notwithstanding, the pace of development continues on schedule with our proprietary maritime domain awareness platform. As I mentioned last quarter, we are creating a leading-edge cloud-based platform with expandable sensor and analytic capabilities. We're doing this using a mix of internal expertise supported by external firms for development, namely Fathom5 and Greensea. Both have strong reputations with cloud computing and robotics development. We are continuing to test and refine our maritime domain awareness offering with ocean trials off the coast of New Jersey. Since September, we have deployed and retrieved test buoys that operated as expected and produced broad data, including video footage and radar tracks that we believe will be very attractive to our customers. Our near-term plans include deploying PB3 and hybrid power buoys outfitted with the necessary radar cameras and other equipment software development continues. We believe that pairing the security features of our MDA system with a zero and low carbon power of OPT's PowerBuoy products and with the future integration of the capabilities of the WAM-V vehicles will keep OPT at the forefront of this critical market. Next is our power as a service segment, which delivers autonomous clean power to our customers wherever and whenever it is required by utilizing our managed power platforms such as the PB3 PowerBuoy, hybrid power buoy, and the Subsea Battery for topside and subsea power applications. We continue to advance our existing platforms to offer our customers an expanded range of options for delivery of power to their equipment. A recent example of these efforts is the initial study conducted for the Deep Stock Consortium developing a concept of subsea oil and gas power supply. We also continue development of our next generation Mass-On-Spring Wave Energy converter supported by the U.S. Department of Energy grant we just spoke about on our last call. This is the type of public-private blue energy collaboration that we believe is necessary on a larger scale to accomplish the goals of the United Nations decade for ocean science for sustainable development. Finally, we have our strategic consulting services business which focuses on delivering value to our customers in the areas of ocean engineering, structural and dynamic analysis, front-end engineering and design or FEED studies, and motion simulation. Our February 2021 acquisition of 3Dent Technology continues to integrate well and has expanded our strategic consulting services offerings. I'd like to remind you that we are in the process of subsetting the name 3Dent, and going forward we will simply refer to our strategic consulting offerings. We now have the capabilities to conduct engineering projects for a variety of clients, including offshore energy-related applications. This is especially important right now as the oil and gas industry recovers from last year's downturn. We are seeing increased demand for this type of support as companies look to restart exploration and production projects that were put on hold due to the pandemic. Another achievement for our consulting business includes successfully winning our first wind farm project early in the third quarter. We are excited about our progress to date and the opportunities ahead of us. With that, let me turn the call over to Joe to discuss the financial results in more detail.

Thank you Philipp and good morning again to everyone joining us on the call today. Revenue for the second quarter of fiscal year 2022 increased to $247,000 compared to $118,000 in the second quarter of fiscal year 2021 due to the growth of our strategic consulting services. Engineering and product development costs increased $1.1 million sequentially from the first quarter this year; this was mainly due to testing done off the coast of New Jersey as we further position our data as a service segment for growth. Selling, general and administrative costs increased by approximately $200,000 from the second quarter of fiscal year 2020 to the second quarter of fiscal year 2021. However, they declined sequentially from the first quarter by almost $900,000. We continue to operate with a strong balance sheet, and in the second quarter with $72.6 million of total cash and cash equivalents and no bank debt, which gives us significant flexibility. We expect our cash near-term to fund our operation needs of approximately $5 million of cash per quarter. Additionally, in support of our growth strategy, we will continue to look for tuck-in acquisition opportunities that reinforce our three core service segments. The MAR acquisition is a great example of this which resulted in a cash outlay of $4 million at closing subsequent to quarter end. In short, we had a fairly straightforward quarter from a financial perspective. For now, we are happy to take your questions.

Our first question comes from a line of Robert Rayo. Please proceed with your questions.

Hello, I'm an individual investor and I have a few questions that may differ from what others are asking. In your last conference call, you mentioned deploying three PB3s, including the anchorless PB3 off New Jersey, but there has been no update or news about it since. I have read on various Navy sites about how the SPIR and STTR processes work, and it seems that if a study moves into Phase 2, it often becomes confidential. Is the test with the anchorless PB3 classified, meaning you are under NDAs and unable to share any information about it?

Hi Robert. Thank you for your question and for being an investor. The tests off New Jersey that we are conducting are entirely financed on our own. The products that we have deployed so far are a set of test buoys, and we have a set of PB3s and hybrids being deployed at those three sites that we have. Then, later on in the fiscal year, we would also be deploying the first demonstrator for the next generation PowerBuoy system that we are developing, which I mention is the mass-on-spring-wave-energy-converter or MOSWEC for short. But the three sites that we have are financed by us, and their science is permitted by the Army Corps of Engineers.

Okay, one more question. Your buoys, the PB3s can detect other ships or vessels or whatever. I'm wondering what is the distance? How far out can they detect vessels, and can they pinpoint their location like a GPS location, and how accurate is that?

Thank you for the question, Robert. The detection distance depends to a certain extent on how high we fit the mast and how high the customer wants to go and how many miles a customer wants to cover. Typically speaking, we are out and about a 50 nautical mile radius range for detection, and with the combination of AIS radar and video camera detection abilities that we've got, we can pinpoint vessels very accurately, including having the ability to detect AIS spoofing on vessels with AIS off.

Alright, thanks. That's all the questions I have at this time.

Thank you. Our next question comes from the line of Tom VanArsdale with Arsdale Capital Management. Please proceed with your question.

Yes, guys, so I saw the results and the total losses to investors are $243 million. When are you guys going to be profitable? I saw the recent acquisition, and I would like you to explain the pathway to profitability for this company.

Absolutely. Thanks for the question, Tom. As I mentioned on the last call and reiterated today, we are moving towards the ocean data as a service segment. One of the reasons we brought in Bob Powers as CFO is his experience with subscription stream revenues. This segment allows us to start providing more recurring revenue type services, resulting from the subscription streams we can establish. Additionally, we can incorporate our buoys into a power as a service segment. By layering on recurring revenues across the platforms, we are building an installed base globally that will enable us to generate profits and achieve profitability for our shareholders.

And with the installed base, how many PB3s are in the water for paying customers?

At the moment and per the press releases that we have, the primary PB3 that's currently installed, which is still under the previous strategy that we were executing, is the one that's down in EGP for Chile.

So there's only one in the water, and the pathway to profitability is when?

We are expanding our installed base. To enhance the installed base and ensure the platforms are profitable by themselves, we must develop the solution set that operates on these platforms, as that is ultimately what our customers want—solutions to their problems.

Thanks.

Thank you. Our next question comes from the line of Jeff Brubaker. Please proceed with your questions.

Hi everyone. I was wondering if you could provide more details about the slam-on initiative. There was an interesting video about Ocean Powers, and I specifically want to know if there is a PB3 at the slammer plant market that would be located in Monterey.

Hi Jeff, thanks. That's a good question. We're very excited to be working on Slam-On, the sea line and military research initiative which is hosted by the Naval Postgraduate School. As you've probably seen in that video, the initial studies for that project have been completed. Ultimately, that will involve a PB3 going into the water for the offshore demonstrations. As you would have seen in the video provided by AT&T, it extends 5G offshore and then communicates with aerial surface and subsea drones. We are currently in ongoing discussions with Naval Postgraduate School about when and where the actual offshore demonstration will take place, and we're looking for the ideal location in terms of permitting.

Okay, awesome, thanks. And then you mentioned that Next Gen PowerBuoy with Fathom5 and Greensea, I was just wondering when we could expect some more information on that, like what the new capabilities might be and stuff like that?

Okay, yeah, I think just to clarify Fathom5 and Greensea and this is where we are moving to a more platforming approach. Fathom5 and Greensea are independent of the underlying platform. They are developing the edge computing and cloud computing capabilities for us. The mechatronics for the solution payload, the next generation power platform I mentioned is the mass-on-spring-wave energy converter. Essentially what you end up doing, you move the moving parts on the outside of the PB3 into the PB3 thus you reduce any risk of having any external exposure where a valve could fail or a seal would need maintenance. This increases the time between maintenance and potential failures. We are currently in Phase 1 with the Department of Energy, where they are contributing $197,000 to the study. Once that study is complete, which will be in the next couple of months, we will be deploying the first demonstrator off the coast of New Jersey, and then looking to secure additional funding for commercializing this product, which would then occur at some point over the next 12-18 months.

Okay, thank you.

Our next questions come from the line of Robert Rael. Please proceed with your questions.

Hello, okay. I got a couple more questions. One is, is the study that's going on with Adams Engineering and the study with the Navy and the 5G, is that study classified or secret?

That study is not classified or secret. But for commercial confidence reasons, I can't divulge the details of the study other than what I just mentioned about the Slam-On study in general.

Okay, one more. Say the Navy needs one of these anchorless buoys that you're working on, if they need one deployed somewhere in the world, can they be air-dropped?

I, we don't currently have an anchorless buoy that we have commercially available, and we are not working on an anchorless. We're working on single point moorings. To this point in time, we have not looked at air dropping one of our buoys. But one of the reasons we acquired marine advanced robotics is the ability to have additional launch and roaming capabilities to deploy MDA systems for ISR purposes, say for example, on a global basis.

Okay, well I've read several articles on Navy sites about either call it an anchorless buoy, or a station keeping buoy. So you're not working on either one of those?

I think those were concepts that were being developed and talked about a couple of years ago. But what we've decided is that we are utilizing some of the findings from the anchorless concepts and putting that into the mouse-click system, which is a next-gen power system. Additionally, I think given the growth in the ASV/USB market, look, instead of having an anchorless buoy, having roaming vehicles is a much better concept because you can cover a much larger area at any given time.

Okay, so that sounds like to me that you might be using the PB3 to be a recharging docking station for the RAM?

That is definitely one of the concepts we're working on. It's a concept we actually developed prior to even the MAR acquisition with some potential docking station partners.

Thank you. Our next question has come from the line of Robert Cervera with RE Cervera Associates. Please proceed with your questions.

I'm sorry that I came in a little bit late. I missed the first 12 minutes or so. Did you announce any new sales of actual PB3 units, and if not, do you have any on order?

Hi, Robert. No, we did not announce any new sales or any backlog. We are in active discussions with several customers, domestic and overseas right now, where the PB3 and the hybrid are under discussion as the platforms for a maritime domain awareness solution.

Oh, okay. So right now all revenues are coming from basically services provided?

Right, in the quarter, they came from services provided and the study with the Department of Energy. Obviously, as we're moving forward, you might have missed that it was before you logged on. Obviously, MAR is immediately accretive to our business. But these are activities that occurred in the third quarter so far.

Thank you. Our next questions come from the line of Joe Dirkowski. Please proceed with your questions.

Yeah, how many offshore buoys are there off the Coast of New Jersey?

There are three permitted sites, given the weather that occurred over the past week. They were put in after being out there for several weeks. We are currently waiting for a suitable weather window for redeployment on those systems.

How many buoys were pulled in?

Lot. The final one was pulled in, I believe, last week on Tuesday or Wednesday.

Okay, so in the last call, you had said that there were going to be three buoys set out off the coast of New Jersey. So did you take in three buoys that were out there or how many actual buoys were out there that you pulled in?

I appreciate your question and apologize for the confusion. We had two buoys taken out due to weather conditions and two returned. Currently, we have five additional buoys that we plan to deploy across three areas. If I did not mention this in the last call, our strategy involves cycling some buoys in and out to refine the payloads based on the live data we are collecting. We are actively swapping payload systems among the different platforms. This process is ongoing, and we currently have three buoys on standby that we will deploy at the next available opportunity.

How much revenue directly came from 3Dent last quarter? I mean, can we see an uptick in revenue here, or is this what we have to look forward to for what we paid for it?

Last quarter, 3Dent revenues were just over $260,000. We have seen a material uptick in the opportunity pipeline and in revenues coming into the third quarter, given the uptake in oil pricing as well as the uptick in East Coast wind farm activities.

What happened with the PowerBuoy 3 in Japan that was launched in 2018?

The PowerBuoy from Mitsui engineering was out for about six months, and that project has now ended, so the buoy has returned to us. It served as a demonstrator project for Mitsui.

What kind of feedback are you receiving from the Chile buoy that is currently deployed?

Well, as you can see from the public statements that EGP has made, they appreciate and like the buoy's operations profile. I believe they have a public website where you can see how the buoy is operating and the power it is generating.

I guess my point out of the whole thing is, why isn't the buoy getting any traction out there, where the company's not even able to sell one a year or one a quarter? What's holding it back? Is it the sales? Are they not working out there properly? What's the end game with them?

So I think the buoys work as designed and intended and as engineered. The reason we are making the pivot, and we're executing it very swiftly to boards more of the solution side, is that our customers are looking to us to provide them not just with the platform, but also with the payload and the integration of that payload into their systems. That is where we've seen a material uptick in our opportunity pipeline since we've moved towards being able to provide them more of a call it a modified off the shelf type systems, as opposed to being able to solely provide them with the power platform in and of itself.

If anybody's looking at the Chile information I just pointed out, I mean, nobody's stepping up to the plate and putting orders together for it and seeing that if it's working that good, why aren't other companies looking for it?

In the conversations we have had since the deployment in Chile, and since we've moved towards the ocean data as a service offering, have increased substantially, and as I mentioned earlier, the conversations we're having with some overseas and domestic customers are about the buoys but the buoys as a platform for the payload that is going to be provided, specifically around maritime domain awareness on subsea sensing.

Do you have any idea of when we're going to see any kind of revenues on the books with the new acquisition of WAM?

You will see revenues on those books this quarter. This is an immediately accretive deal.

Thank you. Our next question comes from the line of Robert Cervera with RE Cervera Associates. Please proceed with your questions.

Hi, since you have moved strictly, it seems to this selling services idea, as I understand you, we are the provider of the unit that will be the base for the services. Therefore, the cost is hours of creating this unit. What kind of timeframe gives us from the services costing, the payback for our investment in the actual buoy and subsystem?

Thanks for the question, Robert. The way we're looking at it is somewhat of a hybrid model that we're discussing with some of our potential customers right now. In some instances, they're looking at acquiring the platform and us providing the services on top. In other cases, they are discussing with us rolling in essentially a lease model, similar to what we did for E&I and Harbor Energy a couple of years back and rolling that into the overall cost. So it kind of depends on the customer and whether they're governmental or private, but it generally is a hybrid between leasing or selling of the platform and then the provision of the services for the payloads and the corresponding subscription charges.

So we are obviously willing to go either way through lease or purchase?

Yes, we are willing to go either way primarily to rapidly scale up the installed base that exists out there.

Thank you. Our next question comes from the line of Tom VanArsdale with Arsdale Capital Management. Please proceed with your questions.

Could you check if you're on mute, please? Tom, one more time, are you self-muted? Yes. Can you hear me now? I'm sorry.

We could hear, yes.

Yes, sorry about that. Robert Cervera asked a very interesting question. I'd like to follow up with a follow-up question on that. He asked for what is the payback? On the model for data? The company's pivoting to a data as a service, what is the payback, how long will it take from the initial capital cost to build it, deploy it, get it out there, put the systems on, and then get paid back for a profitable business? So that's the question I'd like to ask.

Thank you for the question. Regarding the hardware sales, the payback is immediate, plus there's an additional margin above that. This payback occurs right at the time of delivery and after the acceptance testing, followed by a continuous data stream. For the lease model, the payback period varies based on how long the customer requires it, but generally, it ranges from 18 to 36 months, which aligns with typical payback periods for most offshore assets.

So you're saying that the actual contract that may develop is an 18 to 36-month contract, and over that time, the payback will be complete, in terms of covering all of the upfront capital costs deployed? No, no, Tom, that's not what I'm saying. What I'm saying is that the contract could be any duration from six months to ten years. But the typical payback period of the hardware in and of itself sits in the 18 to 36 months range. That's one of the main reasons why we are spending the time and effort at the moment of developing the data capabilities in addition to that, because that is the recurring data subscription charges that we can then maintain, even once the hardware is paid off to have recurring revenues on an installed base that is paid off. So as I understand it, it would require a consistent revenue stream from customers that would enable a payback, is that correct?

Well, we would only lease if it is on a longer-term basis or with a customer where there is a high degree of certainty on recurring revenues. Otherwise, the model as I mentioned to Robert would be focusing on a sale of the hardware and then provision of the services on a recurring basis on top of the sold hardware.

Okay.

Thank you, that is all the time we have today for question-and-answers. I would like to hand the call back over to Dr. Philipp Stratmann for any closing comments.

Thank you. I'm very excited about what is ahead for OPT. With the additions of Marine Advanced Robotics and 3Dent technology, we are transforming the company with new and varied capabilities that seek to build on the innovative technologies on which OPT was founded. We are confident this will translate to long-term value for our customers and shareholders. I want to thank our customers, employees, vendors, strategic partners, and shareholders for your continued support.

Thank you for your participation today. This does conclude today's teleconference and webcast. You may disconnect your lines at this time.