Ocean Power Technologies, Inc. Q2 FY2024 Earnings Call

Good morning, and welcome to the Ocean Power Technologies Second Quarter Fiscal Year 2024 Earnings Conference Call. The webcast of this call is also available and can be accessed by a link on the company's website at www.oceanpowertechnologies.com. This conference call is being recorded and will be available for replay shortly after its completion. On the call today are Dr. Philipp Stratmann, President and Chief Executive Officer; Bob Powers, Senior Vice President and Chief Financial Officer; and Joseph DiPietro, Controller, Treasurer and Principal Accounting Officer. Following the prepared remarks, there will be a question-and-answer session. Now, I’m pleased to introduce Joseph DiPietro.

Thank you, and good morning. After the market closed yesterday, we issued our earnings press release and filed our report on Form 10-Q for the quarter ended October 31, 2023. Our public filings are available on the SEC website and within the Investor Relations section of the OPT website. During this call, we will make forward-looking statements that are within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections or other statements of the company's plans, objectives, expectations or intentions. These statements 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 the company's Form 10-K and subsequent filings with the SEC. The company disclaims any obligation or intention to update the forward-looking statements made on this call. Finally, we posted an updated investor presentation on our IR website. Please take a moment to review it as it provides a nice overview of our company and strategy. Now, I’m pleased to introduce Dr. Philipp Stratmann.

Thank you, Joe, and good morning, everyone. We're pleased to have you join us on this call, and your continued support is greatly valued. Before we delve into the numbers, I'd like to highlight that I'm pleased with our quarterly results and our continued positive momentum. The market demand is clear. Our customers are procuring autonomous, resident and roaming assets that protect marine environments, collect essential ocean data, and enhance national security. We continue building our pipeline and are converting opportunities into backlog and revenues, as seen with wins like the recently announced Multi-Buoy and Multi-Vessel contracts. We believe we're well-positioned to translate this momentum into profitable growth in the next 15 to 18 months and deliver value for our shareholders. Let's talk about some recent developments. In November 2023, we announced that we have substantially completed our research and development phase and are primarily focused on commercial activities. We've built a suite of products and solutions that we believe will be the basis for our current and future commercial success, resulting in meaningful progress in backlog, revenue, and profitability, with contracted backlog increasing from $3.1 million at July 31, 2023 to $4.5 million at October 31, 2023. This pivot to commercial and operational activities has enabled a reduction in headcount reallocation, the divestiture of our 3dent, and a significant reduction in third-party expenditures. As a result, the majority of our employees are now dedicated to customer delivery. We expect that recent meaningful contract wins, which I will describe more fully in a moment, the growth in our commercial pipeline, and the expense savings noted will enable us to reach profitability during calendar year 2025 using current capital resources. This expectation does not account for extraordinary expenses such as those related to the Paragon litigation, which could cause OPT to seek additional capital from financing sources. In December 2023, we secured our first Multi-Buoy letter contract. This is a subcontract with a U.S.-based prime contractor with a $6.5 million ceiling to deliver maritime domain awareness solutions for U.S. government agencies. This contract exemplifies our commitment to innovation and underscores the crucial role our technology plays in bolstering maritime national security and providing state-of-the-art solutions, including Multi-Buoy arrays that contribute to a safer maritime environment. In October 2023, we were awarded our first Multi-Vessel WAM-V order, a volume order from Sulmara, a prominent player in offshore services. The order, valued at $1.6 million, underscores the recognition by customers of our ability to provide innovative and sustainable solutions for the offshore industry. Due to demand, production is already underway to fulfill the order and will allow for revenue recognition this fiscal year. We recently retained Rear Admiral Victorino “Vic” G. Mercado as a special advisor to the company's Board of Directors. We plan to leverage Vic’s experience, expertise, and networks as we build on our momentum in providing intelligent maritime solutions to the U.S. government and defense and security sectors, and carefully navigate the challenges of securing access to and protecting highly sensitive and confidential information. Finally, we recently appointed Matt Burdyny to the newly created role of Chief Commercial Officer. Matt will report directly to me, and we will leverage Matt's vast experience to drive the next phase of our growth and the commercialization of our cutting-edge products, particularly for the National Security and Defense markets. In short, our increased commercial and operational activity levels are seen throughout the organization. We continue to position the company well within the industries we serve. Our opportunity pipeline continues to grow. In addition to the orders I just discussed, we've also continued to add to the top of the pipeline. The pipeline on October 31, 2023, is approximately $93 million, for a net gain of approximately $26 million during the first half of the fiscal year. We are continuing to grow our revenues, and our gross profit margins are increasing. Our strategy is working, and we see additional opportunities for multi-system orders on the horizon. Now, before we dive into the financial highlights, I'd like to introduce our CFO, Bob Powers. Bob will provide you with more detailed information about our financial performance in Q2 fiscal '24.

Thanks, Phil. Let's begin with revenue. In Q2 '24, our revenues reached $900,000, marking a significant increase compared to the $300,000 reported for the same period in the prior year. Year-to-date, our revenue generation is in excess of 2x where we were last year. This growth can be primarily attributed to the conversion of backlog from our strong performance in WAM-V sales and revenue generated from our DOE contract. Our orders are $2.9 million year-to-date and growing, with backlog standing at $4.5 million at October 31, 2023. We continue to expect order activity and revenue to ramp significantly throughout the second half of the year. Our gross profit for Q2 '24 stood at $500,000, a substantial improvement compared to the Q2 '23 figure, which showed a gross profit of under $100,000. This improvement is primarily attributed to our unmanned vehicles business, particularly the higher-margin WAM-V leasing business. I’m enthused about the progress we have made in this area and the expansion of the progress made in fiscal 2023. Our operating expenses for Q2 '24 amounted to $8 million, reflecting our investments in both personnel and systems to support the growth Philipp and I discussed previously. As for the net result, we reported a net loss of $7.2 million for Q2 '24, compared to a net loss of $5.9 million for Q2 '23. We continue to manage our costs tightly, making targeted investments in the personnel and structure needed to support our strategy and plans for growth. As Philipp mentioned, we expect our operating expenses to decrease materially going forward as a result of our plan to achieve profitability. On the balance sheet front, our combined cash, cash equivalents, and short-term investments as of October 31, 2023, totaled $18.9 million. Notably, we continue to maintain a debt-free balance sheet with no bank debt or financial obligations. In terms of cash flow, the net cash used in our operating activities for the first half of fiscal 2024 amounted to $15.5 million. This primarily reflects our net loss, the payout of employment bonuses accrued during fiscal year 2023, and the payment of the earnout accrued during fiscal 2023 related to the outstanding performance of our autonomous vehicles business. Finally, you will note that our inventory balance increased by approximately $1.5 million to $2.5 million. This investment in inventory was necessary to satisfy the growing backlog as well as our planned growth in revenue for fiscal 2024. That covers our financial update. Before we enter the Q&A, I'd like to remind everyone that the purpose of today's call is to discuss our second quarter of fiscal year 2024 results, as well as our financial outlook. As we head into the Q&A, we ask that you limit your questions to these topics. Thank you.

Thank you. We will now begin the question-and-answer session. Our first question is from Shawn Severson with Water Tower Research. Please go ahead with your question.

Hi. Thank you. Good morning, everyone. Philipp, great move on the pipeline. And I'm curious, when you talk about the pipeline, looking at that $93 million, is there any way to look at that and figure out how much recurring revenue something like that can drive? I guess I'm trying to understand the mix of that pipeline and what it would look like should it convert and go into backlog in sales? Is it really heavy towards this mix of recurring revenue?

Good morning, Shawn. Thanks for your question. We're definitely seeing a shift in our pipeline compared to two years ago when the current management team took over. Back then, it was primarily focused on product sales, but now we're seeing a significant move toward lease opportunities, which provide recurring revenue, along with more data and robotics as a service. For instance, some of our larger multi-volume orders include leases, but they also come with minimum operating day guarantees. This effectively turns them into take-or-pay contracts, allowing us to supply assets to our customers. This setup enables us to build momentum as we look ahead and begin offering guidance moving forward.

And just a second question on that. I know it's going to vary project by project, of course, but what are the key triggers that convert this pipeline? I mean, are you waiting for budgetary approval for pilot programs? Just trying to understand what triggers conversion in that pipeline in a generalization.

Thank you for the question, Shawn. It partly depends on the customers. The majority of our customer base and opportunities are government-related, primarily in defense and national security. In these cases, the main challenges often involve the speed of contracting and finalizing terms before we can provide anything. Additionally, it involves coordinating the projects where these assets are being utilized, especially if it’s part of a larger project that requires financing. Overall, we are also observing a reduction in the time it takes to move from opportunity identification to pipeline discussions and then to a purchase order. This is mainly because we are not encountering many demonstration requirements anymore, as the vehicles and buoys are now regarded as commercialized and product offerings.

Great. Thanks. That’s great. Thanks a lot.

Thank you. At this time, I will turn the floor back to management for any closing remarks.

Thank you. We continue progressing towards profitability and we never take any of your support for granted, and we thank you for being a valued shareholder.

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