Earnings Call Transcript - OPTT Q2 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Ocean Power Technologies Second Quarter Fiscal 2020 Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Michael Porter, Investor Relations for Ocean Power Technologies. Please go ahead, sir.

Michael Porter, Investor Relations

Thank you. Good morning and thank you for joining us for the Ocean Power Technologies Conference Call and Webcast. On the call with me today are George Kirby, President and Chief Executive Officer; and Matthew Shafer, Chief Financial Officer and Treasurer. Following our prepared remarks, we will open the call to questions. This call is being webcast on the company's website at www.oceanpowertechnologies.com. It will also be available for replay after the call. On December 9, 2019, OPT issued its earnings press release and filed its quarterly reports on Form 10-Q for the second quarter of fiscal year 2020 with the Securities and Exchange Commission. All of our public filings can be viewed on the SEC website at sec.gov, or you may go to the Investor Relations section of the OPT website, oceanpowertechnologies.com. Now let me reference the safe harbor provisions of the U.S. securities law for forward-looking statements. This conference call 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, such as may, will, aim, will likely result, believe, expect, will continue, anticipate, estimate, intend, plan, contemplate, seek to, future, objective, goal, project, should, will pursue and similar expressions or variations of such expressions. These forward-looking 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. Some of these factors include, among others, the following: future financial performance, expected cash flow, ability to reduce costs and improve operating efficiencies, revenue growth and increased sales volume, success in key markets, competition, ability to enter into relationships with partners and other third parties, delivery and deployment of the PowerBuoys, increasing the power input of PowerBuoys, hiring new key employees, expected cost of PowerBuoys, products and building customer relationships. Please refer to our most recent Form 10-Q and 10-K and subsequent filings with the SEC for a further discussion of these risks and uncertainties. We disclaim any obligation or intent to update the forward-looking statements in order to reflect events or circumstances discussed on this call. Now I'm pleased to introduce Mr. George Kirby. Good morning, George.

George Kirby, CEO

Good morning, Michael. Thank you. Good morning, everyone. I'm going to review our business operations and provide an update on our commercial activities and developments during the second quarter up to today. Then Matt Shafer will provide a review of our financials, then we'll open the floor for questions. In September, we announced the signing of 2 new contracts with Enel Green Power, the renewable generation arm of the large Italian utility company, Enel. One of the contracts is our first sale of a PB3 PowerBuoy, along with a mooring system and deployment off the coast of Chile. The second contract is for an Open Sea Lab, which enables EGP to collect environmental information. These contracts totaled nearly $2 million of revenue in this fiscal year. This is an exciting project for us, and we anticipate that the PowerBuoy will be delivered in the spring of 2020. We also announced that OPT's wellhead monitoring study was approved for operational use by the customer, a leading offshore oil and gas operator. The engineering design study results provided a comprehensive solution for monitoring deepwater wells during decommissioning in the Gulf of Mexico using PowerBuoys. This represents the first phase of work with the next step being potential deployment in the Gulf of Mexico under the existing framework agreement. In August, we deployed a PB3 PowerBuoy in the Central North Sea for Premier Oil. The PowerBuoy has been providing remote, unmanned, autonomous surveillance and monitoring services at their Huntington field offshore operations in extreme conditions with average wave heights approaching 20 feet. Our PowerBuoy deployed in the Adriatic Sea for Eni recently marked a full year of continuous operation. In late October, our technology was introduced to Italian Prime Minister, Giuseppe Conte, who was on-site at Eni's offices in Ravenna, Italy, learning how the PB3 PowerBuoy fits into Eni's global strategy of decarbonizing its oil and gas operations using our renewable technology. Our business employs some of the most innovative engineers and technicians in the industry. In 2020, our team expects to release 2 new products, our hybrid PowerBuoy and our Subsea Battery Solution. We believe that these 2 new products will expand our addressable markets. First, by allowing us to provide more comprehensive solutions to our customers using these new products, which are highly complementary to the PB3 PowerBuoy. And second, by allowing us to provide solutions for brand-new market segments and in brand-new geographies. We've also expanded our commercial team in meaningful ways by the addition of sales and business development in Europe and North America. In November, we announced the addition of Mr. Jeffrey Wiener as our new Vice President of Global Sales. Jeff brings decades of sales leadership in commercializing power generation and energy storage systems, and he's already making significant strides in reducing our sales cycle as well as bringing new and innovative ways to market and price our products and services in order to pull forward potential customer orders. We expect that these changes in products, people and processes will accelerate our path to revenue ramp, while at the same time, dramatically expanding our total addressable market.

Matthew Shafer, CFO

Thank you, George, and good morning, everyone. We recorded revenues of $204,000 in the second quarter of fiscal year 2020 ended October 31, 2019, compared to $141,000 of revenue for the second quarter of last year. This increase in revenue generated from our contracts with Enel Green Power, Premier Oil and the U.S. Navy. Cost of revenues decreased $349,000 to $288,000, as compared to $637,000 in the 3 months ended October 31, 2018. Cost of revenues for the 3 months ended October 31, 2018 included higher upfront spending and material costs on new customer projects at that time. The net loss for the second quarter of fiscal 2020 was $3.2 million as compared to a net loss of $3.9 million for the prior-year period. This decrease in net loss was mainly attributable to lower cost of revenues and decrease in engineering and product development costs. Revenue for the 6 months end of fiscal 2020 was $406,000, an increase of $234,000 as compared to $172,000 for the prior-year period. This increase was attributable to revenue generated from our contracts with Enel Green Power, Premier Oil and the U.S. Navy. Cost of revenues decreased $125,000 to $655,000 as compared to $780,000 during the 6 months ended October 31, 2018. This is a result of decreased costs associated with lower spending on our Eni and Premier Oil projects offset by spending on new projects as compared to the same period in fiscal 2019. The net loss for the first 6 months of fiscal 2020 was $6.2 million as compared to a net loss of $7.1 million for the prior year period. This decrease in net loss was mainly attributable to lower cost of revenues and decrease in engineering and product development costs, as well as a decrease in selling, general and administrative costs. Turning now to the balance sheet. Total cash, cash equivalents, and restricted cash were $11.4 million as of October 31, 2019. That's down from $17.2 million on April 30, 2019, which is our year-end. Net cash used in operating activities during the 6 months ended October 31, 2019, was $6.4 million, a decrease of $1.2 million as compared to $7.6 million during the 6 months ended October 31, 2018. On October 24, 2019, the company entered into a new common stock purchase agreement with Aspire Capital, which allows for OPT to put up to an aggregate of $10 million of shares of the company's common stock to Aspire Capital for purchase over a 30-month period.

George Kirby, CEO

Thanks, Matt. Before we move on to Q&A, I wanted to close on the following points. We've made and continue to make moves today that we believe will drive growth for OPT in the near term and for years to come. We believe we have a very strong team and compelling products and services, and a sales strategy that is set to capitalize on big opportunities in our addressable markets. We see plenty of reason for optimism. I believe that we've turned the corner in terms of bookings and anticipated fiscal year revenues. And we're leveraging our strong track record of operational performance to further ramp revenues. We continue to execute for our customers, which we know is essential to sustain growth and strong financial performance. As always, as we enter into the holiday season, I want to thank our wonderful team at OPT for their contributions to our ongoing success throughout the year, and thank you all for joining us today. For those who didn't have a chance to see our PB3 PowerBuoy deployment video as well as footage of it in action, I want to invite everyone to watch our YouTube channel for some terrific footage and follow us on social media, including LinkedIn, Facebook and Twitter. With that, we welcome your comments and your questions.

Operator, Operator

Our first question is from Peter Ruggiere from Dawson James.

Peter Ruggiere, Analyst

Hope everybody is ready for the holidays. I have a couple of questions while going through the highlights. Can you hear me?

George Kirby, CEO

Yes.

Peter Ruggiere, Analyst

Okay. Regarding the Gulf of Mexico, you mentioned it was approved. My question about the presentation is about your headquarters in Texas and the two companies, Anadarko and Exxon. Which one did you work with for the employment, deployment, or contract?

George Kirby, CEO

That's a good question. We've been asked not to disclose the company's name. However, you're correct that the study we completed over the summer was accepted and approved by this customer. They take our solution and roll it out across their operations. Since we have a framework agreement with them that covers both services and products, we hope to be able to proceed to the next steps with this operator.

Peter Ruggiere, Analyst

How many PowerBuoys do you anticipate is possibly there?

George Kirby, CEO

With one single customer, right now, we have line of sight to definitely more than one. It could be as high as 5, 6, 7. It really depends on how they want to approach their challenges. But the good news is that the PowerBuoy solution as well as utilizing other solution functions have all been approved for use by this customer.

Peter Ruggiere, Analyst

That's great. A question about the balance sheet. If I take $11.4 million at the end of October, how much would I get if I divide it by how many shares? Is it around 6.2 million shares? Or...

Matthew Shafer, CFO

Yes. So Peter, you're asking what is our number of shares outstanding?

Peter Ruggiere, Analyst

Right. If I look at cash value without warrants right now because I get $1.83 a share, and we're trading at under $1 now, which is kind of ridiculous as far as I'm concerned.

Matthew Shafer, CFO

Right. So our shares outstanding is about 6.5 million. So maybe you're using 6.2 million.

Peter Ruggiere, Analyst

I have 6.5 million shares, so that's $1.75. This is for George. A few conference calls later, you all are still progressing with MES and Mitsui Engineering. But wasn't there a Latin company in Asia that might possibly have an order in the works?

George Kirby, CEO

We are discussing several opportunities in Southeast Asia, particularly with an island nation that is considering a significant order. Island nations often have extensive coastlines to protect and this specific nation is focused on combating illegal fishing and trafficking with very limited resources. They need to enhance their surveillance and monitoring capabilities using unmanned systems. While satellite imaging can help, it only provides a limited view. Our PowerBuoy offers them real-time data, not just sent back to shore but also to vessels on the water that can intervene in illegal activities. This presents significant value to the end user that has not been available until now. They have become aware of us, and we are actively engaging with them to pursue this opportunity.

Peter Ruggiere, Analyst

That sounds great. Regarding MES, what is happening with them?

George Kirby, CEO

In our discussions with MES, we are concentrating on identifying the core areas of opportunity. Besides the Southeast Asia prospect I mentioned, our primary focus is on the North Sea and Gulf of Mexico. We are evaluating ways to enhance our efforts in these markets that are generating immediate revenues and opportunities, and we are actively pursuing them. Japan is also a significant market for us, and MES has been a valued advocate and customer. However, we are uncertain about the immediacy of the opportunities there. Therefore, we are staying highly focused on where we can generate revenue in the short term while continuing our conversations with them.

Peter Ruggiere, Analyst

What are the chances of manufacturing a number of these? Do you have plans in place if you receive an order for 50 units?

George Kirby, CEO

Yes, that's a valid point. Before, Matt discussed how we've managed to lower our net loss and consistently cut costs, which is crucial and something we are always working on. This is a growth narrative. Over the years, we’ve invested in the right talent, processes, and, in some cases, the right systems to prepare for significant orders. We have already established a supply chain capable of fulfilling large orders. Regarding the Southeast Asia opportunity I mentioned, we are quite confident that if we secure an order, we can deliver on it as well as on future orders from that customer. We believe it’s essential to invest in our operations while simultaneously building demand and expanding our markets. We truly think we have reached a turning point. We are beginning to see our figures improve, and we notice real demand emerging from our pipeline. We have an outstanding sales team and a complete internal focus on sales. Every individual in our organization is dedicated to sales. Beyond delivering for our customers and fulfilling our responsibilities, every team member is committed to either supporting or engaging directly with customers.

Operator, Operator

If there are no further questions at this time, I will turn the floor back over to management for any additional or closing comments.

George Kirby, CEO

Thanks, operator. Before we conclude here, I really want to thank everyone who's been a stakeholder in the company, including our employees, our customers, our vendors and our loyal shareholders. Have a wonderful holiday season, and we'll talk to you soon. Thank you.

Operator, 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.