Earnings Call Transcript - OPTT Q3 2024

Joseph DiPietro, Controller, Treasurer and Principal Accounting Officer

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 January 31, 2024. 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.

Philipp Stratmann, President and Chief Executive Officer

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 as we advance with our plans to enhance shareholder value. Before we delve into the numbers, on February 28, we conducted our 2023 Annual General Meeting. I am pleased to announce that all of the resolutions proposed at the Annual General Meeting were duly passed by our shareholders, including the reelection of all of our Board members by a strong majority of the votes cast. I'd like to thank you for this vote of confidence. The management team we have put together over the past two years has the right skills to take advantage of the market demand, which 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 vehicle order from a Latin American customer and the latest subcontract from a U.S.-based prime contractor for multiple maritime domain awareness buoys. We believe we're well-positioned to reward your confidence and turn this momentum into profitable growth and deliver value for our shareholders. Let's talk about some recent developments. We continue to make progress on our path to profitability in line with our November 2023 announcement that we have substantially completed our research and development phase and are primarily focused on commercial activities. This pivot to commercial activities has enabled reallocation of headcount, resulting in approximately $4.5 million in annual run rate savings on a go-forward basis, and a material reduction in third-party expenditures. The majority of our employees are now dedicated to customer delivery, which includes manufacturing, vehicle operations, and marine deployments. We have built a suite of products and solutions that we believe will be the basis for our current and future commercial success and is driving meaningful progress in backlog, revenue, and profitability, with our pipeline of $77 million increasing over 5X year-over-year. 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. In February 2024, we received multiple orders of fully integrated WAM-V unmanned surface vehicles, also known as USVs, from clients in Latin America, highlighting the wide-ranging capabilities and applications of the WAM-V USVs and heightened interest and trust in our WAM-V technology from clients across the globe. These orders underscore the growing demand for OPT's advanced marine technologies and their applications in maritime surveillance, environmental monitoring, and ocean data collection. Also in February 2024, we received funding from the Naval Postgraduate School in Monterey, California, for a year-long deployment of a PowerBuoy in Monterey Bay. The PowerBuoy, integrating OPT's maritime domain awareness system along with cutting-edge satellite communication and AT&T 5G technology, will demonstrate its persistent surveillance and communications capacities in a maritime environment. This advancement is a testament to the ongoing collaboration between OPT and AT&T. In December 2023, we secured our first multi-buoy letter contract. This is a planned subcontract with a U.S.-based prime contractor to deliver maritime domain awareness solutions for U.S. government agencies. We are currently working on the conversion of the letter contract to a firm order. In addition to these contracts, we also completed several deployments with our WAM-Vs and delivered additional vehicles from our facilities in New Jersey and California. In addition to the aforementioned activities, we continue to see increased levels of commercial demand. The company is positioned well to deliver to our customers in the defense and national security space, and over 20% of our workforce are military veterans. Our opportunity pipeline continues to grow. In addition to the orders I just discussed, we have also continued to add to the top of the pipeline. 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, vehicles, and buoys 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 Q3 2024.

Robert Powers, Senior Vice President and Chief Financial Officer

Thanks, Philipp. Let's begin with revenue. In Q3 2024, our revenues reached $1.8 million, marking an increase of over 2.5X compared to the $0.7 million reported in 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 at $3.4 million year-to-date and growing, with backlog standing at $3.3 million at January 31st, 2024. We continue to expect order activity and revenue to ramp meaningfully throughout the final quarter of our fiscal year. Our gross profit for Q3 2024 stood at $0.8 million, a substantial improvement compared to the Q3 2023 figure, which showed a gross profit of $0.1 million. This improvement is primarily attributed to our unmanned vehicles business, particularly the higher margin WAM-V leasing business. I am enthused about the progress we've made in this area and the expansion of the progress made throughout fiscal 2024. Our operating expenses for Q3 2024 amounted to $8.5 million, and $24.6 million on a year-to-date basis. The year-to-date figure includes approximately $3.2 million in extraordinary expenses related to the company defending litigation and other failed offensive tactics by Paragon Technologies, Inc. to achieve control of OPT without following required applicable legal requirements. As for the net result, we reported a net loss of $6.5 million for Q3 2024 compared to a net loss of $6.1 million in Q3 2023. This is despite the materially higher extraordinary expenses. 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, unrestricted cash, cash equivalents, and short-term investments as of January 31st, 2024 totaled $9.1 million. Notably, we continue to maintain a debt-free balance sheet with no bank debt in our financial structure. In terms of cash flow, the net cash used in operating activities for the first nine months of fiscal 2024 amounted to $24.7 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. In addition to payment of expenses related to Paragon activities as I just mentioned. Finally, you will note that our inventory balance increased by approximately $2.5 million to $3.5 million. This investment in inventory was necessary in order to satisfy backlog as well as our planned growth in revenue for fiscal 2024. That covers our financial update. Before we enter Q&A, I'd like to remind everyone that the purpose of today's call is to discuss our quarter of fiscal year 2024 results as well as our financial outlook. As we head into Q&A, we ask that you limit your questions to these topics. Thank you.

Jeff Grampp, Analyst from Alliance Global Partners

Good morning, guys. Thanks for the time. I was curious first to start on this PowerBuoy contract with the U.S. prime, the $6.5 million or up to that. I'm curious, what are the main variables in play when assessing how much of that is potentially available to you guys? And is there a rough timing that you'd expect to recognize the potential revenue of that project?

Philipp Stratmann, President and Chief Executive Officer

Good morning, Jeff. Thank you for your question. In this case, it pertains to an unnamed U.S. government agency. A letter subcontract is how the U.S. government and its prime contractors finalize statements of work and outline necessary tasks. They then proceed to what the government calls definitizing the contracts. I am currently in Washington, D.C., and ongoing discussions are focused on finalizing the timeline for when this and other contracts will be definitized, followed by the commencement of product shipments. Typically, we will recognize revenue from a non-recurring engineering perspective once the contract is signed and work begins. For sales, revenue is recognized when the products, specifically buoys in this instance, leave our facility headed to customers. In the case of leases, revenue is recognized over time. Generally, contracts are structured so that we get close to the total expected amount. Once definitized, we will provide a detailed release outlining the terms and timelines. I anticipate these contracts will be fairly short-term.

Jeff Grampp, Analyst from Alliance Global Partners

Okay, great. I appreciate those details. My follow-up, I'm curious to dig into, you guys have called out Latin America as a pretty interesting near-term growth market for you guys. I'm curious, is there something specific about either the customer base or the geography and really trying to understand, I suppose, how you can potentially replicate that success elsewhere or maybe even accelerate or grow further in Latin America?

Philipp Stratmann, President and Chief Executive Officer

Yeah. That's a great question, Jeff. Latin America for us is actually an interesting market for us. It's one we haven't specifically targeted previously. As we have grown the solution offering and particularly on the vehicle side, there is a huge appetite in places like Brazil, Colombia, and Mexico to utilize autonomous vehicles for offshore infrastructure surveys. So Latin America so far for us is less of a defensive national security market and is really more focused on offshore energy or for offshore infrastructure survey work. Given the vast expanse of the coastline, if you're looking from the oil-producing regions, you go from Brazil, Guiana, all the way up and into the Bay of Campeche, you end up with autonomous vehicles really being a great solution in order to help the customers there do what they need to do in an environment where cash is constrained and interest rates are high.

Jeff Grampp, Analyst from Alliance Global Partners

That's really interesting. Okay, that makes sense. If I can just sneak one more in, you guys called out the New Jersey State NOL program as a source of liquidity here. Is there a way to handicap how much that can continue to be a source of liquidity over the coming six, 12, 18 months?

Robert Powers, Senior Vice President and Chief Financial Officer

Sure. Thanks, Jeff. It's Bob. Yeah. So there are limits in place with the state of New Jersey. Currently, we have about $4 million left on what we can obtain from the state over the course of the next several years. The amount that we receive on an annual basis is determined by the state. Obviously, our NOLs have continued to add to the amount that we can receive from New Jersey. But at this time, I would expect about $4 million or so over the course of the next several years.

Jeff Grampp, Analyst from Alliance Global Partners

Got it. All right, thank you guys for your time.

Shawn Severson, Analyst from Water Tower Research

Thank you. Good morning, everyone. Philipp, I'm interested in your ability to deploy more WAM-Vs. When you consider longer-term contracts and the deployment of these vehicles for extended periods, how much growth do you anticipate for that business in terms of available capacity? Additionally, how does this relate to the length of these contracts? What are they like now, and what do you foresee for the future? Will these be multi-year deployments, or are they more likely to be six-month arrangements? This is important for understanding the recurring revenue.

Philipp Stratmann, President and Chief Executive Officer

Thank you for your questions, Shawn. Regarding market demand, I believe we are only beginning to explore the potential of USVs. The data supports our view that significant market demand remains for USVs, which includes the WAM-Vs. This is evident across various applications. For instance, our strategic partner Samara continues to grow rapidly, and we've recently announced a deal in Latin America, with more opportunities being explored in the region. Additionally, thousands of vehicles are being built and supplied in areas like Ukraine. The United States Navy is also increasing automation and integrating artificial intelligence into their operations. We foresee substantial growth in demand over the long term. In terms of deployment duration, it varies across two categories. There are long-term supply agreements for customers, often structured as take or pay or lease-to-own, typically lasting one to two years. Conversely, there is also a significant portion of the market where initial customers test one or two vehicles for specific jobs. Many larger contracts we see now often begin with these shorter trials of one or two months, leading customers to expand their orders as they recognize the value. This trend of increasing deployment lengths and rising demand is contributing to our growing profit margins, as highlighted in our Q3 financials.

Shawn Severson, Analyst from Water Tower Research

So it's really the two factors coming together, much more overall demand, right? As time goes on, you expect the length of those contracts to increase, creating this much bigger stream of reoccurring revenue. And obviously that's great business and good margin. So both of these should be happening at the same time, units and length of contracts, right?

Philipp Stratmann, President and Chief Executive Officer

Yeah. I think you're right, Shawn. That goes hand in hand. There is still a materially untapped part of the industry, let's call it the ocean industry in general, where vehicles aren't being used. And to tap into that market doesn't require us to do any material R&D. It requires us to just integrate different deployment tools on our platforms. And I think that's what's exciting. And you saw that with the demonstrations that our team did at Oceanology in London this week. And those different types of sonars and sensing equipment that can be deployed on the same platform that might have done a work with an aerial during a couple of weeks beforehand, or that might have deployed a radio for a military customer at a different time.

Shawn Severson, Analyst from Water Tower Research

Okay, thanks for that, Philipp. Another question, and I won't say too much about it. But for modeling our growth in commercial versus military, should we think about differences in margins, and is military or commercial more likely to have more contracts, right, longer term contracts? I'm just trying to understand the dynamics of the margin growth as these two businesses grow at different rates or separately.

Philipp Stratmann, President and Chief Executive Officer

I believe the margins are quite comparable on both sides. We are beginning to notice an increase in the length of the agreements that our commercial customers are interested in, which has traditionally been more common among defense and national security clients. Additionally, we are seeing growing interest in the buoy aspect of the business, which tends to involve longer-term deployments, primarily within the defense and national security sector.

Shawn Severson, Analyst from Water Tower Research

My last question is about the commercial side, specifically regarding Latin America. Are most of the projects you're involved in new initiatives, or are you replacing traditional practices and solutions with your offerings? Are you being utilized more for new developments and projects?

Philipp Stratmann, President and Chief Executive Officer

Both. In some instances, it involves a new project that may have initially planned to use traditional methods but is now open to different approaches. In other cases, it's about an existing project where a customer seeks alternative methods, leading us to replace a larger, carbon-emitting, fully crewed vessel. This situation offers benefits in terms of lower costs and reduced emissions. So, it's definitely a combination of both.

Shawn Severson, Analyst from Water Tower Research

Great. Thanks and congratulations on the progress.

Philipp Stratmann, President and Chief Executive Officer

Thank you for being an OPT shareholder. We have materially transitioned the company from an R&D product provider and developer to a provider of solutions in the ever-growing ocean technology sector. We look forward to further enhancing shareholder value, and thank you for your trust.

Operator, Operator

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