Ocean Power Technologies, Inc.

Good morning. Welcome to Ocean Power Technologies third quarter fiscal year 2022 conference call. A webcast of this call is also available on the company's website at oceanpowertechnologies.com. This conference call is being recorded and will be available for replay shortly after its completion. On today's call are Dr. Philip Stratman, President, Chief Executive Officer of Bob Powers, Senior Vice President and Chief Financial Officer, and Joseph DiPietro, Controller, Treasurer, and Principal Accounting Officer. Following their prepared remarks, there will be a question and answer session. I am now pleased to introduce Joseph DiPietro.

Thank you. After the market closed on March 14, 2022, OPT issued its earnings press release and filed its quarterly report on Form 10Q, for the quarter that ended January 31st, 2022. All OPT public filings are available on the SEC website at sec.gov or within the investor relations section of the OPT 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 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 most recent Form 10-K and subsequent filings with the SEC. The company disclaims any obligation or intent to update the forward-looking statements made on this call. Now I am pleased to introduce Dr. Philip Stratman.

Thank you, Joe. Good morning, and thank you for taking the time to join us for our business update. I will start with a broad overview of our strategy. We're moving fast, and I want to make sure everyone fully understands what we are doing, why we're doing it, and where we are heading. I feel that it is important since we've added several new revenue streams to what we've been known for in recent years, the power booty. Our vision is to be the first company that someone thinks of when it comes to monitoring assets or areas in our oceans. This vision is bold and our recently expanded business strategy has three main components. First is data as a service. Here we are providing robust data to customers. We believe long-term that this will be the part of our strategy that is our largest recurring revenue producer. We can do this through our maritime domain awareness software and WAMV autonomous surface vessels. Our MDA software in development will be used with our power buoys and WAMVs. Plus, it can also work with other vessels, offshore assets, and structures to provide real-time data. Applications for tracking and monitoring include illegal fishing, crude oil theft, and national security. Second is power as a service. We will continue to manufacture and upgrade our category leading power buoys, which can be leased or owned. For example, we're making iterative design changes to our hybrid power buoy to increase solar power conversion capabilities and improve stability. We're also developing the next generation power buoy with the development of the mass on spring wave energy converter, or what we refer to as MOSWAG. We're in the final stage of the phase one study for this development, with the US Department of Energy, and we've already commenced scoping our submission for phase two funding that would bring us closer to a first of a class system if granted. We're currently targeting a late fiscal 2023 completion date of this development. Finally, is our strategic consulting services. We will continue to provide the most robust offering of consulting services available to those who do business in the oceans. As noted on our last call, activity for offshore energy related engineering consulting services has been steadily ramping back up as companies restart exploration and production projects that paused during the pandemic. We are also broadening our non-oil and gas services, including the delivery of our first WIMP farm support project. OPT's Strategic Consulting Services team is also increasingly in demand to provide expert engineering analysis on legal matters. Our highly respected engineers use data analysis and proprietary simulation techniques, to model vessels and equipment using environmental and other case-specific data to simulate incident conditions. With that as an overview, I'd like to take you through an update of each component of our growth strategy in a little more detail. Ocean intelligence is at the core of data as a service, and it's a component of our strategy that we believe has the most opportunity long-term. In the short term, recently acquired marine advanced robotics will drive a significant portion of our revenue growth. Not only did the existing team come over to us, but so did the existing customer base and customer pipeline. We now have autonomous roaming assets in the 1V to provide intelligence and data to customers. This includes the hydrographic survey market, providing customers with critical seafloor data nearshore in ports and harbors, far offshore in shipping lanes, and wind farm development sites. It can also include defense and security maritime domain awareness applications. For example, WAMVs can identify suspicious vessels, patrol security perimeters, and inspect objects of interest. Longer term, we expect to provide robust, reliable data through our autonomous maritime domain awareness software in development with software and integration experts such as Fathom5 and GreenSea. We identified this need over the course of the past two years in working with our targeted customer group. There is significant demand from commercial entities and government agencies. who are monitoring areas offshore and want to do so without the need for crude vessel or the human capital, which significantly increases the costs. We believe we can deliver a better solution that reduces the ongoing cost considerably and takes out human error. Examples include offshore national security efforts, enforcement of fishing activity and marine protected areas, protection of shipping lanes, and prevention of crude oil theft. Our proprietary cutting-edge system will interact with multiple hardware sources, It can be mounted on power buoys, WAMVs, platforms, vessels, or elsewhere to provide real-time analytics about activity in a designated area. Beyond the capabilities to track vessels and capture and store evidentiary vessel data in the cloud, including radar and video, our software will facilitate the integration of public and private third-party data sources and analytics. This capability can only further enhance the site-specific information and data for a customer. Our investment in continuous improvement cycles of the software will be ongoing. We expect a strong return on this investment through monthly fees for this data. This is valuable data with high interest, and we're currently building the customer pipeline to support its launch. Other data intelligence we can collect and provide includes ocean environmental condition monitoring, weather data collection, mammal tracking, and additional sensor-based information critical for a broad range of needs. from wind farm development to ensuring the vitality of marine protected areas for future generations. Our value proposition is strong, since we can do this autonomously with sensors and software, eliminating the use of carbon-producing vessels and crews, which are very expensive and have varying degrees of human risk. We believe our data-as-a-service business directly addresses the single biggest hurdle we have to ramping up sales of power buoys. Buying cycles for our platforms are generally very long, especially in end markets with government involvement or dependent on the primary projects to be developed, such as oil and gas projects. Our data as a service models are closer to subscriptions, where the monthly fee is significantly lower, which we believe will speed up the decision-making process for our customers and result in a materially bigger customer pipeline. For this reason, we are focusing on creating a leading-edge maritime domain awareness offering that combines autonomous, low-carbon OPT hardware and proprietary OPT software. We are continuing to refine system operation with continued ocean trials off the coast of New Jersey with PB3 and hybrid power buoys before moving on to future incorporation of WAMVs. The integration of marine advanced robotics continues diligently and remains on plan. We've recently added and continue to actively recruit additional staff to accelerate fulfilling the backlog and delivering on the growing pipeline. Interest in WAMVs remains high and it's why we pursued this acquisition. Marine Advanced Robotics contributed $257,000 to revenue in the third quarter. We expect this line of business to ramp and contribute approximately $2 million to our revenue in fiscal year 2023. The immediate response we have seen for WAMVs with our customer group has been strong and gives us even more confidence about the long-term opportunity MAR gives us. To meet this initial demand, we currently have approximately 20 WAMVs being built. Power as a service is where we have most of our legacy business. Our autonomous power buoy platforms convert wave energy or solar energy into electrical power for offshore applications and payloads. Producing and delivering that power to the end user is a service OPT provides via the power buoy and subsea battery platforms, which could be sold or leased to a customer. But again, these buying cycles are long and unpredictable. Therefore, we recently expanded our service offering here based on customer feedback. We now have a model where the power buoy or subsea battery platform is owned and operated by OPT or an affiliate who then sells the power produced to the customer for a recurring fee. Additional services can also be built into sales and leases, including routine maintenance, specialized integrations, and hardware and software updates. The revenues for this service are in the $20,000 to $30,000 per month per buoy range. Finally, in addition to expert witness services, OPT strategic consulting services provides engineering and design services for oil and gas, wave energy, and offshore wind customers, such as drilling contractors, defense contractors, construction yards, and engineering and service firms. Our dedicated team has expertise in structural engineering, hydrodynamics, and naval architecture, applied to services including simulation engineering, software engineering, concept design, and motions monitoring, all of which help our customers increase operational efficiencies and reduce risk. We are quickly becoming known as a very effective firm to help address a wide range of issues for companies with their ocean assets. I want to switch gears now and provide you with an update on several of our important projects in process throughout the world. First is our project in Chile, which we classify as data as a service. We have team members on site this week finalizing our work for our customer there, which was delayed due to COVID-19 and recent inclement weather. If everything goes well, we should complete work this quarter and have full acceptance from the customer. We're discussing ocean monitoring with other entities as a result of our work in Chile. Another data as a service project is our work with the U.S. Naval Postgraduate School's SLAMA initiative to support its autonomous offshore defense network initiative. Like most initiatives involving government agencies at home or abroad, most of the information is classified. Well, we believe we provide an incredible value proposition to government agencies with our technology and teams and look forward to additional projects like this. Based on the business drivers of data, power, and strategic consulting services, we're very optimistic about the future of OPT. We believe that there are solid opportunities for business growth and creating shareholder value and that we're on the right path for making that happen. With that, let me turn the call over to Bob to discuss the financial results in more detail.

Thanks, Philip. I will start my comments with my initial observations of our finance function since I now have my first quarter under my belt. I have been pleased by what I have seen to date. This is not a situation that needs an overhaul or a big fix. The team is lean and strong. We have an excellent balance sheet, and the process and control environment met my expectations for a company our size. But as with everything in business, if there is a vision, things can become even stronger. The company's strategy is bold and achievable. Our number one job within finance is to make sure we stay a step ahead and to ensure we can scale and provide the analytic visibility to our sales and operations teams to drive growth. It has not been lost on me that revenue traction has been slow over the years. However, I joined OBT because I see where Phillip and the operations teams are heading, and it is exciting. Our finance team will continue to work hard to maintain strong cost management and optimal visibility to our sales pipeline. Moving to our financial highlights during the quarter, I'll start with revenues. Revenue for the third quarter of fiscal 22 increased to $484,000 compared to $317,000 in the third quarter of fiscal year 2021. As Phillip mentioned, this is due to revenue contributed by Marine Advanced Robotics following the acquisition and continued growth of our strategic consulting services. Due to lower project costs, Engineering and product development costs were down sequentially $617,000 from the previous quarter. As you can appreciate, projects like our MDA software development do not come in at the same level each quarter. Omicron resulted in some slowdowns in the third quarter due to absenteeism. Generally speaking, we expect our engineering and product development to be somewhere between the second quarter and third quarter levels over the next few quarters as we advance this initiative. SG&A cost increased by approximately $925,000 from the third quarter of fiscal year 2021 compared to the third quarter of fiscal year 2022, primarily due to approximately $300,000 of costs related to our acquisition of marine advanced robotics and an increase of approximately $225,000 to share-based compensation. We expect SG&A to be around $2.3 million near term. We continue to operate with a strong balance sheet, ending the third quarter with $63.9 million of total cash, cash equivalents, and restricted cash, and no bank debt, which continues to give us significant flexibility to drive our strategy. Regarding our near-term plans for the use of cash, we continue to expect to use approximately $5 million of cash per quarter to cover our operating expenses. Additionally, we will continue to look for tuck-in acquisition opportunities that reinforce the three components of our growth strategy. Now, Philip and I are happy to take your questions. Operator?

Thank you. We will now be conducting a question and answer session. Please press star 1 on your telephone keypad to join the question queue. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you want to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Once again, that's star one to ask a question at this time. One moment while we poll for questions. Our first question is from Jeffrey Campbell with Alliance Global Partners. Please proceed.

Good morning. Philip, you've guided approximately $2 million in WAMV revenues for fiscal year 23. I was just wondering what sort of work supports this revenue during the fiscal year?

Thanks for the question, Jeff. Good morning. Good to hear from you again. The primary efforts that the WAMVs are being used for is hydrographic survey efforts when it comes to the smaller WAMVs. And it is government and defense work when it comes to the 16 and 22 footers that we're building out.

You mentioned that 20 WAMVs are being constructed. Let's try to think of that in terms of what you have currently. What's the size of the current WAMV fleet? What sort of units are you building in terms of size and Are any of these units part of your 2023 guidance for the division?

Yep. So the current fleet is about a handful, just because of the size that MAR has been operating at prior to the acquisition. In terms of where we're going, we took a deep cut of the various proposals that were sitting in MAR's pipeline. And on that basis, our building – 8s, 16s, and 22s, but with a preference towards the 8s. And yes, you are correct. The 20 vehicles that we're building out are featuring into the 23 guidance so that we can go and enable recurring lease revenues from the fleet.

There's a significant amount of offshore wind development beginning to gather steam in the eastern U.S., Do you see ocean power having any meaningful prospects in that area? And if so, could you point out which tools would be most applicable to this area?

Yeah, so actually to that point, I'll be testifying in front of the New Jersey legislature on Thursday morning as part of New Jersey's broader efforts for wind power and ocean technology writ large and how wave power features into that mix. Our primary effort on wind development is actually for both sets of our primary products, which is the power buoys to do monitoring of lease sites to ensure that developers know who's going in and who's going out, doing hydrographic survey development with the WAMVs, And then longer term, you know, obviously looking at supporting inspection, maintenance, and repair intervals with surface vehicles and with buoys. But obviously with those developments a few years out, that's going to come down the line. But in the very near term, there is site monitoring and surveillance that is going to occur.

Okay. And then Bob mentioned some interest in tuck-ins. As time goes by, I was just wondering, are there any significant business left to add to the Marine Domain Awareness Toolkit, or do you expect the business to start to score some customer wins as currently configured?

The business can and will score customer wins as currently configured, but obviously we have an active business development process. going on, and we continuously look for opportunities to add to what we have in our toolbox to make us even more attractive for the customers and accelerate revenue growth further. Okay. Thanks very much for the call.

No, thank you, Jeff.

Our next question is from Robert Savella with RE Savella. Please proceed.

Hi. Thanks for taking my call. My first comment is thank you for telling us an update on the Chili Boy and that it is getting to the point where it can generate some significant revenue. Do you have any other applications out there that are approaching that kind of a point?

Thanks for dialing in, Robert, and thanks for your question. Just to reiterate, you know, the top revenue-producing projects that we currently have, obviously there are the efforts with EGP in Chile, which is doing data as a service. There is the ongoing MAR revenues for RAMVs. And, you know, as we said, we see that in terms of a $2 million guidance for FY23. We are... finishing the Power as a Service project, which is the MOSWEC efforts for the Department of Energy, and are currently working on our submission for Phase 2, which would be a material driver of the development of that system. And we're currently priming to have our MDA software in the next generation that we have, going into the water off the coast of New Jersey, and we've got several government agencies that are already booked to witness various demonstrations of that system. So that is where we see the bulk of the revenue growth coming from right now.

So that's New Jersey. Okay. You mentioned an application that would yield $20,000 to $30,000 per month revenues. Can you expand on that and how close might that be?

Yeah, essentially it's a shift from what the company has historically been focused on, which is trying to find a market to sell our platforms into. And it's shifting to an effort to lease these platforms on a longer term basis. And by taking a look at how the useful economic life of the assets that we have developed We can, and by building out, you know, having assets on our own books, we are now at a position where we can go and offer customers PB3s and or hybrids and or WAMVs on a lease basis so that it reduces, it shifts the burden from CapEx to OpEx for the customer. The 20,000 to 30,000 specifically is related to PowerBuild platforms. and with a primary focus on the PB3. As you will recall, obviously we've refurbished the buoys that we have deployed in the Mediterranean and in the North Sea previously, so these are now available for customers to utilize and are being specced into proposals right now.

Very good. So do you have any kind of an estimate when that might actually materialize?

I don't want to provide you guidance at this time, but based on the way that we've been expanding the business strategy and the growth in the pipeline that we've been seeing in terms of proposals and discussions, we believe the path is well-defined, and we'll be providing updates on that as they occur.

Very good. You mentioned also a market to monitor crude oil theft. Can you expand on what size of a market that is and how much of that is going on?

Yeah, absolutely. So just to mention crude oil theft in general is a rather large existing issue that exists primarily in parts of West Africa to a large extent. Given the fact that we have a maritime domain awareness system that operates autonomously and alert operators as and when vehicles approach offloading buoys that are otherwise unmanned, that is one of the primary areas that we're focusing on. So it is another example of us utilizing what we have in our toolbox, in this case, maritime domain awareness on the range of platforms that we have, and looking at deploying it into markets where there is a direct need for this type of monitoring application. Oh, great. Okay.

Thank you very much. That's about all my questions.

Thank you, Robert. Appreciate it.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Philip for closing comments.

Thank you. As I said earlier, I am very optimistic about the future of OPT. Our investments in strategic consulting services and innovative autonomous vehicles are truly transformative for this company. I firmly believe that our concentration on developing data as a service capabilities and next generation power as a service platforms will pay off for the company and our shareholders. I truly appreciate your continued support.

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