Ocean Power Technologies, Inc.

Greetings and welcome to the Ocean Power Technologies Fiscal Year 2025 Q1 Earnings Conference Call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Chief Financial Officer Bob Powers. Please go ahead, sir.

Thank you, and good morning. After the market closed yesterday, we issued our earnings press release and filed our quarterly report on Form 10-Q for the period ending July 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 the 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. we posted an updated investor presentation on our IR website. Please take a moment to review it as it provides a nice full review of our company and strategy. Now, I am pleased to introduce Dr. Philip Strappett.

Thank you, Bob. Good morning. We appreciate you joining us. The first quarter of fiscal 2025 saw us continue to make significant progress towards positive cash flow in calendar year 2025 for our company. This quarter saw us advance several strategic partnerships with established and highly reputable companies, materially reduce our operating expenses, progress our technical advancements to support further commercial growth, and build upon the significant increase in pipeline we achieved during fiscal 2024. Today, I will focus on the significant developments occurring recently and the resulting confidence they provide toward achieving our goals for fiscal 2025. First, we recently announced that we completed more than four months of offshore testing of our next generation power buoy in the Atlantic Ocean of New Jersey. This solar and wind power equipped next generation power buoy was equipped with our proprietary artificial intelligence capable Mero suite of solutions. The system maintained 100% data uptime and the state of charge of the batteries remained over 90% throughout the deployment. During the deployment, Several intelligence, surveillance, and reconnaissance demonstrations for potential customers were completed. Additionally, in May 2024, we announced we were approaching 15 MWh of renewable energy production from our family of power buoys. The just-mentioned deployment of our next-generation power buoy off the coast of New Jersey materially accelerated average energy production by combining solar, wind, and wave energy production capabilities. Our energy production numbers show that non-grid connected marine energy production is not just for the R&D community, but is a commercially available solution. Finally, we recently announced our patent application for our docking and recharging buoy technology, specifically designed for the WAM-V. This advanced system has already been successfully demonstrated, showcasing its potential to revolutionize the operational efficiency of autonomous marine vessels. This development aligns with our broader strategy to enhance the functionality and versatility of our MEROS platform, bringing artificial intelligence capable solutions to the ocean, thereby expanding our market reach and supporting a variety of customer needs. Each of these innovations stands as a testament to OPT's dedication and leadership role in supporting the security and protection of global waterways and positions us to capitalize on the expected growth in these areas while solidifying the company's unique position as a groundbreaking systems provider. In addition, we advanced strategic alliances with a number of complementary industry leaders. In August 2024, we announced the signing of the latest of four new reseller agreements targeted supporting global critical services. These agreements include opportunities for partnering with allied nations in areas like the South China Sea, previously announced efforts in Latin America, and the Middle East, and servicing global commercial markets. We also announced additional developments in our integration of AT&T's 5G systems for our power boots, most notably for the deployment of the Naval Postgraduate School and the integration of Teledyne Marine's industry-leading suite of underwater sensors. These partnerships provide the amplification for us to proactively serve the demand for our autonomous maritime technologies. We believe these partnerships will further accelerate our growth and drive additional revenue streams. We look forward to further strategic partnerships in the near future that specifically focus on supporting our expanding efforts in Latin America and the Middle East. Finally, as Bob will detail momentarily, during Q1, we realized the initial benefits of the significant cost reduction activities we implemented at the end of fiscal 2024. including significant reductions in cash burn and operating expenses. In closing, our business is performing well. As a result of the foundation and opportunities I've just described, we remain on track to achieve our previously stated goal of attaining profitability during the fourth quarter of calendar 2025. Now I will hand it over to Bob to discuss our financial performance in more detail.

Thanks, Philip. Let's begin with revenue. In Q125, our revenues were $1.3 million, in line with the $1.3 million in revenue we experienced in Q124. A number of opportunities in our backlog experienced delays beyond our control, and these are now expected to be realized in Q2 and Q3 of FY25. Our pipeline stands at approximately $92 million and represents the largest pipeline in the history of the company. Our operating expenses for Q125 amounted to $4.9 million, a 39% decrease as compared to the operating expenses last year. This reduction was the result of headcount optimization, material reductions in third-party spend, and efforts to tightly control and contain costs. As for the net result, we reported a decrease in our net loss of over 35% per Q125. primarily driven by the decrease in operating expenses I just noted. Finally, our backlog at July 31st, 2024 stands at $5.3 million, a 71% increase as compared to the $3.1 million in the prior year. A significant portion of this increase is driven by our previously announced recent expansion into Latin America, as well as the recurring revenue to be generated under long-term leasing contracts. On the balance sheet front, our combined cash, restricted cash, cash equivalents, and short-term investments as of July 31st, 2024 totaled $3.3 million as compared to the $26.9 million balance for Q1-24. Notably, we continue to maintain a debt-free balance sheet with no bank debt in our financial structure. In terms of cash flows, The net cash used in operating activities for the first quarter amounted to $6.1 million. This primarily reflects our net loss, the payout of employment bonuses accrued during fiscal year 2024, and the payment of the earn-out accrued during fiscal 24. Investments and inventory necessary in order to satisfy the increase in backlog previously noted, as well as our planned growth and revenue for fiscal 2025. 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 fiscal 2025 first quarter 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'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one at this time. One moment, please, while we poll for questions. Our first question is coming from Jeff Graham from Alliance Global Partners. Your line is now live.

Morning, guys. Morning. First question on the pipeline. Can you guys maybe peel the onion back a little bit more? What do you guys kind of attribute the main drivers for the continued increase there? And also related, I guess, curious if you can touch on, you know, perhaps how the sales team has evolved I don't know, either in terms of size or approach, maybe over the last few quarters or year that might also be driving that pipeline growth.

Yeah, Jeff, good morning and thanks for the question. I think there's a range of factors. I mean, there is one is broader geopolitical factors that impact an increasing demand for autonomous ocean security and ocean monitoring systems. And I think that's on the defense and security side, you see it every day you look at the news. There is also on the domestic side, an increasing appetite and funding available from our government to help support standing up the next generation of autonomous systems to be deployed within the US warfighter community. So that's on the geopolitical side. I think on the other side, What we have done over the past few years is making sure that our systems are ready, commercially available, and able to be dropped into exercises where we can then showcase their capabilities to the end user community and then drive that growth forward. So that's on the defense and security side. There is also an ongoing desire for anybody operating offshore to lower their OPEX, lower CAPEX requirements, and get access to more ocean data at a much lower cost point and with less carbon emissions than would have been done through traditional means. When all of those factors combined are helping us keep on increasing the backlog at the same time as we are maintaining revenues, gross margin, and lowering our overall burn. To the other point on the sales team, one of the big evolutions that the sales team has gone through is that we have a sales team that is focused and understands the US government, defense and security, overseas government, and also understands the kind of the overall marine technology sector. And because of that, they are able to help create solutions that our end customers can then take to their end customers and help have that integrated. And I think all of that combined is what keeps on growing the pipeline and helps us convert pipeline to backlog, which we're excited about, then will lead to increased revenues.

Great. I appreciate all those details. And with respect to the orders and the guidance you guys put out last quarter, I don't know if you just closed orders explicitly. I kind of backed into a number maybe a little short of $2 million for the quarter. I guess first, does that sound about right? And then I just wanted to make sure you guys still feel good or on track about that order guidance for this fiscal year.

Yeah, we still feel good about where things are heading and trending. You've seen the increase in backlog from what we had at the beginning of the fiscal year. So we've increased backlog. But we also maintained revenues versus this quarter a year ago. So I think combined with those efforts and with what we're seeing in the growth in the pipeline, we feel good with where we're heading.

Perfect. If I can just sneak one more in. OpEx obviously came down pretty nicely year over year. Is there anything left to do on that front or is that kind of a reasonable steady state to think about going forward, at least in kind of the near medium term?

Yeah, I think we've done a lot of the hard work that was required to really bring OPEX down. I think you will see potentially some marginal fluctuation, but that's really going to be due to embedding and having full quarter effects of the last efforts that were implemented. And we continue to make sure that we manage and contain costs tightly.

Perfect. Thank you guys for the time. Thanks, Jeff.

Thank you. Next question is coming from Sean Severson from Water Tower Research. All right.

Thanks. Good morning, gentlemen. Morning, Sean. I was looking at the new deck. You have a slide in there about market capitalization upside. My question kind of relates to the commercial readiness of the sector overall. I know you put some different sectors in there and talked about market valuation, but my question is more about where do you compare and contrast in terms of your commercialization inflection point, let's say, right, versus some of these other companies that are in the industry? Again, many of them are private. I don't think investors fully know or understand where they're at. So can you give us some color? on where you are in the greater scheme versus that comp group, let's say.

Yeah, thanks, Sean. I appreciate the question. Where we see OPT, and you look at it, Jeff just asked the question, and you've seen it in our numbers, the pipeline continues to grow, but the backlog continues to grow. We've achieved a good level of gross margin So from a commercial readiness perspective, we're ready, the systems are there, and the demand signals are there. And it's no longer demand signals. The demand signals are being converted into actual backlog and then into revenues. I think when you're looking at what's going on in the market in general, I think the market overall is very ready, and there is a good combination technologies that is available commercially in the market, particularly on the autonomy side. I would say that on the buoy side where we're at, you know, we feel strongly that, you know, the systems we have are commercially deployable and ready. And we're seeing that through the projects like, you know, the further advances we are making with Naval Pitch Graduate School and AT&T. with the efforts that we've got ongoing with the buoy that we're shipping to the Middle East. You know, those are all really encouraging because what those show is that those are projects now being done through third parties that are not grant funded. You know, this is actual use cases for these systems being deployed. And I think, but probably because, you know, to the other part of your question, there's probably less of visibility into what goes on in the public markets, mainly because there aren't many ocean technology providers that are on the public side. So I think, you know, we feel good about where we are commercially. We think it is a very robust market with a large TAM and we feel comfortable and confident in the growth that we're seeing and that it will continue to accelerate and help deliver value for all of our shareholders.

Thanks for that, Phillip. And next question is a long-term modeling question. As we're trying to build out, you know, as the pipeline and backlog starts to convert, trying to understand what the mix of the business, whether it's a targeted mix of the business would look like between data as a service and equipment sales. So, again, this is from a long-term modeling perspective, trying to understand what you think the business would look like when it's matured a bit more and in full commercialization scale?

Yeah, I think let's look at this, take a step back from that and let's look at really what the end customer industry mixes. I think we see about 50 plus percent of the business being in the defense and security side. you know, and the balance really being on commercial with a little bit of research and science type work. And it's going to vary across those segments. And if you're looking at the commercial side, that is a strong and robust long-term leasing model. You know, we're very pleased and thankful for the partnership we have with companies like Samara, who've got several of our systems on long-term leases. You know, that is a great, recurring revenue business where we're layering in maintenance into that and it helps both sides of the equation. Then there's others where we're doing long-term leases during exercise phases for defense and security customers. And I think then what we're going to start seeing is increasing sales to defense and security customers, particularly on, I think, on some of the buoy sites, but then with additional service layered on top of that. And that's really going to come down to the fact that, you know, if it is short-term deployments for monitoring, yeah, that's probably going to be leased. If it is long-term deployments into a specific region for a specific customer who wants to own it and have it in that region, that's going to be a sale. And as we've said before, sales is what's going to help us scale up quickly and But the lease model is what's going to give us the long-term free cash flow and healthy margins that we're all looking forward to.

Thanks. My last question is on the technology roadmap. And I'm fully aware that you guys have – you've already made significant investments. The technology is there. It's commercial. But when you look out to the future, Philip, what do you see as – you know, a couple other points where you think, well, if we could do this or we could do that to improve it maybe, you know, not necessarily reinventing the wheel, but do you have things that you're focused on for technology improvements over the next 24 months?

Thanks, Sean. Yeah, it varies. I mean, obviously, we never stand still. You know, our customers know that we are continuously working on integrating any feedback they have from having operated our systems in regions where we haven't previously operated or towing systems we haven't previously towed. And then we'll issue it field service bulletin, and then we'll work through some continuous improvement program, and then we'll provide additional maintenance systems, say, for example, at a later stage. At the bigger level, You know, we obviously, we just announced that we completed the four months of offshore testing for the next gen power buoy. So I think that's obviously, you know, we're really glad that that performed, you know, above and beyond any expectations that we had. We are continuing to work on the integration of the remote charging and docking opportunities. And I think that that is really exciting because that is what's going to enable collaboration, not just with our systems, but with a whole range of autonomous systems out in the ocean. Imagine a system where you have buoys deployed that essentially act like charging stations out in the ocean, and then you have a range of autonomous vehicles, initially ours and later on others, that can go and do their work, come alongside a buoy, charge up, offload the data, the data gets processed, and then you retask it. At that point, you really start moving into autonomous offshore operations. You know, we've already got, you know, we already announced that we filed a patent for the remote charging and docking systems. And we look forward to continuing working on integration in this kind of system of systems approach for autonomous ocean technology that uses zero or low carbon production.

Great. Thank you.

Thanks, Sean.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Thank you for being a shareholder and for supporting our ongoing growth and execution of our strategy. We look forward to continuing to deliver for you, our customers, and all of our stakeholders. Thank you and have a great day.

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