Q3 2024 Ocean Power Technologies Inc Earnings Call

Participants

Joseph DiPietro; Controller, Treasurer & Principal Accounting Officer; Ocean Power Technologies, Inc

Philipp Stratmann; CEO, President & Director; Ocean Power Technologies, Inc.

Robert P. Powers; Senior VP & CFO; Ocean Power Technologies, Inc.

Jeff Grampp; Analyst; A.G.P./Alliance Global Partners

Shawn Severson; Analyst; Water Tower Research LLC

Presentation

Operator

Good morning, and welcome to the Ocean Power Technologies Third Quarter of 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 today's call are Dr. Phillip Stratman, President and Chief Executive Officer, Rob Powers, Senior Vice President and Chief Financial Officer, and Joseph DiPietro, Controller, Treasurer and Principal Accounting Officer. Following prepared remarks, there will be a question and answer session. It's now my pleasure to introduce Joseph DiPietro. Please go ahead sir.

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 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 am pleased to introduce Dr. Philipp Stratmann

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 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 the 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 then that's a subcontract from a US-based prime contractor for multiple Maritime Domain Awareness buoys. We believe we are 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 it is driving meaningful progress in backlog, revenue and profitability with our pipeline of $77 million, increasing over five times 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 for fully integrated WMV. unmanned surface vehicles, also known as USV.s from clients in Latin America, highlighting the wide-ranging capabilities and applications of the when the USBs and heightened interest and trust in our IB technology from clients across the globe.
These orders underscore the growing demand for OPT's advanced marine technologies and their applications and 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 Power Buoy and Monterey Bay.
The Power Buoy integrating EBITs Maritime Domain Awareness System, along with cutting edge satellite communication and AT and T five G technology was demonstrated 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-boutique letter contract plans subcontract with us the US-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 MVX 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. And in addition to the orders I just discussed, we have also continued to add to the top of the pipeline. We're continuing to grow our revenues and our gross profit margins are increasing. Our strategy is working, and we see additional opportunities for multisystem orders, vehicles and buoys on the horizon.
Now before we dive into the financial highlights, I'd like to introduce our CFO, Rob Powers. Rob will provide you with more detailed information about our financial performance in Q3 2024.

Robert P. Powers

Thanks, Phillippe. Let's begin with revenue. In Q3 24, 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 IB 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 31, 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 '24 stood at $0.8 million, a substantial improvement compared to the Q3 '23 figure, which showed a gross profit of $0.1 million. This improvement is primarily attributed to our unmanned vehicles business, particularly the higher margin when the leasing business. I'm enthused about the progress we've made in this area and the expansion the progress made throughout fiscal 2024.
Our operating expenses for Q3 '24 amounted to $8.5 million and $24.6 million on a year-to-date basis. 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 '24 compared to a net loss of $6.1 million in Q3 '23. This is despite the materially higher extraordinary expenses. We continue to manage our cost tightly, making targeted investments in the personnel and structure needed to support our strategy and plans for growth. As Philip 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 31, 2024 totaled $9.1 million. Notably, we continue to maintain a debt-free balance sheet with no bank debt and 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 employee bonuses accrued during fiscal year 2023 and the payment of the earn-out 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. So 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 the Q&A, we ask that you limit your questions to these topics. Thank you.

Question and Answer Session

Operator

Thank you. We'll now be conducting a question and answer session. (Operator instructions)
Jeff Grampp, Alliance Global Partners.

Jeff Grampp

Your line is now live and one, I guess is the time I was curious first on to just starting this Power Buoy contract with the US prime, the $6.5 million or up to that. I'm curious, what are the main variables in play when kind of 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 that projects.

Philipp Stratmann

Hey, Jeff, good morning and thank you. Thanks for being on, and thanks for the question. So in this specific case, for each one unnamed US government agency and letter subcontract is essentially the way that the U.S. government and its prime contractors work on finalizing statements of work on what would need to be done and then they work on what in government they refer to as definitive contract.
So I'm actually in Washington, D.C. this week and part of the ongoing discussions we're having is finalizing the exact time line of when this contract and others are going to be definitive. And then when we start shipping the products and generally speaking, we will start recognizing the revenues and from a nonrecurring engineering point of view, once the contract is signed and we start doing the work plan in the case of a sale, we would recognize the revenues once the products in this case do is leave the facility and are heading to the customers. And obviously, in case of a lease, they're recognized over time. Generally speaking, we would look at getting these companies.
Generally speaking, these contracts are set at a level that you're going to get very close to that total number, assuming that this definitized, we will end up putting an additional release that shows in a kind of more more details on the terms and the timing for these. But I expect these to be fairly short-term in nature.

Jeff Grampp

Okay. Great.I appreciate those details. But 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. And I'm curious, is there something specific about either the customer base or the geography? I mean 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

Yes. That's a great question, Jeff. And Latin America for us is actually an interesting market for us. It's one we haven't specifically target previously as we have grown the solution offering and particularly on the vehicle side, there is a huge appetite in places like Brazil, Colombia, like Mexico, to utilize autonomous vehicles for offshore infrastructure surveys to Latin America.
So far for us is less of a defense and national security market, and it's really more focused on offshore energy of offshore infrastructure survey work, given the vast expanse of the coastline, if you're looking from in the kind of the oil-producing regions in it, you go from Brazil via Guiana or all the way up and they are competitive. You end up with autonomous vehicles and 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.

Jeff Grampp

That's really interesting.
Okay.
That makes sense. If I can just sneak one more in on the you guys called out the New Jersey state NOL program as a source of liquidity here. Is there a way to handicap kind of how much that can continue to be a source of liquidity over the coming years 6, 12, 18 months

Robert P. Powers

Sure.
Thanks, Jeff.
It's Rob.
Yes, 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. And the amount that we receive on an annual basis is determined by the state and But 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

Got it.
Thank you, guys.

Operator

Thank you.
Shawn Severson, Water Tower Research.

Shawn Severson

Well, thank you.
First of all it, Phillippe, I was curious about the the ability to deploy more when the so when you look at longer, I guess I have two questions in there. When you look at longer term contracts and we and these vehicles are being deployed for longer for longer contracts, how much can you grow that business is kind of available capacity if you want to call it that then that's tied also the question of the length of these contracts, what they are today and what you think they might be in the future, it is going to be multi-year deployments or the six month type drivers to get us get a perspective on that reoccurring revenue, which is so important.

Philipp Stratmann

Yes, Sean, and thanks for being on and both very good questions. I think I think in terms of market demand that we're seeing to go back to your first point, I think we're only just starting to scratch the surface of what is possible with Unisys in a way, we think and I think the numbers bucket is up, that is several orders of magnitude of market demand still to come when it comes to U.S. based which WM. V's fit into.
And you can see that across the range of applications you're seeing, obviously in Samara, which is one of our strategic partners continues to scale at a rapid pace. You know, we've recently announced one of the Latin American deals here. We're actively looking at other opportunities in the region outside of work that we are supplying directly at the moment.
If you're looking at the USB market in general, you look at the thousands of vehicles, you are being built and supplied in places like the Ukraine. You look at the efforts that the United States Navy is going through in terms of the increasing automation and introduction of artificial intelligence into war-fighting capabilities. And I think we see that over the longer term, as I said, best several orders of magnitude of growth left in demand in terms of length of deployment and it varies and I would put it into two buckets. There is the long-term supply of vehicles to customers on either a take-or-pay or at least our own structure, which we have in place for some of our customers and that ramp period, they would never typically stretch for, like I say, a year or two. And then you have still a fairly sizable contingent of the market that particularly at the earliest stages when they're taking one or two vehicles, he's trying out a vehicle on a job that they've got. But I think as we are showing is that a lot of the larger contract I just referred to that discretion is nearly two years.
Essentially.
They tend to originate from customers who took a vehicle for one or two jobs for maybe two months or three months at the time of them converted that into well.
Great.
I really like to put it there because as one vehicle. I'm going to take two next year. And then actually, I want to take all6 want to take base. And I think that's that's what excites us. And I think there is a deck that length of deployment increasing and the order of magnitude of demand increase is really helping us grow our profit margin, as you can see in the SEC in the Q3 financials.

Shawn Severson

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

Philipp Stratmann

And again, I think that you're right, you're going hand-in-hand and there is still a materially untapped part of the industry, and that's called the Ocean industry in general where vehicles are being used having and they to tap into that market doesn't require us to do any material or it requires us to just integrate different deployment towards on our platforms. And I think that's what's exciting. And you saw that with the demonstrations that our team did at Knology in London this week in a different type of Sonos and sensing equipment that can be deployed on the same platform that in a might have done a work with an Aereo during a couple of weeks beforehand or that might have deployed a radio for forever actually customer differently.

Shawn Severson

Okay, thanks for that.
So another question is I know you don't want to say too much about it, but if we're modeling out growth in commercial versus versus military. Should we think about differences in margins and as military or commercial more likely to have more of more contracts, right, longer term contracts? And you're trying to understand the dynamics of the margin growth as these two businesses grow and grow at different rates or separately,

Philipp Stratmann

I think the margins are pretty similar on things.
So it's funding and we're starting to see an increase in the duration of the terms that our commercial customers, our wanting to sign up for, which is something in the past.
We've seen primarily from from defense and national security customers.
I think the other bit that it is starting to really gain traction is the interest in the beauty side of the business, which has been longer. And these are definitely longer-term deployments and new. It's almost all of that. It's sitting in the defense and just security.

Shawn Severson

And then my last question is on the on the commercial side and on Latin America wherever it might be, are you seeing that are most of these projects that you're working on new projects or are you coming in and displacing our conventional practices and conventional solutions with your solution?
Or are you being deployed more on new things that are going on and new projects that are going on,

Philipp Stratmann

Both, it is often in certain in certain cases, it is a new project, but it's a new project that may have mentioned the envisaged using a traditional tool of doing the work. And but they're now open to using different tools or it is an existing project where a customer is looking for alternative ways of doing work. And therefore, we're displacing, let's say, a much larger carbon emitting. It's fully crewed vessel, which then has obviously all of the benefits that we would provide in terms of lower cost points and lower emissions on site.
It's definitely a mix of both.

Shawn Severson

Great.
Thanks and congratulations on the progress, and thanks.

Philipp Stratmann

Thank you.

Operator

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

Philipp Stratmann

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

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