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Ocean Power Technologies (NASDAQ:OPTT)

Q1 2014 Earnings Call

September 13, 2013 10:00 am ET

Executives

Chris Witty

Charles Frederick Dunleavy - Chairman of the Board, Chief Executive Officer and Interim Chief Financial Officer

Analysts

Robert Littlehale

George Santana - Ascendiant Capital Markets LLC, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Ocean Power Technologies Fiscal 2014 First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and webcast. I would now like to turn the conference over to your moderator, Mr. Chris Witty of Darrow Associates, Investor Relations Adviser. Please go ahead, sir.

Chris Witty

Thank you. Welcome to Ocean Power Technologies Earnings Conference Call for the first quarter ended July 31, 2013. OPT issued its earnings press release earlier today, and the company will soon file its quarterly report on Form 10-Q with the Securities and Exchange Commission. All public filings can be viewed on the SEC website at www.sec.gov, or you may go to the OPT website at www.oceanpowertechnologies.com. With me on today's call from the company is Chuck Dunleavy, OPT's Chief Executive Officer.

Please advance to Slide 2 of our presentation on the website. During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

As indicated in the slide, these forward-looking statements are subject to numerous assumptions made by management regarding future circumstances over which the company may have little or no control and involve risks and 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.

We refer you to the company's Form 10-K and other recent filings with the Securities and Exchange Commission for a description of these and other risk factors.

Now let me turn the call over to Chuck Dunleavy, OPT's CEO. Chuck?

Charles Frederick Dunleavy

Thanks, Chris, and good morning, everyone. I'll begin by providing an update on key activities, after which we'll briefly go over our financial results for the first quarter. I'll then be available to answer any questions.

Turning to Slide 3. Let me first review OPT's recent developments since our last earnings call just 2 months ago. In August, we launched one of our enhanced Autonomous PowerBuoys off the coast of New Jersey as part of a previously announced contract with the Department of Homeland Security. We're pleased with the deployment and test results of this buoy as I'll detail more in a moment.

We were also recently awarded a Phase 1 Small Business Innovation Research grant of approximately $150,000 by the U.S. Department of Energy, or DOE. Under this grant, we will be evaluating certain advanced control systems for our power take-off mechanisms, which are essential to increasing the wave energy captured and hence, the total system electrical power output.

The scope of work also includes assessing various control models by carrying out simulations using OPT's proprietary tools. This analysis will be corroborated using data collected from previous full-scale PowerBuoy deployments and wave tank testing. The work is aimed at enhancing the ability of OPT's wave energy convergence to increase their power output. This is a critical parameter in the reduction of the levelized cost of energy and in making PowerBuoy systems more commercially competitive with conventional power generation.

When this Phase 1 is complete and if invited by the DOE, the company can apply for a Phase 2 SBIR funding for further analytical work, including wave tank testing. We're very pleased to have been chosen for this grant, particularly given that in the current budget environment, less than 12% of the DOE's SBIR and related small business technology transfer funding applications were granted in this funding round.

Separately, we recently won a $1 million award from the DOE to enhance our PowerBuoy's wave energy systems through mechanical component design changes to maximize power-to-wave output ratios and also to reduce overall installed capital costs. We will evaluate alternative designs for the PowerBuoy's float and spar, which account for about 1/2 of the system's mass to optimize their geometry, the materials used, power output, manufacturability and also the durability.

We receive these funds as subject to negotiation of final contract terms and confirmation of cost sharing sources. Both grants make a strong statement about the DOE's support for clean energy economy and also the prospects for wave-generated power, as well as OPT's leadership in that space.

We also continue to have substantive discussions with Mitsui Engineering & Shipbuilding about next steps in Japan, and we are working with our consortium partners on the WavePort initiative in Spain, including WavePort casting methods and the assembly and land testing of the PowerBuoy.

I'd now like to go over certain of our projects in more detail. First, turning to Slide 4 for an update on our Autonomous PowerBuoy business. As I mentioned just a moment ago, we're excited to have recently deployed and completed initial testing of an enhanced APB-350 unit 35 miles off the coast of New Jersey in approximately 140 feet of water.

As a reminder, this work is being performed under a Cooperative Research and Development Agreement with the U.S. Department of Homeland Security Science and Technology Directorate. Following the launch in August, we tested various aspects of power and energy production performance. In addition, we tested the new onboard acoustic sonar system to further validate our technology's capacity for expanded ocean surveillance by demonstrating the effectiveness of this application for subsurface vessel detection.

We're pleased with the data we received from our initial run of testing with respect to energy output and also the response of the new sonar system to detect undersea acoustic profiles. We expect to conduct further tests to this system going forward, building on these initial results and after we implement some planned improvements to the APB-350.

For this mission, OPT has been leveraging the experience gained from its prior LEAP program with the U.S. Navy. Previously, the APB-350 featured only HF radar capabilities for surface vessel detection. The current APB combines the HF radar technology with an acoustic sensor system, allowing the PowerBuoy to collect data for surface as well as subsurface ocean observation and surveillance.

The unit provides power at low persistent levels, which are needed for sophisticated vessel protection and tracking, enabling maritime surveillance in the near-coast, harbors and littoral zones worldwide. We're excited about the markets that this APB-350 may open up for the company, both in North America and overseas. We expect to work with the Department of Homeland Security to analyze the results further and plan for next steps.

Autonomous PowerBuoys continue to be a major focus for Ocean Power Technologies and not just in the area of national defense. They also provide persistent off-grid clean energy in remote ocean locations for applications such as offshore oil and gas operations and fish farming. We believe these additional market opportunities to be significant. And a key differentiator of our product is that the APB-350 is designed to provide consistent power in all wave conditions while maintaining a fixed ocean site position. The company's proprietary power management technology and onboard energy storage capability are further innovations, which enable operation even in extended 0 wave sea conditions.

As an additional note, OPT received a great deal of attention at the recent Offshore Europe Conference in Aberdeen, Scotland. The event was focused on the oil and gas exploration and production industry's direction towards accelerating the adoption of new technologies. OPT shared a booth with an oil and gas industry consortium, and we presented alongside Premier Oil to conference attendees. The OPT APB-350 was met with enthusiasm at the conference and resulted in numerous requests for follow-on meetings.

On Slide 5, you can see some great photos of the recent transportation and deployment of our APB-350 off New Jersey.

Now turning to Slide 6. Let me provide an update on our activities in Japan and Australia. Australia continues to be a major opportunity for OPT, where we have been working with Lockheed Martin on plans to develop in 3 phases a 62-megawatt peak generator rated wave power station off the coast of Victoria.

We are also working with the Australian Renewable Energy Agency, or ARENA, on the timing and structure for the AUD 66.5 million grant we previously were awarded. In addition, we've already commenced a seabed survey by the Victoria-based company Professional Diving Services and are moving to assess the most appropriate place for the power station to be located.

The seabed survey is fine-tuning selection of a project site off Portland, taking into account seabed conditions, as well as environmental, recreational and commercial interests. The project recognizes the importance the ocean represents for Australia and the opportunity of providing power to up to 10,000 local residents, as well as the creation or sustaining of at least 300 jobs. Finally, we continue to work with our financial advisor on power purchase agreements and additional required funding for the project.

Turning to Japan. We're working closely with our partner there, Mitsui Engineering & Shipbuilding, on developing the next steps towards commercializing wave power generation. As noted in our last call 2 months ago, we have completed a contract from Mitsui for the initial analysis and design work on PowerBuoy enhancements for improved power capture in Japanese sea conditions. And we are working with Mitsui on developing the next steps towards ocean trials of a demonstration PowerBuoy system. These discussions include review of business opportunities that could lead more rapidly to commercialization in Japan.

Mitsui and OPT believe there's a significant market opportunity and one that could certainly benefit from our leading-edge PowerBuoy technology. As an interesting side note, OPT has received trademark protection in Japan for the name PowerBuoy in both English and katakana.

Moving to Slide 7. I'll give a brief update on some of our other ongoing activities. In Spain, for the WavePort project there under contract from the European Union, OPT and our consortium partners have been working on wave prediction models and have started final assembly of our enhanced PowerBuoy. We'll soon conduct land testing.

The buoy includes an advanced modular power take-off from OPT and a new wave prediction model formulated in part by one of the consortium partners for the project. The model is designed to assess the characteristics of incoming waves before they reach the PowerBuoy, thereby providing more time for OPT's proprietary electronic tuning capability to react. This is expected to boost the power output of the PowerBuoy and reduce cost per megawatt-hour of energy produced.

We're please with the work accomplished to date under this project, with many fine European companies and institutions. The members of the consortium team are all working under separate contracts from the European Union, as is OPT. Deployment of the buoy is expected on the north coast of Spain, following completion of work by all consortium members, completion of funding arrangements and under appropriate weather conditions.

In Oregon, as discussed previously, prospective deployment of a nongrid-connected Mark 3 PowerBuoy is subject to a 2013 FERC ruling, which effectively increased regulatory requirements such that for the deployment of just the first buoy, OPT now needs to meet all FERC requirements for a full grid-connected application of 10 PowerBuoys. This translates to some additional report studies and cost for the first PowerBuoy installation.

In addition, we're addressing other requirements of Oregon state agencies, including the removal of certain equipment from the seabed off the coast of Oregon. As a result, the deployment and commissioning of the Mark 3 PowerBuoy off the coast of Oregon must take into consideration these various regulatory, business and financial factors, including a significant use of funds.

Now let me briefly review our financial results. As noted on Slide 8, OPT reported revenue of $0.5 million for the fiscal first quarter as compared to revenue of $1 million for the 3 months ended July 31, 2012. The decrease primarily relates to lower billable work for the company's Mark 4 PowerBuoy development project and a decline in revenue tied to OPT's project offerings for Oregon, which has been delayed pending resolutions of certain matters, as I just mentioned.

The year-over-year comparison also reflects the fact that OPT completed the latest phase of the company's project with Mitsui in the prior fiscal year. The net loss for the 3 months ended July 31, 2013, was $3.8 million as compared to a net loss of $4.4 million for the 3 months ended July 31, 2012. The favorable decrease in the company's net loss year-over-year primarily reflects lower product development cost, with the decline mainly due to the decreased level of activity for OPT's project in Oregon.

Turning to Slide 9. On July 31, 2013, total cash, cash equivalents, restricted cash and marketable securities were $18.6 million as compared to $21.7 million as of April 30, 2013. Net cash used in operating activities was $3.1 million and $3.4 million for the 3 months ended July 31, 2013, and 2012, respectively. The net decrease in cash and marketable securities was lower in the fiscal 2014 first quarter relative to fiscal 2013, primarily due to lower expenses related to the company's Oregon project.

I'll now make some closing comments before turning the call over to questions. Moving to Slide 10, I'd like to wrap up by summarizing where we are focused and what we expect going forward. As I mentioned earlier, we are seeing significant interest in our Autonomous PowerBuoy business, particularly driven by opportunities in the oil and gas sector plus maritime surveillance. We're very proud of the work now being done by our staff to expand the opportunities in this regard and are seeking to reduce the cost of our APBs while improving overall efficiency.

We also remain excited by our opportunity in Australia for the buildout of a wave power station in the state of Victoria. While the federal government in Australia is now in transition, we're working with the government agency ARENA and other local partners to move forward with this project. Likewise, we view our opportunity in Japan very positively and expect to make progress with our partner, Mitsui.

And lastly, we view the overall interest in alternative energy, including ocean-based power generation, for both utility and autonomous applications as strong and growing. Our business development team is focused on finding and leveraging such opportunities. In the meantime, we continue to carefully manage cash and costs and to improve our capital position as this remains critical while we work towards commercialization of our buoys across a number of projects.

This concludes our prepared comments. We'll now open the call for questions. Please go ahead, operator.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Robert Littlehale with JPMorgan.

Robert Littlehale

Your comment about the Australian government being in transition, I guess Tony Abbott now assumes control of the government from Kevin Rudd. Any sort of inkling in terms of their view, Tony Abbott's view of renewable energy, or do you think the policy will remain the same? Any thoughts along those lines?

Charles Frederick Dunleavy

Sure, Bob. I think there will be some changes based on what certainly I've read and also what our people in Australia have listened to, heard and passed on to us. I've also had some discussions with about 2 or 3 months ago with a person who was, at the time, the treatative [ph] Minister for Energy, who's the so-called shadow minister. So that also has provided some input to us. I think the likely -- one of the likely initiatives of the Abbott government is to reduce or eliminate the carbon tax. And other than that, we are not aware at this time of any specific articulated changes of any note. We feel confident about the continuation of the grant, which has been awarded, so -- to which I referred to a few moments earlier. But until the government really gets its feet on the ground, gets all its ministers placed with their portfolios well established, we're making, by the way, an outreach effort to a number of ministers who have been selected at this point and to make sure that they're aware of this great project. It does mean jobs for the state of Victoria, as well as potentially other areas of Australia, and that's a strong powerful message that they're listening to.

Operator

[Operator Instructions] Our next question comes from the line of George Santana with Ascendiant.

George Santana - Ascendiant Capital Markets LLC, Research Division

Listening to you talk about this, the sonar package, I mean, it sounds like a fairly significant development. Is that -- does that launch you into kind of a new vertical? You have to perhaps staff up in that area. Does it build on former efforts? And also, I mean, is that just the -- what we should expect as we look at your company going forward that you could kind of continue to tailor the product to different uses, and this would really be kind of the first one in that direction?

Charles Frederick Dunleavy

Sure. Well, certainly, the sonar and the radar very important from the viewpoint of what I'll call homeland security. That includes not only defense, pure defense, but also relates to such issues as trafficking and drugs, which increasingly uses very sophisticated seaborne vessels and illegal immigration. So there are some parts, a couple of areas in the world where illegal immigration is a very big, major concern. And so interestingly, for this system, the existing platform that we have, we've initiated some discussions with at least one government about that, that is to say the illegal immigration. And for us, a homerun with our product would be effectively for some customers to establish what we refer to as a picket line, that is to say, a series or sequence of our systems that would be out in deep ocean and which would be capable of detecting both subsurface and surface vessels. That obviates a lot of very, very expensive monitoring equipment, particularly ships and aircraft, which the government otherwise might be required to deploy. So we think it's a very compelling story that we tell in terms of the capability of our systems. So as to your question about things to look forward, I think that, that is certainly an aspect of one of the applications of the existing platform. And George, it's really important to convey that while there are other forms or versions, let's say, of the Autonomous PowerBuoy, which we are -- have some initial design work already accomplished, we're focusing very much on the product we have now, which is to say the APB-350. So we're aggressively marketing that. And in -- I think one other application which looks very promising is with respect to subsea operations in the oil and gas industry. So we've got a heck of a boost at that Offshore Europe show. I think it was about 10 days ago in Aberdeen. Just some great, great reception as a result of that. And at any show, you get a lot of people come in your booth and they all say, "Well, let's keep in touch." But you really have to focus hard on, out of that group of contacts, how many are really quality contacts of people who have a strong strategic interest and need for your product. And that was what we found at the show, that there were a number of such very enthusiastic and strategically interested parties that said, "Look, let's get together. Let's set some meetings after this show." So I think again, as we look forward, we believe that not only in the field of homeland security, but also oil and gas and in particular, subsea ops, that there's a great opportunity for our system.

George Santana - Ascendiant Capital Markets LLC, Research Division

[indiscernible] follow-up. It's just -- it's kind of difficult to see kind of in this and follow the development of the tidal [indiscernible] in Scotland. But has there any been strategic and [indiscernible] sector even ocean [ph] power or tidal? And what do you kind of see developing there?

Charles Frederick Dunleavy

George, I'm sorry. Your call cut out a little bit and I didn't catch all of the questions. So would you mind just trying one more time with the question?

George Santana - Ascendiant Capital Markets LLC, Research Division

Yes, no problem. In terms of any strategic investments, anything along those lines in either tidal power or ocean power, anywhere around. I know there's a lot of activity in Scotland, they're still testing a lot of that center, perhaps the Japanese. Just if anything has happened there over the last 3 to 6 months?

Charles Frederick Dunleavy

Well, you're right to point out some activity in Europe. I'd say, in the very short term, I'm not aware of any recently announced new strategic investments in Europe. I know that there are a few companies out there that are starting to report some results, which I think are good for some of their systems. We've always said that we don't want to be the only game in town with respect to marine energy. So I take it very encouraging that there's some other companies out there that are deploying systems, getting data, reporting that and establishing a presence within the, what I'll generally refer to as the marine hydrokinetic industry. But back to your question and the specifics of your question, I don't see any particular -- I'm not aware of any particular investments in the short term. I have to say that from our perspective, however, and some of our business development activity, we're very encouraged by some discussions that we're having with some major companies. And that's not intended to be a teaser, but simply to communicate that we have had some good dialogue with large companies interested in this field, interested in what specifically we're doing. I think an important aspect, as people considered the industry, one thing that has been said to us that they like very much about OPT is that we have not only the utility markets which we serve, but also the autonomous ones, which I've obviously spent some time talking about it during this call. But that aspect not only is an issue that mitigates risk. I think in the eyes of potential investors and customers, as well as partners, but also just simply why didn't the opportunity to make money with the PowerBuoy product. And that's, I think, hopefully provides you with a little more color about the kind of dialogue that we're having and we're seeing ourselves.

Operator

There are no further questions in the queue. I'll now turn the call back over to Mr. Dunleavy for any closing remarks.

Charles Frederick Dunleavy

Thank you all once again for attending today's call. If you have any further questions, please don't hesitate to contact us. Otherwise, we certainly look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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