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Ocean Power Technologies, Inc. (NASDAQ:OPTT)

F3Q2014 Results Earnings Conference Call

March 14, 2014 10:00 AM ET

Executives

Mark Featherstone - Chief Financial Officer

Chuck Dunleavy - Chief Executive Officer

Analysts

Carter Driscoll - Ascendiant Capital

Rob Stone - Cowen and Company

Operator

Good morning, ladies and gentlemen. And welcome to Ocean Power Technologies Fiscal 2014 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded and webcast. I would now like to turn the conference over to Mark Featherstone, OPT’s Chief Financial Officer. Please go ahead, sir.

Mark Featherstone

Thank you. Welcome to Ocean Power Technologies earnings conference call for the fiscal third quarter ended January 31, 2014. 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 sec.gov or you may go to OPT’s website oceanpowertechnologies.com.

With me on today's call is Chuck Dunleavy, OPT's Chief Executive Officer.

Please turn to page two of our presentation, where you will see a notice regarding the use of projections or other forward-looking statements during this call, as well as 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.

I will now turn the call over to Chuck Dunleavy.

Chuck Dunleavy

Thanks, Mark, and good morning, everyone. I'd like to start by welcoming Mark to our senior executive team. Mark joined OPT this past December to serve as our Chief Financial Officer. His successful career to-date has been 30 years working with capital markets, regulatory, accounting matters, strategic alliances and treasury management. This has included work at Quaker Chemical Corporation, Coty and Kimberly-Clark.

I will now begin by providing an update on key activities after which Mark will briefly go over our financial results for the third quarter. Mark and I will then be available to answer questions.

Turning to slide three, let me first summarize OPT’s recent activities, since our last earnings call just a few months ago. It’s been a busy period with notable news in the Pacific Rim regarding the planned wave power station off the coast of Australia and the start of work under the recently signed contract with Mitsui Engineering & Shipbuilding.

In addition, we continue to make progress in the development of Autonomous PowerBuoy opportunities. We have strengthened our management team and also improved our cash position. I will now discuss some of these recent events in greater detail.

Please go to slide four, in January, Victorian Wave Partners Limited or VWP signed an amended grant agreement with the Australian Renewable Energy Agency or ARENA through which a A$66.5 million grant was previously awarded towards the cost of building and deploying the wave power station off the coast of Australia.

VWP is 100% owned by OPT Australasia, which in turn is 88% owned by Ocean Power Technologies Incorporated. The new agreement is a Deed of Variation which accelerates the reimbursement of eligible expenses for Stages 1 and 2 of the planned 3-stage project, increases the number of project milestones. Both of these changes serve to better support project cash flow requirements.

The Funding Deed for the project set up in terms of the grant, including the requirement to obtain significant additional funding, as well as completion of specific project milestones.

VWP is currently conducting seabed surveys toward meeting the requirements for licenses and approvals. The company is also assessing power purchase agreement opportunities and is working with financial advisors in the connection with efforts to raise the required additional project funding.

As previously announced, Lockheed Martin will provide overall project management and will assist with the design for manufacturing of the PowerBuoy technology, lead the production of selected PowerBuoy components and perform system integration of the wave energy converters, once completed, the project would be the largest of its kind in the world.

Please turn to slide five for an update on our activities in Japan. We began work under the $2.6 million contract received from our partner in Japan, Mitsui Engineering & Shipbuilding for the design and delivery of key components of a PowerBuoy for deployment off the coast of Japan.

As discussed last quarter, we also signed a wide-ranging license for Mitsui to sell our PowerBuoys for both grid-connected, utility installation and also for autonomous applications.

The territory covered by the agreement is Japan, the Philippines, Malaysia, Vietnam, Mozambique, South Africa and Namibia. Those seven countries in the Pacific Rim and Africa have extensive coast line and conditions well-suited for harnessing the energy of waves for different applications.

For the PowerBuoys sold in those countries, OPT will make and sell to Mitsui the power takeoff portions of the systems while the rest of the PowerBuoy will be manufactured and sold by Mitsui to customers in its licensed territory. Also OPT will receive royalty payments from Mitsui on this sale.

Turning to slide six, we have continued to work on the development of Autonomous PowerBuoy market opportunities. In January, we announced the hiring of David R. Heinz as Vice President, Autonomous Power.

Prior to joining OPT at iRobot Corporation, David held the position of VP and General Manager of the Maritime Systems Division, which made underwater autonomous vehicles.

Previously, he served as a Major General in the U.S. Marine Corps, where he ran large acquisition programs and performed oversight of worldwide military operations. David has had business development experience in both the oil and gas and defense industries, which are key markets for our Autonomous PowerBuoys.

In December, Autonomous Power group completed ocean testing of a novel generating -- generation system for low power requirements in connection with a Small Business Innovation Research or SBIR contract from the U.S. Department of Defense.

Work also was conducted on the development of advanced energy conversion control algorithms as part of a U.S. Department of Energy SBIR contract. Achievements under this advanced control work will also benefit our utility PowerBuoys.

As our engagement with prospective customers in the APB market continues to evolve, we increasingly recognizing the market interest in a broader range of power in our Autonomous PowerBuoys.

Accordingly, in addition to lower power levels of our autonomous products, we are actively examining the use of our Mark 3 PowerBuoys for autonomous power, as well as grid connected application. This may expand the available market for our core Mark 3 PowerBuoys technology within oil, gas, as well as maritime surveillance segments. In fact, recent meetings internationally with companies involved with the oil and gas sector has shown keen interest in this important opportunity.

Moving to slide seven, our activity in Oregon involving a single non-grid connected PowerBuoys remains on hold as we address regulatory requirements and the need to obtain additional funding specific to that project.

In late February, we decline to renew a preliminary permit received several years ago from the Federal Energy Regulatory Commission in connection with the potential future phase of that project.

This reflects our focus on determining the prospects to obtain added funding directly related to the current single PowerBuoy phase. We plan to make that determination over the near-term and we remain in communication with project stakeholders as it unfolds.

In Spain, we continue work under our contract from the European commission. Under this project, OPT and our consortium partners have been working on new wave prediction models and the completion of a PowerBuoy, which incorporates an advanced modular power takeoff system. The enhanced wave prediction models are designed to improve energy conversion efficiency of the PowerBuoy.

Deployment of the PowerBuoy is expected on the north coast of Spain, following completion of work by all consortium members, who are separately funded directly by the EC, completion of funding arrangements and under appropriate weather conditions.

I'll now turn the call over to Mark Featherstone who will briefly review our financial results.

Mark Featherstone

Thanks Chuck. As noted on slide eight, OPT reported revenue of $0.2 million for the most recent quarter as compared to revenue of $0.9 million for the three months ended January 31, 2013.

This decrease related to primarily to a lower level of external funding for the company's PowerBuoy development projects and a decline in revenue tied to OPT's Reedsport, Oregon, project which has been suspended pending resolution of regulatory, financial and other matters, and a decline in revenue of OPT’s project off the coast of Spain. These decreases were partially offset by an increase in revenue related to OPT's new contract with Mitsui which we signed in October 2013.

The net loss for the three months ended January 31, 2014 was $0.8 million as compared to a net loss of $1.5 million for the three months ended January 31, 2013. The favorable decrease in the company's net loss year-over-year reflects lower selling, general and administrative costs, including a decrease in employee-related costs. In addition, the company reported a higher income tax benefit in 2014 due to the $1.75 million sale of New Jersey net operating tax losses and research and development tax credits.

For the nine months ended January 31, 2014, OPT reported revenues of $1.1 million as compared to revenues of $3.2 million for the prior year’s comparable period. This again reflects a decline in revenue related to the suspension of the company's project off the coast of Oregon, decreased billable work for OPT's PowerBuoy development projects, the completion of a previous contract with Mitsui in the prior fiscal year, and a decrease in revenue related to the project off the coast of Spain.

The net loss was $7.9 million for the nine months ended January 31, 2014 compared to $10.6 million for the same period in the prior year. This favorable decrease in net loss was primarily due to a decline in product development costs associated with OPT's project in Oregon, a decrease in selling, general and administrative cost related to lower employee-related costs, and a higher income tax benefit due to the sale of New Jersey net operating tax losses and research and development tax credits noted above. Importantly, our backlog remained stable at $5.6 million at January 31, 2014 compared to $5.8 million at October 31, 2013.

Turning now to slide nine, as of January 31, 2014, total cash, cash equivalents, restricted cash and marketable securities were $19.6 million, as compared to $18.7 million as of October 31, 2013. Net cash used in operating activities was $8.1 million and $8.2 million for the nine months ended January 31, 2014 and 2013, respectively.

Net cash used was slightly lower in the current nine-month period relative to the corresponding prior year period due to a lower net loss. In addition, the company raised $2.5 million for general corporate purposes during the fiscal 2014 third quarter through the sale of stock under our active market or ATM facility with Ascendiant Capital Markets. An additional $3.8 million was raised under the ATM just after the close of the January 31, 2014 quarter.

Now, I will turn it back over to Chuck to make some closing comments before opening the call for questions.

Chuck Dunleavy

Moving onto slide 10. Much has been accomplished in the past few months to strengthen the company’s growth prospect. Our work in Japan and Australia is expected to position us for commercialization and market adoption of our leading edge wave energy applications. And we are partnered with strong participants in the industry, including Lockheed Martin as well as Mitsui Engineering & Shipbuilding.

In addition, the recently signed deed of variation with ARENA in connection with our activity in Australia marks a significant achievement as our development efforts for that project move forward. Important aspects of our business strategy are geared to positioning the technology as well as our strategic relationships to enhance the prospects for PowerBuoy sale.

We continue to invest in our core technology with funded third-party contracts as well as our own capital. Our senior management team has increased breadth and our balance sheet remains strong. The world continues to seek clean, reliable and consistent means of power generation and our oceans are clearly huge, untapped resources which can fulfill this vision. We at OPT are fully dedicated to remaining a leader in this field.

With that, I'll now open the call for questions. Please go ahead, operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Carter Driscoll from Ascendiant Capital. You may begin.

Carter Driscoll - Ascendiant Capital

Good morning, gentlemen. Thanks for taking my questions. I wanted to start maybe with kind of a very big-picture question and talk about the long-term development efforts you have and the path to commercialization? And what key hurdles do you see in terms of what would get you there in at least your two major projects you have in Australia and Japan and what key hurdles will get investors comfortable that you are truly on a path to commercializing this great technology. And then I have a series of follow-ups?

Chuck Dunleavy

Sure. Thanks Carter. Appreciate your question. I would say just at a more overarching -- as a more overarching point that if really key for us to demonstrate the technology on an increasing basis, I think we've been very successful in the past in a number of in ocean deployments. So we need to keep that going.

We are very focused on the WavePort project, the one in Spain to which we referred earlier. That's another perspective PowerBuoy in the ocean. And those are very key benchmarks I think as people watch our whole industry not just the OPT so that's, I think, a key point which is starting with the technology and its demonstration.

Then in addition, we have, as you rightly pointed out some ongoing opportunities, one under contract with Mitsui and for Japan and in particular, rolling out our technology in Japan, starting with a targeted deployment of a system that we are working on with them and to which we referred little bit earlier in our presentation.

But on that particular project, the milestones I think are well articulated by our customer and as I said include deployment of our system and that's an important benchmark. I think, what’s great is that we are working very iteratively and cooperatively with Mitsui on the delivery of the technology.

They have a lot of value to add and so this is a case where the market specifically, this customer within the Japanese market is really bringing their own experience to bear and I think that augurs well for our prospects in that country. So it’s a shared task if you will to rolling out our technology and demonstrating it in that particular area.

In the case of Australia, as we noted an important milestone for us to move that forward, is to complete funding for the first stage of that project. We are doing some work currently under that project and I think that reflects OPT's dedication to the importance that it holds for us as a company and specifically with respect to our utility products and therefore, add a key milestone to again, take regarding your question. In the case of the Australian project, is completing the funding and the permitting for that project. But we are working closely with Lockheed on that project.

Carter Driscoll - Ascendiant Capital

I'm sorry to interrupt. I was just going to say in following up with the Australian project and the permitting process, has the recent change in administration, which has seemingly openly hostile to renewable types of technologies. Do you see that being any type of hindrance, or is that more geared towards the more traditional types of renewables? I'd love to hear your thoughts on…

Chuck Dunleavy

Sure.

Carter Driscoll - Ascendiant Capital

…facts there.

Chuck Dunleavy

Yeah. Well, certainly there is a change in government that has taken place there. As a matter of fact, I was in Australia just two weeks ago and met with some officials in the federal government. And I would not say that they are hostile. They have their own priorities, of course, and they are at this point actively discussing whether to continue the carbon side tax provisions and that certainly has an impact -- a prospective impact on us, but that has not occurred at this time. They are fostering discussion about it. But aside from that point, indeed, people in the government with whom we've met are very supportive of our project and notwithstanding the fact that the government has changed as you know. The funding for our particular project and the agency that is our sponsor and actually the specific agency that’s providing the grant, has had its existence and its mission reaffirmed by the new government.

So in general, we’re pretty positive about the prospects. But you're right, you have to bank on the technology and levelized cost of energy at the end of the day that is what we are really focused on. You can't bank on governments and their policies. You really go to go to the baseline economics.

Mark Featherstone

I think it’s important, Chuck, to note too that the deed of variation we find was less than January of this year, which is kind of after the change in government, so it kind of reaffirms the commitment of the government to projects such as ours.

Carter Driscoll - Ascendiant Capital

Thanks for that, Mark. The level of funding that you think is going to be necessary to move this project along, could you kind of bracket what levels you think are necessary to accelerate development?

Chuck Dunleavy

What we said publicly about that, Carter, is that the entire project which is in three stages is planned as a total of $232 million, that’s for the entire project, all three stages and the Commonwealth of Australia has step forward with a total grant of $66 million, so the delta there obviously represents additional funds we raised.

But it's very important to note that this is being done on a stage-by-stage basis or a phase-by-phase basis. So, we're focusing on making this thing first phase of that project and that is roughly $42 million in total value expected budget for that project, and the Commonwealth is providing -- out of their total grants, they are providing half of that.

Carter Driscoll - Ascendiant Capital

Got you. And you are obviously talking Australian dollars?

Chuck Dunleavy

Yes.

Carter Driscoll - Ascendiant Capital

We talk about the levelized cost of electricity maybe and what you have been able to demonstrate and where you stand in the pecking order, if you could put it in there and what types of cost reductions you are going to need to get that closer to some of the current baseload and intermittent resources?

Chuck Dunleavy

Sure. I will have to go with our website and what we've put forth in that and certainly enunciated publicly with respect -- and your answer I take is primarily focused on our utility product, not the autonomous devices, which is different market and in some respect a different approach to costing on the part of our customers. At the end of the day, it all comes down to levelized cost of energy as you exactly pointed out.

In the case of our utility systems, we have, as a target approximately US$0.15 per kilowatt hour as to the levelized cost of energy and that would be in large production levels, of at least 400 PowerBuoys per year, so that’s our target. We've not demonstrated that yet but we have gone a long way towards demonstrating the technology that can be built in large quantities and that includes testing of our system off the coast of Scotland, that’s our Mark 3 PowerBuoy.

One thing, I would note as well is that, as we are focused on the levelized cost of energy, helping us and assisting us in that process is Lockheed Martin in connection with not only us -- they are involving with our Australian projects but they have worked with us under additional projects that we’ve reported on in the past. And with a clear focus on supply chain management, reducing the cost of the products within the supply chain, but also the baseline product itself. And with that, I'm referring to Lockheed efforts with respect to design for manufacturing where they provided some real strong assistance to us.

So the path to achieving that goal of a levelized cost of energy which I mentioned earlier is one, which is not just volume driven, it is also based on the path that we’ve already identified to our own engineering team which is a very strong team, as well as they are working [intuitively] (ph) with Lockheed and we think also Mitsui will add value as well on this.

Mark Featherstone

The only thing I would like to add maybe to that, Chuck, is we see with our technology and are having discussions with people to directly supply customers with the energy and so we are doing that. The customer would avoid distribution and transmission charges, which is actually a significant piece of the energy bill. So that’s being able to do that with customers is an important savings and we can reap a fair amount of savings generated.

Carter Driscoll - Ascendiant Capital

That’s an important point. Thank you, Mark. A couple others before I get back in queue. Can you talk about where -- in the Oregon project, what specifically the regulatory requirements that they’re asking you to address? Can you talk about that project and really prospects? It sounds like you may be taking a step back from that project and maybe clarify what hurdles remain to potentially restart that and where that stands in the pecking order in terms of your attention and whether you’re really more focused on opportunities abroad or -- it sounds like you’ve taken a step back. Maybe you could just add a little color and characterize what is going on in Oregon?

Chuck Dunleavy

Sure. It has been an important project and important focus of it, OPT or for OPT. So I wouldn’t want to rank its prioritization. It has been important to us. And OPT has spent a lot of resources and time associated with that project. But where we stand right now is being very realistic with respect to the cost associated with moving forward with that project. And nearly all of that falls on OPT.

So the point that we made earlier in the prepared portion of our call here was I think the cleanest and simplest way to state it which is (indiscernible) as we seek to determine if we couldn’t raise capital specific and directly to that project. We do hope to get closure on that point in the near term. So while it’s on a hold at the present time, we do need to as a company make a decision as to what the next steps from the path forward might be. So we are looking at it very seriously.

Certainly it could be regulatory environment within both the state and federal jurisdictions, as they relate to that project, have also provided a dimension if you will to the total cost picture, and that is in part the regulatory aspect which we referred in our comments a little bit earlier. But I think the most direct point or answer I can give to you Carter is that we are weighing up right now our steps forwards and we certainly don’t want to prejudge or I guess ourselves as to where we will come out. But I think it’s safe to say that over the next quarter that will come to closure on exactly what our path forward is.

Carter Driscoll - Ascendiant Capital

Thank you. That's helpful. Two more, can you talk maybe about some of the specific benchmarks for the Spanish project that you need to meet to move that project forward? I mean, is it -- from deployment, is it talking about improving the prediction modeling aspect? Can you talk about some very specifics about what hurdles would move that forward?

Chuck Dunleavy

Sure. I don’t -- I wouldn’t characterize them as hurdles per se. We’ve made a lot of progress under this project. It’s important to note that there is a certain atypical aspect to this project, which is our customer the European commission under the original Framework 7 program a few years back which has been a great program from our perspective by the way has a feature to it, which is that the EC is separately funding each of the members of the consortium who are working on this project. So OPT has its own funding relationship with the EC, our partners, our other consortium members are separately funded.

And I think it is the dimension of the overall project, which has been something that we’ve worked with over the last year or more under the effort. Some of the specific things that we are looking to achieve include the demonstration of an advanced power takeoff systems, which OPT has made and we’ve done so with some assistance in that regard and then prior support by the way by the U.S. Department of Energy which has been really crucial to advancing our power takeoff technology. So, that’s one thing that we are looking to demonstrate in this project.

In addition, some of the other consortium members, two specific ones are working on the advanced tuning capability to fine tune that, specifically referred to as a wave by wave tuning. And one of the consortium members is providing Wave Rider buoy that will detect incoming wave conditions which such information would be transmitted to our power voice and then our own algorithms would take over and utilize that information to reacting real-time and we expect that to improve the overall energy conversion efficiencies of the power boy.

So it’s really a unique project from our standpoint. And I think from view of the EC as well because of the broad group that are bringing in the consortium that is they are bringing the respective technologies and expertise. And also much of the result of this will be made known as is required under our contact to the marine energy community,

So I hope that provides you with a sense of what makes us different and exciting from our standpoint, different not only from the technology view point but also how the contract is structured.

Carter Driscoll - Ascendiant Capital

The total number of partners involved including yourselves is how many?

Chuck Dunleavy

Total of five.

Carter Driscoll - Ascendiant Capital

Five, okay. And then just lastly, if you -- obviously, from a modeling perspective, the business in very early stages is still very lumpy from modeling traditional P&L metrics. Maybe one thing that might be helpful is the royalty payments seem like those might be coming sooner rather than later versus maybe some of your other projects. Could you help characterize what the royalty payments are based on with Mitsui? Is it unit, is it total dollar content, is it some combination therein?

Chuck Dunleavy

Sure. The royalty base or first of all just as a quick point of reference, the revenue streams that are prospective for OPT under our arrangement and license arrangement with Mitsui, those revenue streams include both royalties as you’re asking of course as well as from the sale by OPT to Mitsui of the power takeoff systems that specific subset or of course subsystem of the overall PowerBuoy system. Mitsui does all the rest, they will be manufacturing the buoys themselves. So again our revenue streams from royalties and from the sale of the PTOs.

One of the reason why I say that is that the royalty base is the total gross sales that are recorded or booked by Mitsui within that territory with that reduced by the value of our power take-off system. So, that's the base of the royalty system. And it’s a relationship that is one that is very vibrant. We are working very much and very closely with Mitsui. Some of their engineers were over here just last -- a little bit earlier rather last month in the latter part of February and we will be sending some of our people there in about two, three weeks.

So very good relationship, one that continues I think and what makes it works is not only what we all see is the strong market opportunity, but also the respective technology expertise and manufacturing capability in the case of Mitsui that's brought to the overall relationship.

Carter Driscoll - Ascendiant Capital

And any idea and any indications about the number of PowerBuoys that they hope to deploy over X period of time?

Chuck Dunleavy

Certainly, we've discussed that with them and we're encouraged by those prospects, but with respect for your question, I have to say we're not making that public at this time.

Carter Driscoll - Ascendiant Capital

Fair enough.

Mark Featherstone

The other thing I would add is I think Mitsui is interested in both of the utility size and the autonomous power side as well. So that's what’s great about Mitsui. As Chuck mentioned, they have a license that covers a number of different countries. So they're very engaged and excited about the project. We're having meetings with them on a regular basis. So we're not at liberty to discuss their plans, but I know they are very interested in the project.

Carter Driscoll - Ascendiant Capital

I appreciate all the questions answered and I apologies. Thanks, gentlemen.

Chuck Dunleavy

Okay. Thank you, Carter.

Operator

(Operator Instructions) The next question is from the line of Rob Stone from Cowen and Company. You may begin.

Rob Stone - Cowen and Company

Good morning, Chuck. And welcome, Mark.

Chuck Dunleavy

Thank you.

Mark Featherstone

Good morning, Rob.

Rob Stone - Cowen and Company

I wanted to follow up on Mitsui for a bit, the contract you have now I guess has to do with certain amount of development and a first demonstration. Do you have a sense of -- I know you don't want to talk about the number of potential projects they see, but kind of a rough timeline to a first commercial project with them?

Chuck Dunleavy

Sure. The current project that we have in backlog, it was at inception a $2.6 million contract. We've started work under that, so a little bit less in backlog at this point, has as its scope of work, taking, accomplishing the building of the first PowerBuoy that would be deployed off the coast of Japan. The next phase of that same project would include deployment and operation. And I believe that Mitsui has noted publicly that it is expected that cycle that scope of work I just described will play out over the balance of 2014 and calendar 2015.

The planned or perspective next step would be that in some level of larger volume, additional buoys would be deployed. I want to add that this first one is expected to be grid-connected by the way. It's not operating autonomously but will be connecting to the grid and represents an important milestone to move forward for both OPT and Mitsui.

But I gave you timeframe for the current stage we're on and then it would be planned and hope that right after that demonstration that we would begin to address a higher volume rollout of the system.

Rob Stone - Cowen and Company

Okay. And with respect to some of the other market opportunities, I know in the context of maybe developed countries or North American utility rates that $0.15 LCOE might seem like a high number, but I would suppose that in some of those other countries, you're competing potentially with smaller scale, maybe oil-fired generation? Do you have a sense of the boggy for the types of competing installations that you would be going up against in those other countries with Mitsui?

Chuck Dunleavy

Sure. Well, certainly, within the renewable energy space, some of the primary areas would include wind, there is a lot of offshore wind for which pricing, for which our pricing and even at that $0.15 per kilowatt hour our -- for which our price would be very competitive. That's with respect to offshore wind.

There are some onshore wind facilities that are less than that, particularly those that are cited close to existing T&D transmission and distribution resources and infrastructure. But I think that our pricing and our targets what we see is doable is something that's very competitive, certainly with offshore wind, as well as solar thermal and solar affordable takes, in some areas biomass as well.

Our target though is to do better than $0.15, long range target is to do better than that $0.15 and our target as well is to set our sites on competing with other more conventional sources of energy.

I think what we're finding internationally as we try to summarize quickly in the closing remarks, prepared remarks, is that our experience is that, there are still very strong initiatives internationally to favor and to encourage the uptake of renewable energy and specifically marine energy and as well to support the early market introduction of technologies.

And we see that in Japan, we see that in Australia and some parts of the European and U.K. theater. There are still strong structure of price report in the U.K., most notably with the existing renewable obligation certificates even as that moves forward into a different stage under the market reforms that are envisioned in the U.K. still some strong support for renewables.

So there are number of underpinnings to the market that are there that we see internationally. And in addition, our work and our targets working with Lockheed, working with Mitsui is to keep on focusing on a much lower level of cost of energy, so that the benchmark isn’t just other renewables, include other more conventional sources.

But just a quick point on that, Lockheed has articulated energy security is a very important part of their overall corporate mission and within the marine energy space, they have a strong commitment with three areas, wave energy working with OPT, also entitled and also Ocean Thermal Energy Conversion. So I think that underscores what remains as a strong international opportunity for what OPT is doing certainly.

Rob Stone - Cowen and Company

Thanks. My question, next one anyways is on the Autonomous PowerBuoys. You mentioned that a larger potential opportunity now for higher power applications, as you think about the relative size of low versus high power opportunities, which one looks like it might contribute more?

Chuck Dunleavy

Contribute more to the…

Rob Stone - Cowen and Company

The autonomous piece.

Chuck Dunleavy

You know, really, what is -- really has us quite excited is that there is a strong market opportunity for both our smaller systems, which most recently is -- what we call the APB-350, it's rated at 350 Watts on a continuing basis, that’s not the peak. As they continue us providing the power, which meets a certain set of needs within defense markets, maritime surveillance as well as oil and gas.

But what has developed in as we are talking very actively with our markets and I think David Heinz is also important part as well as other people within our U.K. and Australian operations where we’re reaching out very strongly right now to companies that work within the oil and gas space is that our Mark 3. Back to your question here, our Mark 3 utility buoy can be used in an autonomous mode. It has been developed from the standpoint of it being used for the utility markets.

But from a technical standpoint, it's fairly straightforward path to utilize the Mark 3 on an autonomous basis. And when we talk about the capacity or the power rating of that which on a peak generator capacity basis is just under a megawatt. Again, that’s on Mark 3 that opens up some additional market opportunities and generated a fair amount of -- has generated fair amount of interest and excitement within the various market sectors that we’re talking with.

So the breadth -- to your questions, the scope and the breadth of the product that's available to meet those autonomous needs includes not only our existing APB-350 product but also the Mark 3 that we have already had in the Ocean and expect to be with completion of funding of our Australian project, expect to be three Mark 3 is connected to the grid on off the coast of Australia. And they are supposed to be connected as a grid but the autonomous use would be well demonstrated as well, I think just by having them in the water and showing the power production.

Rob Stone - Cowen and Company

How much time and spend would need for the modification to turn the Mark 3 into an APB system?

Chuck Dunleavy

It requires no inventions and it requires simply -- I don’t want to say simply because nothing is trivial when you are out in the ocean. But it is straightforward and revolves around adapting some of the onboard energy storage, in particular, that would accommodate the autonomous mission. And just maybe to explain that a little bit more, it’s all -- within the case of the autonomous market need, it’s all about continuous power.

And we utilize a larger storage capacity as on board. We have some patent spending on power management software that we’ve created to take it down to the cell level. So that technology and that storage capability, which now exist in our APB-350 product is something we need to bring forward on a larger basis because there is just a lot more power involved with the Mark 3. So, again, no new inventions, it’s a scale up of existing technology, but one that which, one can never take for granted, particularly when you’re dealing out in the ocean.

Rob Stone - Cowen and Company

So, David Heinz looks like a great addition to the team. Would you say that, at this point, it’s a matter of just getting in front of the key decision-makers and do you feel like that’s happening?

Chuck Dunleavy

That’s definitely happening. As I said a little bit earlier, mentioned a little bit earlier, not only David personally, but as well some of the people in our U.K. and also our Australian operations are working very closely and I’m very proud about that. It’s just great co-ordination, market co-ordination that's occurring among those groups and now with David’s leadership. So that’s an important point.

But I don't want to be overly glib in my answer to the other part of your question, which is basically, so what does it take to start recording some sale? It certainly requires good and consistent marketing capability and good relationships. And I think we've done extremely well in that regard. The market is looking for, in the case of the oil and gas market, I think to be fair about it is looking for increased demonstration of our product in the ocean.

We scored well and highly with respect to the deployments previously done of our APB-350. And we need to get that system out in the water and staying out in the water. At the present time, working on some optimization of the design of the system because we have a multi-year maintenance free goal with that system, all the while producing power on a consistent or continuous basis.

So, we’ve set a high bar for ourselves. We know very well that our perspective market base, not only in oil and gas, but also maritime surveillance has high expectations. So part of what we’ve got to do is get our product back out in the ocean and demonstrating consistent performance, that's another part of it and we’re looking on that right now.

Rob Stone - Cowen and Company

Great.

Mark Featherstone

And I think our project in -- WavePort projects and also our VWP project in Australia for those larger-size buoys are helpful for our APB efforts as well.

Chuck Dunleavy

Absolutely. Yeah.

Rob Stone - Cowen and Company

One quick follow-up for Mark, if I may, on expenses, how should we think about the run rate going forward, is this lower level of SG&A sustainable for a while?

Chuck Dunleavy

I think on the SG&A side, we’ll continue to have fairly modest spending. I think we will need to step up a little bit as we get further into our VWP project. We are recruiting additional people to -- we’ve taken on a lot of work in the last couple of months. We are continuing to hire people but yeah, we run a fairly tight ship here on SG&A front and we plan to keep it that way. But we would expect to see some growth there.

Rob Stone - Cowen and Company

Great. Thanks for taking my questions.

Chuck Dunleavy

Yeah. Thank you.

Mark Featherstone

Nice talking with you, Rob. Thanks

Operator

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

Chuck Dunleavy

Thank you all once again for attending today's call. If you have any further questions, please don't hesitate to contact us either by email or telephone and otherwise, we look forward to speaking with you next quarter.

Operator

And thank you, everyone. That concludes our call. You may now disconnect. Enjoy your day.

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