WTR Fireside Chat. I am Peter Gastreich, Managing Director of Energy Transition and Sustainable Investing at Water Tower Research. I am very delighted today to be joined by two members of the new leadership team at Ocean Power Technologies, NYSE American ticker OPTT, Tracy Pagliara, Acting Chief Executive Officer and President, and Jason Weed, Chief Operating Officer. Tracy and Jason, thank you so much for joining us today.
Thank you.
Yeah, thanks for having us, Peter. Really appreciate it.
This is the first time that we have had either of you on a WTR Fireside Chat. It has been a busy time since you stepped into your new roles in mid-September, and I know investors are really keen to know you and to hear you, hear how you are thinking about the road ahead. Before we begin, I would like to point out that the company's safe harbor statements can be found on the investor tab of its website at oceanpowertechnologies.com. Please also note that this Fireside Chat may not be reproduced or transcribed without prior written consent from Water Tower Research. This conversation is also being recorded, so you can access it again in the future and share it with others.
Investor questions are definitely encouraged, so please enter them in the chat box, and we will make sure that those questions are delivered to Tracy, Jason, and the team at Ocean Power. With those housekeeping notes out of the way, gentlemen, let's get started here. Tracy, let's start with you. Many investors know you as the company's Senior Vice President and General Counsel, but you also bring public company CEO experience and a CPA background. Could you tell us a bit about your path and what you bring to the CEO role?
Sure. I appreciate it. In early 2024, a close friend of mine who was formerly the chairman of the board, Terence Cryan, asked me to take on a three-month assignment to help the company. At that time, we had a difficult activist campaign that I am sure some of our shareholders remember. It turned into a two-and-a-half-year stint as the Senior Vice President and General Counsel. Then, of course, I was asked to take on the role by the board of the Acting CEO and President. Prior to joining OPT, I was with a company called Williams Industrial Services Group. I was the CEO there. I was with the company for 13 years in a variety of capacities, all with increased responsibility, and then ultimately was named the CEO role, which I served in for six years.
That was an infrastructure construction and maintenance company that primarily did work on power plants and water infrastructure and all sorts of other industrial manufacturing. Anything that had to do with infrastructure, we worked on. Our primary bread and butter was working inside of nuclear plants and building. We helped build nuclear plants, maintain them, do capital construction work, capital project work. The six years I was there, the company was distressed, although we turned it around and took a lot of costs out, repositioned the business, took our share price from $0.25 to $6, and were able to grow organically by 50%. Then unfortunately, COVID hit, and our order book dried up for a couple of years while our major customers, which were major public utilities like Southern Company, TVA, et cetera, stopped issuing orders. So we ended up selling the company.
Prior to that, and I will try to be brief, I worked for a company called Gardner Denver, Inc, which was an industrial equipment and oil and gas equipment manufacturer. We grew that business. I was the Executive Vice President and General Counsel, was very closely tied to our growth program, which was largely through M&A. We took that business from $350 million in sales to $2 billion. The company market cap went up 800%. Ultimately, it was purchased by KKR, and KKR took it public again, and then Gardner Denver ended up buying a company called Ingersoll Rand, which is a massive industrial equipment company now. So, I bring restructuring and growth experience, and I could not be more happy to be here.
Okay. Thanks very much, Tracy. Moving to you, Jason. You joined the company after a career in the Navy, including commanding the Navy's unmanned undersea vehicle squadron. How does that experience shape the way that you think about what defense customers need?
Yeah. No, great. Thanks for that question, Peter. I kind of start with the operator first, right? Figuring out how difficult and challenging it is to operate in the maritime environment. How do we make our products, what we deliver, simpler in a complex environment? That's really the focus that I've had as I've looked and taken the voice of the customer, understood where we've had our sales over the years. We have more than 100 of the WAM-V surface vehicles sold over the course of MAR and OPT, and over 25 buoy deployments with various customers around the world. How do we take that knowledge, that information, that feedback, and continue to improve our product?
Then look from the end user's perspective about how they might want to use it, what kind of flexibility do they need, especially understanding the operating environments, right? From the Middle East up into the Arctic, there's a wide range of challenges that individuals will face. We really are focusing and have focused over this last year on really taking a deep dive into our products and figuring out how to make them less complex and more user-friendly.
Tracy, for the leadership change, the board framed it around execution and commercial conversion. Why was this the right time? For investors new to the story, could you please give us a high-level overview of the company's business and strategy?
Sure. Jason, in terms of why the change, I will cover that first. For a micro-cap company, I think the board was looking to better integrate and simplify what we do. We have been around a long time, have huge potential in our markets. So bringing in the COO role was really intended to try to get us to be more efficient and have better efficacy in terms of what we do. In terms of the company, what we do is we make We consider ourselves a premier ocean intelligence company. We make PowerBuoys, we make unmanned surface drones, and we have technology that connects between our PowerBuoys and our drones.
Also, we have an ability to interface across platforms, a platform called Merrows, which is our technology, which we developed a couple years ago to interface seamlessly with our customers and their systems to help them provide the interface that is necessary for the types of information that they are looking for from the ocean.
Now, into the roles, how are the two of you dividing your responsibilities, and also, how is the finance function being managed?
Jason runs sales operations and the technology and innovation functions. I really run the rest of it. I mean, Jason reports to me, but he really operates I am not a micromanager, so he really operates pretty autonomously. I am spending a lot of time right now on the corporate functions, to your point. Bob Powers left the company. His family moved to L.A. His wife got a great job out there. So we have, right now, have an interim CFO. Her name is Vicki Hay. She has her own consulting company called Flexible Consulting, and she is very adept at working with companies like OPT, which is going through a state of transition right now. That is really what she does. So, that is how we are managing things currently.
Tracy, now a month or so into the role, where have you been focusing your attention first?
Well, really, as a team, Jason and I have been evaluating every opportunity we can to improve the business, make it more efficient, reduce our cash burn, so we get closer to the point where we are cash positive. I have been trying to support Jason in his new role. He is examining every aspect of the operations and our technology and innovation function. We have also been spending, I have been spending a lot of time on capital raising as well, because we need to continue to fund the growth of the business. The market, the capital markets are I would say there is money out there, but it is a little bit more challenging than, say, it was a year ago. So, we are working a lot on that.
Okay, great. Thank you. Jason, I would like to turn to you for some questions on the commercial execution, and starting with the backlog, which I think really should be the number one indicator that investors are probably tracking. Your backlog is around $19 million, and the pipeline now looks like it is above $150 million. What does it take to convert more of that into revenue, and where are you focusing the team's efforts?
Yeah, no, great question, Peter. We have about $19 million, as you mentioned. We have about $12 million that is in our South America market right now with call-off purchase orders, and we have been growing side by side in the entire region with our partners in South America. So, we are now at the point that we feel very comfortable with where we stand with our partners because we have active bids in. The first portion of those agreements were really growth on both sides, us understanding the South American market, understanding the pain points of our resellers' customers, and then kind of showing up as well too.
So we have also been physically in the region at demonstrations, speaking roles, during demos. We have been on site alongside our resellers. So, I think we have positioned ourselves well to begin executing on that backlog and converting a good portion of that.
In other pieces, we're recurring revenue on the DHS contract. That was a contractor-owned, contractor-operated lease model over a 24-month period of performance. We now have a recurring revenue stream from those PowerBuoys, so that's also incredibly helpful as we pull down some of that. The pipeline sitting at $150 million, that's been a large effort to the team pulling together, going out, figuring out what customer pain points are, and then bringing in qualified opportunities that we can pull through various gate reviews to make sure that we understand the fidelity of those opportunities. We have seen some headwinds as our customers see changes in their markets that have slowed some of the opportunities. The war in the Middle East challenged us because we had been in the Middle East for the better part of three-plus years, and that changed the dynamics there.
Now we're refocusing our efforts there. We do have three assets. Three of our boats are in the UAE right now with our resellers. We do have a PowerBuoy with a customer as well. We're looking at how do we leverage those assets in region to kind of refocus our effort there, so that way we can be successful. I think the big thing, what we're really focused on is customer success, customer management. We hadn't really focused on that in the past, and that's been a big focus of mine over the past year, is to really spend a lot of time listening, understand the pain points of our potential customers and our existing customers, and then how do we lower customer acquisition costs by getting folks that may be interested in one vehicle now, but three in the future, things like that.
How do we get those customers to scale as we work alongside them and learn about how they're using our vehicles, and then how do we need to bring that back into our engineering program to improve?
Jason, we've been following the DHS PowerBuoy deployment closely since it was first announced earlier in the year. I'd also flag to investors that this is the largest deployment in the company's history. How is that performing, and where could it lead next?
Yeah, so great. So we have three PowerBuoys in the water right now that are performing, pushing data as part of the contract. We're pushing our data up into Anduril's Lattice platform, so the Coast Guard has access to that information. We're continuing to work alongside DHS and Coast Guard to deliver the fourth PowerBuoy. We're looking at also additional technology options as the Coast Guard evaluates the program.
We're looking to schedule an official evaluation with their team, so we're working out the details on that right now so we can undergo, during this period of performance that runs through the end of next year, an official evaluation that we get out of the Coast Guard that we can use and then leverage, and to see how we might be able to position this program as a future program of record for Coast Guard DHS to help them find areas where they have gaps and seams in their coverage, and then use the PowerBuoy systems to enable capability where they don't want to put manned assets.
And Jason, there's been a lot of activity on the defense side lately, and let me lay these out for investors. Your WAM-Vs were put to work alongside allied forces at REPMUS. OPT achieved CMMC Level 2 compliance. You were named to a multiple-award contract with the Naval Oceanographic Office, and most recently, the PowerBuoy Mini was selected for a U.S. government operational evaluation. None of these is obviously a contract award on its own, but together they do seem to open a lot of doors. How should investors think about turning these opportunities into revenue, and which do you see moving first?
Yeah. Buoy, if I could predict which one would move first, that would be great. What I really see this is, it's an opportunity for us to showcase what we're doing and how we're growing as a company, and that we're seeing that resonate with customers. Across the board, whether it's Army Corps of Engineers or whether it's the U.S. Navy, whether it's SOCOM, we're starting to get to a resonant frequency that the customers now understand, "Hey, this is what we're doing, how unique it is." One of the things I say is, a lot of folks talk about the USV, so the uncrewed surface vehicle drone market is very crowded, which it is. But there isn't one class of ship that any navy has. On the WAM-V line, we do something a little different with the articulated hull style that we have.
It allows us to carry very unique payloads that are reconfigurable. Our goal is to be very low cost and attritable, so that way you are not spending an enormous amount on the vehicle and you can focus your money on the payload. That makes it a very unique use case across multiple government agencies. The buoy obviously is very unique in itself as well too. We have the better part of 25 years of experience being on the water with these platforms. There is a lot of emerging tech in this space, but we feel very confident in what we have developed and what we are developing from a software and hardware perspective. I think those pieces are resonating very well across multiple channels. I think getting CMMC Level 2 self-certification was very important because that did start unlocking some doors for us.
I think that as we get in the right rooms and have those conversations, I think the value proposition of the OPT product will start to really generate. We are excited about where we are positioned right now. Again, as Tracy and I work to cut costs and to be more efficient and lean across the company, and be more efficient across the various pieces that I now am responsible for, I think we are going to see some real benefits moving forward.
Okay. Let us bring Tracy back in here with the WAM-V as a modular platform. The recent work with Greensea IQ and the Naval Postgraduate School is very interesting, and it really points to WAM-V as a platform for partner systems. A question for each of you here. Tracy, why is this the right model for the company? Jason, how does it help you win repeat business?
I will let Jason start on the-
Yeah. Perfect. I think, how does it help us win repeat business? I think the ability to take the WAM-V and be adaptable and open, I think that is one of the designs that we have built in is that open architecture. The customer is not beholden to a set of hardware that we have selected. They get to select the hardware, and then we have open APIs that allow integration. From that perspective, what we have seen, talking to one of our customers in Norway, the first vehicle that they bought was for a specific use case to do survey and monitoring, but now they are interested in the vehicle for ISR. They can use the same platform, but they can bring a separate set of equipment, and sensors, and capabilities to that platform, and now you have true dual-use capability.
I think that is what allows us to get to the point where we have repeat business and its scalability.
Tracy, let us move on to the financials here. Revenues grew 44% in fiscal Q1, but gross margin is still negative, as your strategic contracts kind of work through. What is going to get margins back to that historical 35%-55% range?
Yeah. We took on, in the last couple years, as our buoy business has matured and become in higher demand, we took on big projects, and we took some lumps, some non-recurring costs that will not recur in future projects, because we have taken a lot of time to evaluate what happened and why. Again, not to beat a dead horse, but this is exactly part of the reason why the board wanted a COO to help coordinate across the functions, get them communicating more often, and really develop processes around more effective estimating and really implementation, and ensuring that we did not have any gaps. I think Jason has done a good job of explaining that. As far as getting the margins back, I think two things. One, just what I talked about.
I mean, we're going to do a better job managing our buoy projects going forward, and then we need to scale the WAM-V business because the WAM-V business, the margin profile is better overall, and again, we think we have the right products and platforms, including the WAM-Vs, to seamlessly integrate with our customers and provide them access to the data and intelligence that they need for their businesses. So, we're bullish on the WAM-V business continuing to grow, and that we also, the buoy business will continue to grow, and we will manage the projects in a more cost-effective manner.
Okay, thank you. Let's move to your financing and capital strategy. Cash was at $7.4 million at the end of July.
Right.
How are you balancing cost discipline with funding growth, and what's your message to investors focused on the capital structure?
As Jason and I talk all the time, we have a team of people looking at how we're taking inefficiencies out of the business. We are going to streamline our cost structure because we've built an organization that right now is for a much larger revenue base than we actually have. So, we're doing that. We are also actively seeking other sources of capital. We realize we need more capital to beef up our balance sheet. The Iran war hasn't been our friend in that way. The US government is sort of in a state holding pattern to a certain extent, so they're not procuring projects as we anticipated they would. We invested a lot of time and energy in the Middle East, in countries like Kuwait, United Arab Emirates, and others, and frankly, the Iran war has really impacted that region and the promise that we feel is there.
All of that is combining to make capital raising a little bit more challenging, although again, I am confident we are going to raise the necessary capital we need to fund the business while at the same time taking out costs, improving efficiencies, and just working, continuing to support Jason's work to make our functions work together more seamlessly and produce profitable work and products in the future.
Tracy, something I like to ask every CEO that we host on our Fireside Chats and podcasts, and your perspective should be fairly fresh here, and that is, in your conversations maybe with investors, what do you think the market is most underappreciating about Ocean Power Technologies right now?
Well, Jason touched on this earlier, but we have been around a while. A lot of our competitors have entered the field in the last two years. They are private and are raising a lot of venture capital money. Unlike us, they do not have to put a report card out every quarter. People do not necessarily know exactly how well they are doing. There is a lot of headlines and what have you, but we think we have the foundation to build from. We have had over 100 deployments, over 25 buoy deployments. We are still just really scratching the surface of our future potential, and our business has a lot more visibility.
I think that is something that people, as they look to invest, you know exactly what Ocean Power Technologies is, the good, bad, sometimes the ugly, but we are very transparent in terms of what we are doing and how we are going about it. I firmly believe the best is yet to come.
Okay, that sounds great. Jason, investors always like to have milestones to focus on. What milestones would you suggest investors should be watching for in fiscal 2027 as evidence that the team's really delivering on the strategy here?
Yeah. Thanks. For that one, what I would say is, the first six weeks I've been in this role, it really has been a journey of learning, really deep diving in the different portions of the organization that I wasn't directly involved in from the operations side, so our deployments, our execution on projects, and then our T&I development as well too. So what technology and innovation projects are we working on? How are those integrated and how do those flow back to the customer? Now I'm at the point where I'm pivoting, to take a look at the next eight weeks. What are the key opportunities that are in front of us and how do we work those to close?
I would say, from a short-term perspective, I would look at the press releases that come out for sales that we close, because I do think that our demonstrations that we did with Army Corps of Engineers in Duck, North Carolina, and our REPMUS event that we did, and then also some touch points that we've had with SOCOM and some other folks recently. I do think that those events, physically being present with the customer, I think over the next few months, those are going to resonate very well, because the vehicles and the buoys have been well received. I think there's a very good runway that I don't think we had last year. I would say, kind of talking about the NAVO contract, we were at the point where we were actually putting in bids at the end of the US government fiscal year.
That wasn't the case a year ago. Our positioning is getting better and better. We're probably a couple years late of where we needed to be as a company to be able to pull back on the yoke, but we are in a very good position now to be able to do that and capitalize on the work we've done over the last year.
Okay, great. Well, Tracy and Jason, this has been pretty comprehensive today. It has been a great inaugural Fireside Chat with the both of you. I just want to ask, is there anything critical that we might have missed today, or would either of you like to provide some closing remarks?
I think this is I share your view that this has been a pretty comprehensive overview of where the business is. Come back to us, give us more than six weeks, and we will probably be able to elaborate a lot more. But again, we are both very bullish on this business, and appreciate the opportunity to share our thoughts and visions and perspectives on where the business is going, where the markets are going, what we are good at, what we need to improve at. I will turn it over to Jason, but I very much appreciate the opportunity to have shared some time with you today.
Yeah, thanks for that, Tracy. Yeah, I echo Tracy's sentiment. It is a challenging period for us right now, but we know exactly what we are up against, and we know we are backed by strong technology and a very strong team here at OPT. We have a lot of talented folks here on the ground that are working hard every day to build the best product that we can. So, thanks for this opportunity to kind of share a little bit about what they are doing. I look forward to meeting again here in a few weeks and kind of talk about the successes that we have had over that time period.
Okay, great. Well, thank you both. It has been great getting to know you today, and I know investors also appreciate hearing your perspectives so early in your new roles. So, we will continue to follow your progress closely here at WTR. You have laid out the strategy and the milestones. We will look forward to having you back again soon.
Thank you very much.
Thank you.
All right. And thanks also to the investors who tuned in today. Additional materials and research on Ocean Power Technologies are available at www.watertowerresearch.com. The views expressed in this Fireside Chat may not necessarily reflect the views of Water Tower Research LLC and are provided for informational purposes only. This Fireside Chat may not be distributed or reproduced without the written consent of Water Tower Research and should not be considered research nor a recommendation. WTR is an investor engagement firm, not a licensed broker-dealer, market maker, investment banker, underwriter, or investment advisor. Additional disclaimers can be found at our website, www.watertowerresearch.com. Thank you very much, and have a great day.