Good day, ladies and gentlemen, and welcome to the Ocean Power Technologies' Fiscal Year 2012 Third 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 the Chief Financial Officer of Ocean Power Technologies, Mr. Brian Posner. Please proceed, sir.

Thank you. Welcome to Ocean Power Technologies' earnings conference call for the third quarter ended January 31, 2012. OPT issued its earnings press release earlier today, and this coming Monday, we will file the company's 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 the OPT website, oceanpowertechnologies.com. With me on today's call is Chuck Dunleavy, our Chief Executive Officer. Please advance to Slide 2 of our presentation. 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 this 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. I'll now turn the call over to Chuck Dunleavy, OPT's CEO.

Thank you, Brian, and thanks to everyone for being with us today. Brian and I will be available to answer questions following our prepared remarks. Turning to Slide 3. Let me briefly provide an update on recent accomplishments. We are very pleased with the results of the Ocean operations of our Littoral Expeditionary Autonomous PowerBuoy or LEAP unit developed for the U.S. Navy. The Autonomous PowerBuoy performed much better than the project specifications. At the same time, we have marked progress on advancing the PowerBuoy's energy conversion capability as part of our WavePort project in Spain, and are taking the steps to expedite development of our planned 19-megawatt project in Australia. With those projects, the PB150 project in Reedsport, Oregon and our ongoing business development efforts, we remain clearly focused on getting more PowerBuoys in the water. Our intellectual property position continues to strengthen as we optimize our PowerBuoy technology. Since our fiscal year began on May 1, 2011, we've been granted 4 patents and applied for 3 new patents covering a broad range of applications. From the new wave energy power take-off system to improved buoy mooring and anchoring, electrical efficiency innovations and patents on our Undersea Substation or Pod. In total, we have now 64 patents issued and pending. Quite impressive for a company of our size and really serves as witness to the creativity and technical innovation of our employees. Our operating loss for the fiscal third quarter and 9 months decline as compared to the comparable, prior year period. This primarily reflects a greater-than-30% decrease in product development costs for both the quarter and the 9-month periods. In addition, our net cash used in operations decreased for the 9-month period versus a year ago. We ended the quarter with a backlog of nearly $8 million and…

Thank you, Chuck. As noted on Slide 9, OPT reported revenues of $0.9 million for the fiscal third quarter as compared to revenues of $1.5 million for the 3 months ended January 31, 2011. This decrease primarily reflects lower revenues related to the company's PB150 being prepared for deployment off Reedsport, Oregon, as well as lower revenue tied to the Navy's LEAP program on a year-over-year basis as that project was successfully completed this quarter. These revenue declines were partially offset by an increase in revenue from the company's WavePort project off the coast of Spain. The operating loss for the 3 months ended January 31, 2012 was $3.2 million as compared to an operating loss of $3.8 million for the 3 months ended January 31, 2011. The reduction in operating loss year-over-year was due primarily to a decrease in product development costs, principally for the PB150 system that underwent successful ocean trials off the cost of Scotland in calendar year 2011, partially offset by costs related to the PB150 PowerBuoy in Reedsport, Oregon. The net loss was $2.2 million for the 3 months ended January 31, 2012, compared to $3.4 million for the same period in the prior year. This decrease in net loss was due primarily to the decline in operating loss and a higher recorded income tax benefit due to the sale of New Jersey net operating tax loss, partially offset by a decrease in interest income and a higher foreign exchange loss. Interest income for the quarter decreased to approximately $95,000 compared with $148,000 for the same period last year. This decrease was largely due to the decline in average yield, and in the total invested cash and marketable securities. For the 9 months ended January 31, 2012, OPT reported revenues of $4.3 million as compared…

Thanks, Brian. Turning to Slide 11, let me summarize our expected activity and goals over the coming months. As I mentioned earlier, we're on track to deploy our first Oregon PB150 during 2012, which will be an important milestone and provide further momentum to our plans to build out a 1.5-megawatt power station in Reedsport. Second, we will continue to report on progress with regard to the design of an advanced energy conversion capability under the WavePort project in Spain. And we also expect to provide further updates on our business development initiatives in North America, Australia, Japan and Europe. Before opening the call to questions, I also want to note that we recently announced the promotion of Tim Steven to Managing Director of Ocean Power Technologies Limited, our U.K.-based subsidiary. Succeeding Angus Norman, who will serve on the company's board of advisors, Tim will take on this leading role in overseeing the expansion of our operations in the U.K. and Europe. We're very proud of Tim's past accomplishments and look forward to seeing him excel in this new position. Thanks again to our investors for their interest in our progress, as we believe the company is well positioned for an increasingly active period ahead. We have the right team in place, the right partners and the right technology to make a significant impact in the Ocean-based alternative energy industry where we see growing demand. This concludes our prepared statement for the third quarter review. We'll now open the call for questions. Please go ahead, operator.

[Operator Instructions] And your first question comes from the line of Jason Feldman with UBS.

So it looks like for the autonomous buoys in particular, it seems like there's a clear benefit to customers. That technology seems to be where it needs to be. What do you see as the key barriers to adoption and what'll have to happen to see the Navy in particular actually start buying these in any quantity?

Sure. It's interesting and goes -- the answer is interesting. It goes right to the point that we sought to communicate, not only in this call but in the previous one, which is to focus on the enabling aspects of it. It really is a game-changing technology in a lot of respects. And the interesting point that I'm referring to is that as we talk very extensively with prospective customers in the -- not only the Navy by the way, but also in other nongovernment venues, that it requires them to all of a sudden start thinking about things that are now possible that can be done. And it's just a normal process, I think, of people thinking that when they're convinced something can't be done, they focus on either other projects, other technologies, other applications. And so what we have found in terms of the, I'll call it the barrier to getting the order, the contract or a purchase order, is very much involved with the -- are satisfactorily communicating the enabling aspect of our technology and then getting the people to whom we're speaking to think about how that can help their mission or whatever their particular applications might be. What we're not finding as issues are cost of pricing barriers, nor is there any issue with respect to what we can accomplish. We think that the LEAP system and the results of the data that we've gotten from that are very helpful. And when we do get in front of people, talk with them, it's gaining some traction. So I think -- I hope that gives you a little feeling, but it really comes down to the technical aspects of the technology and making sure that the way which it opens up some applications is fully appreciated by our audience.

Okay. And then also in Australia briefly, how much progress can you make going forward without obtaining additional financing. I mean it sounds like you're progressing with permitting site selection, but kind of how much more progress can you make until you get the financing? And also, are those activities in and of themselves going to help, do you believe, facilitate the identification of further financing?

Sure. Well first of all, we'll just take the second question. These activities that I'm about to expand on definitely help in the selling of the financing aspect of it. What we're doing right now is focusing on not only the site identification, but also developing the site, and that includes reaching out to local stakeholders, as well as addressing the supply chain that's necessary to fulfill the orders. We're not going to build any buoys until we have the financing lined up, of course. So we're not going at risk in that regard. We are spending some funds with respect to the areas I just noted, though, and these are very helpful as we're talking with potential or prospective sources of capital for this project. There's no doubt but that -- a concern among people who would be the extenders of capital to marine energy projects is -- starts with whether or not this can will be well received by the local communities, what is the extent to which it is or not disruptive for those various stakeholders. So what I'm describing is also very much the case, our MO that we followed in other locations, not only Europe but also Oregon, where we spend time upfront with those stakeholders. This really is very important with marine energy, particularly since marine energy, as it is seeking to commercialize itself, is in the early stages. So those efforts are very helpful to convincing potential funders that we've addressed a number of risks, which of course in this case includes what will stakeholders support. The supply chain that I mentioned very quickly, but it also is another important part of it, it's helping us to fine-tune the costs, our cost models for these systems that we're taking to the financial markets, as well as the prospects for return. One final note I'd like to make on to my answer is that the continuity of the [Julia] Gillard government in Australia, and in particular the Prime Minister's initiatives with respect to the carbon tax plan there is something that's been very much sustained within recent legislative developments in Australia. So we're very pleased about that, and that's helpful as well. It's eliminated some of the uncertainty, and this relates directly to top line support to our financial models.

[Operator Instructions] And your next question comes from Rob Stone representing Cowen and Company.

A couple of questions on LEAP. Why did the system do so much better than the design parameters? If you can shed some light on that.

Sure. Whether -- a couple of areas in which it exceeded the design parameters, but the specific one that we mentioned in our prepared comments I'll start with, which is to say that the Navy set a mission requirement of 150 watts of continuous power. And so that was set by the Navy. And what we've found is as we were setting about to achieve that -- remember, it's also the part of the mission was to provide that on a nonstop 24/7 basis. So one area that was particularly helpful and helped us exceed what was the Navy specs was we made a big stride in terms of reducing what we refer to as the hotel load of the system. The term derives from the notion that even at night, the hotel has got to keep a certain level of lights on and keep baseline functions going on even though it's at night. That's the derivation of the term. In this case for us, the hotel load is that baseline power requirement to keep some of the computers going, the monitoring devices and other aspects of the system independent of the baseline power generation and consumption related to the payload. And we made some very significant strides in reducing the hotel load for this LEAP PowerBuoy. And what's really neat is that it extends directly to the benefit of our PB150 as well as the 500 technology, so that strive forward in terms of reducing the hotel load applies across our platform of all PowerBuoy sizes. So that is probably one of the major dimensions of why we exceeded the design specs. The other one it relates to its storm capacity, its ability to withstand the forces from very large storm forces, which in this case was Hurricane Irene. I don't -- we weren't exactly expecting that kind of storm forces. But what resulted in our being able to do so well in the face of those 53-foot waves, which is the second part of my answer to your question, first one on hotel load, the second one is just focusing on survivability, is that our mechanical and electrical engineers worked very closely as a team, as a well integrated team, focusing on issues of what happens in the system, not only mechanically in the survival mode, but also electrically when you have such huge forces. So we addressed and spent a lot of time on thermal absorption, thermal risk areas. Just think of the huge waves impinging on it, you've got these generators that want to spin and somehow -- and react to that. So what do you do with all that excess energy and therefore what do you do with the heat that can accumulate? So that was another aspect of why we exceeded the expectations on that system.

So how was it exactly that it is able to supply continuous power when the seas are calm?

Sure. Unlike our utility systems, it has 2 aspects to it. The LEAP system has 2 aspects to it. One is a an actual bank of batteries or cash of batteries that -- they're inside it. And the second aspect is a power management function, which we actually, in large part, developed under the LEAP program and which serves to strongly benefit this product offering. So what's happening is that in relatively low wave states, we have a continuous charge of the batteries, that's not necessarily anything new, that notion. But what's new is the power management system, in fact, on which we're submitting some patent applications, that relate to the management of those batteries at the cell level. In other words, within each battery there are a number of cells which is, of course, common knowledge. But it is the aspect or way in which we are, number 1, preventing problems in any individual cells to, in any way, compromise the rest of the power management function. As well as during the instance where you, let's say, have absolutely no wave, 0 waves in a very metered and controlled fashion, utilize, draw on the power in that battery cache. Normally, by the way, just to give you a feeling for what its dimension is or its capability is, normally you've got about maybe 4 or 5 days within which you have what our buoy would consider to be no waves, where you're not generating any energy. The system has been designed so as to provide power over a very much extended period of a little over 30 days of absolutely no waves. I hope that gives you a little more color about the capability of the system and its power management capability.

That sounds very helpful. I understand the part about getting potential customers to now realize what's possible. Supposing that you did start to get an influx of orders for LEAP, what would be the steps and how long would it take to set up serial production?

Sure. We've already established that supply chain right now. And we have 2 different fabricators already online, not only the one who built this particular system, but we have a backup fabricator. I'm thinking now for just the overall geometry or the structure, the buoy structure itself. What we do here at OPT, at our facility in New Jersey, is to assemble and test the internal power take-off or smart part as you referred to it. And we have that process already well defined and established, including the supply chain into that. And typically, what we did in all of our systems as we build them, and especially in this case with LEAP is as we are ordering the 1s and 2s that we needed in quantity for this particular order, we at the same time to put out, we did that on a competitive basis. And in all the RFQs that we issued, we asked for multiple quantities, not just, again, the 1s and 2s we needed for this. But what would it be for 50 and an order of 100 or 200 such systems. Now that was very helpful, I think, in establishing the price points for our LEAP in larger quantities, as well as of course our projections as to profitability.

To turn all that on, let's say you decide to flip the switch, how long would the system take to then come up to speed? It sounds like it would be quite quick?

Yes. And I'm often asked the question what's the cycle time? Just after receipt of order, ARO, to the point were you are delivering a buoy dockside. In the case of the LEAP system, this is a process over about 1 to 2 months, particularly in large production volumes well within about a 45-day period. It's a smaller system, it's less complex and -- which of course, also contributes to the improved hotel load issue I mentioned a little bit earlier.

My last question is on the wave-by-wave tuning work that you're going to do on the PB40, can you quantify the potential impact on cost and output? And when do you expect this development work to be done? And I assume that all of that would translate pretty directly to the PB150.

With respect to your last point, absolutely. It does translate across platform, not just with respect to PB40 applies to the LEAP, which is much smaller, as well as the larger-sized system, PB150 and 500. So you're absolutely right about that. In terms of the timing part of your question, we've held back on giving any specific guidance as to when we expect this system to go in the water and when the actual demonstration to occur. And the reason for that, by the way, is that we're one of the several consortium members, the other consortium members get their funding directly from the EU, as of course, does OPT, but we do not serve as the prime contractor in this particular contract so there's more moving parts over which we have less control than we would normally would have, and therefore we've been guarded in terms of forecasting actual deployment. But a little more specifically with respect to the wave-by-wave tuning, that we are -- as I noted earlier in the prepared text, we're working very closely with University of Exeter. Some very capable people there who are helping us and supplementing a lot of work as well being done by the OPT team. So we're looking to get a lot more visibility on what will be the expected results when it's put into and implemented in the buoy. Actually, what I think the first part of your question which is, okay, so what is that going to mean in terms of either cost or cost of energy more specifically? We also are not giving any guidance on that at this point. The realm of possibility is a very significant multiplier. But that's in more of a theoretical world. What were spending a lot of time on right now is certainly the theoretical calculations, but more importantly, doing some wave tank testing as well as computer modeling, can give us a little more guidance on what's going to happen when we're out there in the actual ocean with a lot of unpredictable forces? So it is from those points that derives our caution and our unwillingness, I guess, at this point, to give anything specific in the way of numbers or percentages. But our expectation is absolutely that we'll improve the power output of the system resulting in a reduction in cost of energy. The verdict is out with respect to the extent or the quantum.

Okay. So we'll just say it's bigger than a bread box and smaller than a tractor trailer.

And your next questions comes from the line of Jeremy Hellman representing Avenue T Fund.

I wanted to talk a little bit more about your new kind of thoughts around marketing a PTO systems and the like excluding the actual PowerBuoys? And could you give us a little perspective on what the addressable market for that might be either in the near term or maybe over a 3- to 5-year kind of look, and how significant you expect that to be in terms of contribution to your revenues over either this year or the 3- to 5-year period as well?

Sure. Again, this is with respect to the marine infrastructure?

Yes.

Just to confirm.

And then a second follow-up to that, if I'll just ask them both at the same time is I just wanted to be clear, are you talking about selling systems and consulting as well, or separated systems or consulting services, essentially hardware and software in management as well?

Sure. The offering that we are putting out there and which we would like to be providing to customers includes both product and services. I think the flagship of the product side of it, since it is propriety to OPT, is our Undersea Substation Pod. We've already built one to order for Iberdrola in Spain, and tested that in ocean trials. So that would be the core of the product. We would, in addition, we are very much in a position to order cabling, oversee the installation of the cabling, as well as the onshore grid reconnection. We've done that, as I mentioned, within the -- again, in the prepared remarks and I'm sure you heard. We've done that a lot over the last 15 years. So we have very, I think, some really good depth on which experience to draw on. In addition, the offering includes an advisory role, which is one also born of the experience we've had. So it truly -- I think, in a way, we're borrowing a page from IBM back in the late '70s and 80s, which is it's not all just about big metal, it's also about the services that can accompany that and add real value to a customer. Now to your first point with respect to the size or the addressable market here. That's also something using the lob [ph] stone quantum, is probably where I'd have to come out, which is to say we don't have an exact market determination yet in terms of its exact quantifiable size. What we are seeing in the marketplace is in a number of locations internationally, there are not only individual private developers but also a number of governments at the local, as well as either state or federal levels that are very desirous…

Okay. Well I guess maybe another way of thinking about it and maybe I don't know if it's getting too specific then, but just be curious for your perspective, especially given where you are in New Jersey with respect to the Atlantic offshore wind project that's been debated and seems to be inching forward. If and when that ever does come to fruition, that would seem to be potentially a multifaceted opportunity for you guys, be it with the LEAP buoys in some form, and also -- and/or the pod systems and the like. And kind of curious if you're, I guess, plugged into that potential opportunity and what you might think of it?

Sure. Well I think you're spot on in terms of it representing an opportunity for us, and it's one that actually we are pursuing. We've had dialogue with some of the people involved with not only that project but a few others that concern offshore wind and not just off New Jersey. What's an interesting opportunity for us is to -- is the notion of a combined or a multiple technology renewable energy site. When you think of all the plant that's being installed for offshore wind, not only the platforms themselves but the cabling to shore, our systems can be utilized in a number of ways. Number one, it could be a little further out from the shoreline, our buoys, to produce power. We've always thought and pointed out and made it very clear that we believe that the ocean resources has a much higher availability than wind at many sites. So it can be, I think, a very powerful offering to the shore-based power consumers from that standpoint. That's just for pure power and obviously you have the economies of our systems drawing on the infrastructure already built for those wind stations, which typically are going to be a little bit further, closer to shore then we would be. Another dimension of the opportunity for us includes not only Marine Energy Infrastructure services and products that I mentioned a little bit earlier to your first question, but also the LEAP system can provide a power for other applications related to that platform, that wind platform. And it's the same with respect to offshore oil and gas platforms. This includes power for security that is to say power for either radar- or sonar-based security equipment to protect these offshore facilities. And other uses at lower power that might be made or be important for that offshore wind facility. So it's a very interesting opportunity for us and one that we are working.

And that concludes the questioning period. Mr. Dunleavy, you may proceed with any closing remarks.

Well thank you all again for attending today's call and for the questions that we've had. We really do generally look forward to getting the questions and having the dialogue. If anyone does have any further questions, please do not hesitate to contact us. Otherwise, we look forward to speaking with you next quarter.

Thank you, everyone. That concludes our call. You may now disconnect. Have a great day.