Earnings call transcript: Coda Octopus Q2 2025 sees revenue rise, EPS miss

Coda Octopus Group Inc reported its Q2 2025 earnings on June 16, revealing a mixed performance. The company reported earnings per share (EPS) of $0.08, slightly below the forecast of $0.09, resulting in an EPS surprise of -11.11%. However, the company exceeded revenue expectations, posting $7.02 million against a forecast of $6.35 million, a 10.55% surprise. Despite the EPS miss, Coda Octopus’s stock surged 12.55% in pre-market trading, reflecting investor optimism fueled by strong revenue growth and strategic advancements in its marine technology business. According to InvestingPro analysis, the company maintains a "GOOD" financial health score of 2.78, with particularly strong cash flow metrics. InvestingPro’s Fair Value analysis suggests the stock is currently fairly valued.

Key Takeaways

• Revenue increased by 31.8% compared to Q2 FY24, driven by marine technology.
• EPS fell short of expectations, posting an 11.11% negative surprise.
• Stock price rose 12.55% in pre-market trading following the earnings report.
• The company launched new products and reported increased hardware sales in Asia.
• Coda Octopus maintains a strong cash position with no debt.

Company Performance

Coda Octopus demonstrated robust revenue growth in Q2 2025, with a 31.8% increase from the same quarter last year. The marine technology business, a key driver, saw a 10% rise in revenue. Despite this, the company faced challenges with its EPS, which was slightly below expectations. The performance was buoyed by increased hardware sales, particularly in Asia, although the company noted underutilization of rental assets during the quarter.

Financial Highlights

• Revenue: $7 million, up 31.8% year-over-year
• Earnings per share: $0.08, compared to the forecasted $0.09
• Gross profit: $4.5 million
• Gross margin: 64.1%, down from 70.2% the previous year
• Operating income: $1.1 million, a 19.5% decrease
• Cash and equivalents: $24.5 million, with no debt

Earnings vs. Forecast

Coda Octopus reported an EPS of $0.08, missing the forecast of $0.09 by 11.11%. However, the company surpassed revenue expectations, achieving $7.02 million against a forecast of $6.35 million. This revenue beat, alongside strategic advancements, likely contributed to the positive market reaction despite the EPS miss.

Market Reaction

In response to the earnings report, Coda Octopus’s stock price rose by 12.55% in pre-market trading, reaching $8.70. This surge reflects investor confidence in the company’s revenue growth and strategic initiatives, despite the slight EPS miss. The stock’s movement contrasts with its 52-week range, where it had previously fluctuated between $5.76 and $9.89.

Outlook & Guidance

Looking forward, Coda Octopus anticipates continued improvement in its marine technology business and expects stronger gross margins in upcoming quarters. The company is focusing on expanding its market presence, particularly in the defense sector, and is targeting foreign navy adoption of its DAVID technology. With a PEG ratio of 0.36 and revenue growth of 15.63% over the last twelve months, InvestingPro analysis suggests strong growth potential relative to valuation. Discover more detailed insights and access the comprehensive Pro Research Report, part of InvestingPro’s coverage of over 1,400 US stocks.

Executive Commentary

"We continue to work to create stable long-term shareholder value," stated Ann Marie Gale, CEO. Blair Cunningham, President of Technology, highlighted, "The NanoGen series strengthens our core product line while strategically positioning us to capture emerging segments." Gale also noted, "These are strong indicators that this is the technology of choice for future diving operations in the defense space."

Risks and Challenges

• Potential underutilization of rental assets could impact future revenue.
• Fluctuating gross margins due to sales commissions in Asia.
• Dependence on defense sector contracts, which can be unpredictable.
• Global policy environment affecting M&A strategy.
• Competition in the rapidly growing underwater technology market.

Q&A

During the earnings call, analysts inquired about the strong hardware sales in Asia and the unusual reduction in gross margin. The company also confirmed a contract for 16 DAVID untethered systems to be delivered in Q3, highlighting ongoing evaluations for its Echoscope technology in defense programs.

Full transcript - Coda Octopus Group Inc (CODA) Q2 2025:

Operator: Good morning, and welcome to Coda Octopus Group’s Second Quarter Fiscal twenty twenty five Earnings Conference Call. My name is Melissa, and I will be your operator today. Before this call, Kota Octopus issued its financial results for the second quarter ended 04/30/2025, including a press release, a copy of which will be furnished in a report filed with the SEC and will be available on the Investor Relations section of the company’s website. Joining us on the call today from Coda Octopus are its Chair and CEO, Ann Marie Gale its Interim CFO, Gail Jarden and its President of Technology, Blair Cunningham. Following their remarks, we will open the call for questions.

Before we begin, Jeff Turner from our Investor Relations team will make a brief introductory statement. Jeff, please go ahead.

Jeff Turner, Investor Relations, Coda Octopus Group: Thank you, operator. Good morning, everyone, and welcome to CodreOctopus’ second quarter fiscal twenty twenty five earnings conference call. Before management begins their formal remarks, we would like to remind everyone that some statements we’re making today may be considered forward looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause events to differ materially from those described in the forward looking statements. For more detailed risks, uncertainties and assumptions relating to our forward looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission.

We disclaim any obligation or undertaking to update forward looking statements to reflect circumstances or events that occur after the date the forward looking statements are made except as may be required by law. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business as well as uncertainties and other variable circumstances including but not limited to risks and uncertainties identified in our form 10 k for the year ended 10/31/2024 and forms 10 q for the first and second quarters of our 2025 fiscal year. You may get Coda Octopus Securities and Exchange Commission filings free by visiting the SEC website at www.sec.gov. I would also like to remind everyone that this call is being recorded and will be made available for replay via a link in the Investor Relations section of the Coder Octopus website. Finally, as a reminder, this is our second quarter fiscal twenty twenty five reporting and all comparisons are with our second quarter fiscal twenty twenty four.

Now, I will turn the call over to the company’s chair and CEO, Anne Marie Gale. Anne Marie?

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Thanks, Jeff, and good morning, everyone. Thank you for joining us for our second quarter fiscal year twenty twenty five earnings call. Despite the challenging global policy environment, our revenue in the second quarter twenty twenty five increased by 31.8%. Operating income decreased due to lower gross profit margins from our core business, the marine technology business due to more units of hardware sales from Asia which incurred a higher than usual commission cost in conjunction with increased operating costs resulting from the weakening of the US dollar against the British pound and Danish kroner. In the second quarter, I am very pleased to see revenue increasing by 31.8%.

I would like now to provide some of the key highlights relating to our results of operations in the second quarter. For those who are new to the Code Octopus story, our business is made up of three discrete business operations. The marine technology business, the marine engineering businesses, and our recently added acoustics, sensors, and materials business unit. Within our group, our core business is the marine technology business. This business generates most of our revenue and in the second quarter, it generated 55.3% of our total consolidated revenue.

It is around this business that we’re building our growth strategy. The marine technology business operates in the subsea market and it’s home to key disruptive underwater technologies. These technologies are bringing the smartphone revolution underwater by providing a comprehensive real time information platform which allows our customers to make real time decisions and also significantly reducing the cost of these operations while increasing safety. The specific addressable markets that we operate in are the imaging sonar market and diving market. It is these market segments that our growth strategy is built around.

Saying a little bit more about our imaging sonar, the ETCHoscope. The ETCHoscope is a real time three-dimensional volumetric imaging sonar that can generate a real time three-dimensional image on the water in zero visibility water conditions. This is widely used in the commercial offshore marine market for a range of underwater applications. A significant part of our annual revenue is derived from the commercial offshore marine market. To achieve the growth that our shareholders want to see from our company, we have to increase our market share for underwater imaging sensors in the defense space.

There are many ongoing defense programs globally where new classes of underwater vehicles are being adopted. Significant budgets are appropriated for this. The EtherScope’s uniqueness of being a single sensor for multiple on the sea activities presents a significant advantage over other technologies. It allows the consolidation of the sensor on the vehicle platform by lowering the power consumption and overall vehicle weight without compromising the various missions to be executed. We are launching our next generation of three-dimensional sonars imminently.

The NanoGen series. The three d sonars within our NanoGen series are a shade bigger than an iPhone. Once launched, we will be positioned to address the range of opportunities in the imaging sonar space removing form factor and pricing barriers. The Nanogen series are designed to address the much smaller underwater vehicles which are now being rapidly adopted for undersea missions in the defense space. Moreover, the Nanogen series being so small can now be easily worn or carried down by the diver or attached to a robot on the water.

The development of the Nanogen series is another significant leap forward in the underwater imaging space and a commendable achievement by our R and D team. Taking the technology and reducing it by two thirds, we never believed we could achieve this. Our second key technology is the DAVIID, the Diver Augmented Vision Display System. The DAVID provides a real time information platform for diving operations, increasing safety and efficiency. The addressable market for the DAVID includes both the defense and commercial diving sectors.

The untethered variant addresses the special forces type of divers and we believe constitutes the largest addressable market for the technology. Now turning to second quarter highlights relating to our core business, the marine technology business. This business sells its products and solutions worldwide and increased revenue in the second quarter by 10%. Key highlights include 65.5% of revenue generated by this business relates to Ecoscope and 34.2% relates to DAVID. Hardware sales increased by 65% and were 3,300,000 compared to 2,000,000 in second quarter twenty twenty four.

Hardware sales to Asia rose by approximately 105% and were 2,200,000 compared to 1,100,000 in second quarter twenty twenty four. This increase resulted in higher commission costs. Rental assets were significantly underutilized in the second quarter resulting in lower units of rentals and associated services. This also impacted on the gross profit margins of this business. This reflects the change in US policy on funding for offshore renewables which caused many projects to be shelved as reported by Shell, and BP.

Looking ahead, however, we’re seeing an uptick in the utilization of our rental fleet currently and we have a number of ongoing rentals which are uniquely for longer rental periods for up to one year. I’m very excited about this currently. I want to emphasize that although the gross profit margins of our core business decreased in the second quarter, this is due to an exceptional set of circumstances where a higher commission cost was incurred on sales from Asia. Now turning to highlights relating to the marine engineering business. In the second quarter, our marine engineering business revenue increased by 2.3% along with gross profit margin from 50.7% in the second quarter to 55.5% in the second quarter twenty twenty five.

This business has long standing relationships with prime defense contractors and has served the defense market for over forty eight years. It is reliant on receiving funding on the defense programs. During the second quarter, it saw an increase in the level of inquiries on the defense programs and also much more momentum around these inquiries. We also saw an increase in opportunities for direct contracts with the Department of Defense, DOD, which positions this segment to be able to compete for more work packages directly with the DOD as opposed to exclusively through prime defense contractors. The success of the marine engineering business is dependent on increasing the number of defense programs that they sell proprietary parts into.

The momentum that we’re seeing therefore is exciting. With defense budgets increasing globally and rail pace being injected into this area, we are excited about this and feel that the group is well positioned. Now turning to highlights relating to the newly acquired business unit, Precision Acoustics Limited. In the second quarter, this newly added business unit contributed 18.5% to our consolidated revenue and 13.4% to our operating income. This business unit has added some diversification and resilience to our revenue structure.

We continue to be very pleased with this acquisition which we made in October 2024 and reiterate that it positions the group to collectively respond to larger defense requirements particularly in the underwater acoustic space. We continue to make it our priority to focus on executing against our growth strategy. And in the second quarter, we saw an increase in sales of both the Echoscope and DAVIID. Blair Cunningham, our President of Technology who is the market maker for our technologies will be updating you on progress and various milestones around our core technologies. Blair will also be available to answer any questions you may have about our technologies.

So please use the opportunity to raise such questions during the Q and A session if you have any. I will now turn the call over to Blair Cunningham.

Blair Cunningham, President of Technology, Coda Octopus Group: Thank you, Anne Marie, and good morning, everyone. Today, I want to focus on the addressable markets for our technology and to expand on what we’re doing to grow the business as shareholders want us to do. I hope this will be helpful to our shareholders. The Ecoscope. The biggest market opportunities for scalable growth for our company around the Ecoscope lie in the defense space, which is undergoing a major transformation through the deployment of new classes of underwater vehicles, including manned, unmanned surface, and fully autonomous platforms.

These platforms vary dramatically in size from large vehicles exceeding 85 feet in length and weighing over 85 tons to compact one person deployable systems. Despite this diversity, a common requirement across all platforms is the need for reliable underwater vision. This capability is essential for safe and accurate navigation, situational awareness, environmental understanding, data collection, and mission execution. The Echoscope directly addresses these needs by providing high resolution, real time three d imaging in complex underwater environments. The defense sector deploys these underwater vehicles for a range of mission critical applications, most notably, mind countermeasures or MCM, anti submarine warfare or ASW, surveillance and reconnaissance, and infrastructure protection.

Currently, the Echoscope is being evaluated for integration into active future defense programs supporting three of these core mission areas, positioning it as a vital enabler in next generation underwater operations. All next generation defense vehicle programs share a common objective, integrating advanced technologies and enhanced capabilities central to this evolution is the development of smarter vehicles equipped with tools like the X Scope, technology that delivers real time, three-dimensional data for informed decision making. Its versatility across a wide range of defense mission applications supports the consolidation of sensor suite requirements on these platforms. A key advantage lies in addressing SWOP, which is size, weight, and power constraints. By reducing the number of sensors required, the Ecoscope helps lower power consumption and overall vehicle weight, directly contributing to extended mission durations.

This capability represents a unique and valuable benefit the X Scope brings to the defense technology space. To address the full spectrum of underwater vehicles, we have been actively investing in the development of our next generation three d sonar technology. We’re now on the cusp of launching our NanoGen series, a compact, high performance product line that represents a significant milestone in our growth strategy. Designed with minimal form factor, some models in the CVs are only slightly larger than an iPhone. This compact size enables seamless integration with the smaller next generation underwater vehicle programs currently in development.

The NanoGem series also extends our capabilities into new mission domains. It aligns well with the DAVED, the diver augmented vision display program, offering a sonar solution that can be easily hand carried by a diver. Additionally, it opens up new opportunities in the robotics market as the miniaturized Ecoscope can now be mounted on a variety of robotic platforms regardless of size without compromising performance. Currently, the Echoscope accounts for approximately 80% of our revenue in the marine technology business. The NanoGen series strengthens this core product line while strategically positioning us to capture emerging segments across defense, commercial and robotic underwater applications.

The unmanned underwater vehicles or UUV market was valued at $4,800,000,000 in 2024 and is projected to grow to $11,100,000,000 by 02/1930. This growth is being driven by the rising complexity of maritime threats and the increasing demands for cost effective, low risk technologies. As a result, remotely operated vehicles or ROVs and other UUVs are becoming integral to defense strategies around the world. The Echoscope is currently under evaluation in several major defense programs, including those involving next generation underwater vehicles. Its ability to deliver real time, high resolution three d imaging positions it as a critical enabler for enhanced navigation, threat detection, and mission execution across a broad range of maritime operations.

I also mentioned on previous calls, we have developed a ship hull scanning solution under a multiyear funded defense program with the Echoscope embedded at the core of the system. CPOL scanning addresses a significant and persistent challenge. The threat posed by unauthorized attachments such as mines or tracking devices on the hulls of high value naval assets. This is a global concern with critical implications for security, readiness, and asset protection. We believe our solution, which is now undergoing formal evaluation, represents the most advanced capability available for this application.

The recent introduction of our NanoGen series further enhances this offering, making it more adaptable to small form factor platforms such as remotely operated vehicles and diver sleds, but are often constrained by payload size and weight. We anticipate receiving initial small volume orders late this year to support broader trials. These early developments will serve as key steps towards accelerating adoption and demonstrating the value of our solution in real world defense environments. DAVIED. The other significant pillar of growth is the DAVIED.

DAVIED technology is an advanced augmented reality display technology designed to enhance divers safety, performance, and situational awareness, especially in low visibility and technically challenging environments. It seamlessly integrates real time data, on demand information, and Echoscope three d sonar imagery projecting these onto the diverse field of vision through the DAVID augmented reality head up display. DAVIDs Heather variant is in adoption with the US Navy. And in The second quarter, we had orders for DAVID systems of over $1,500,000 These new systems will be distributed to new commands and thereby increasing the user base of the technology to around 12 Navy commands. This is an important step in the adoption of the technology.

As with the increased use in live missions, this will propel the broader adoption. The DAVID UnTether system, which presents the largest opportunity for the technology, is still being evaluated. And following the completion of the DAVID untethered system development hardening program by us, under which we delivered key items such as the new generation of HUD in a much smaller form factor and higher resolution, in the first quarter of twenty twenty five, we received our first order for 16 untethered systems, which is pivotal for the broader adoption of the technology in the defense community. We will be delivering these systems in our third quarter. For context, in The U.

S. Alone, there are 14,000 divers within the potential community of users for the untethered system, US Special Forces, EOD, US Army, Marine Corps, US Coast Guard, first responders, and law enforcement. If we were to achieve 15 of these users, this would, without modeling for inflation, add approximately $105,000,000 to our revenue over time. This is The US market alone. Recent feedback from several major defense trials on the DAVID confirms the significance and uniqueness of combining the DAVID with Echoscope in low visibility environments, again, giving us good insight that the full scale adoption by user groups is likely to include Echoscope.

In keeping with this, in this year alone, we have five DAVID related development projects where various other sensors are being integrated in the DAVID to ensure that all US defense sensors used by the various missions are available in the DAVID. We believe we have created the DAVID solution ecosystem, which is well positioned to serve the global defense and commercial diving market. One of our key milestones for this year is the adoption of the DAVID Diver Augmented Vision Display technology for foreign navies, expanding its use beyond the US Navy. We are making strong progress towards this goal. In the second quarter, we showcased the Davis system at the Special Operations Command, SOCOM, annual conference and exhibition, where it was demonstrated to multiple foreign naval delegations.

Importantly, the event also brought us into direct engagement with leading defense diving equipment manufacturers who play a critical role in the successful integration of DAVID into broader diving systems. These demonstrations and discussions mark a significant step in advancing international awareness, validation, and future adoption of the DAVID technology. Additionally, in the quarter, I personally led our team in a live demonstration of the DAVID system to a foreign Navy conducted in collaboration with a local law enforcement dive unit, an existing customer of both the Echoscope and our UIS underwater imaging system. This demonstration not only highlighted the operational value of GAVED, but also reinforced the benefit of its seamless integration with the Echoscope. Second demonstration with this Navy is already scheduled, where David and the Echoscope will be deployed during a live operational mission to showcase their combined capabilities in a real world environment.

This particular Navy holds significant influence within the European Defense Caucus and manages a centralized procurement budget covering the Navy, Army, Special Forces, and Coast Guard equivalents, making it a strategically important partner in our international expansion. I will turn the call over to Amerie and I will be available to take your questions during the Q and A session.

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Thank you, Blair. Let me now turn the call over to our interim CFO, Gail Jardine, to take you through our financials for the second quarter twenty twenty five before I provide my closing remarks. Gail?

Gail Jardine, Interim CFO, Coda Octopus Group: Thank you, Anne Marie, good morning everyone. Let me take you through our second quarter fiscal twenty twenty five financial results. For reference, all income statement comparisons are with second quarter fiscal twenty twenty four and all figures are in U. S. Dollars.

Starting with revenue. In the second quarter of twenty twenty five, we recorded total revenue of $7,000,000 compared to $5,300,000 in the second quarter of twenty twenty four, an increase of 31.8%. Our core business, the marine technology business, generated revenue of $3,900,000 compared to $3,500,000 a 10% increase for the second quarter twenty twenty four. Our acoustic sensors and materials business, which was added to our group in October 2024, recorded revenue of $1,300,000 Our marine engineering business, services business, generated revenue of $1,840,000 compared to 1,800,000.0 representing a 2.3% increase over the second quarter of twenty twenty four. Our total consolidated net revenue increased by 31.8%.

The newly added business, Position Acoustics, added 18.5% to our consolidated revenue in the second quarter. Moving on to gross profit and margin. In the second quarter of twenty twenty five, we generated gross profit of 4,500,000.0 compared to $3,700,000 in the second quarter of twenty twenty four. Consolidated gross margin was 64.1% versus 70.2% in the second quarter of last year. In our marine technology business, gross margin decreased to 67.7% in the second quarter of twenty twenty five compared to 80.2% in 2024, reflecting higher commission costs attributed to increased sales in Asia for hardware, in conjunction with a lower utilization of our rental assets, therefore reducing rental income and associated services.

The acoustic sensors and materials business realized gross margin of 65.4%, and we expect on an annualized basis this to be between 5963%, depending on the mix of sales. Our marine engineering business gross margin increased to 55.5% in the second quarter of twenty twenty five versus 50.7% in the second quarter of twenty twenty four, again reflecting the mix of engineering projects during the second quarter of this year. Now moving on to our operating expenses. Total operating expenses for the second quarter of twenty twenty five increased to $3,400,000 compared to $2,400,000 in the second quarter of twenty twenty four. The main factors for the increase in total operating expenses were the addition of Precision Acoustics into the group, which added 29.5% to these costs, and the weakening of the U.

S. Dollar against British pound and Danish kroner, which impacted on these costs once translated into U. S. Dollars from the base currencies for reporting purposes. Our selling, general and administrative costs in the second quarter of twenty twenty five totaled $2,700,000 an increase of 47.4% from $1,800,000 in the second quarter of twenty twenty four, reflecting the addition of the new business unit into the group and the exchange rate adjustment charges.

As a percentage of revenue, our selling, general and administrative costs for the second quarter of twenty twenty five were 38.8% compared to 34.7% in the prior year quarter. Operating income in the second quarter of twenty twenty five was $1,100,000 compared to $1,400,000 in the second quarter of twenty twenty four, a decrease of 19.5%. Operating margin was 15.5% compared to 25.4% in the second quarter of twenty twenty four, which we attribute to the increase in cost of revenue and total operating expenses for the reasons explained earlier. Pretax income in the second quarter of twenty twenty five was $1,300,000 compared to $1,600,000 in the second quarter of twenty twenty four. Net income after tax in the second quarter of twenty twenty five was $900,000 or $08 per diluted share compared to 1,400,000 or $0.13 per diluted share in the second quarter of twenty twenty four.

Looking now at our balance sheet. As of 04/30/2025, we had $24,500,000 in cash and cash equivalents on hand and no debt. This represents an increase of $2,000,000 from 10/31/2024, with a comparable figure $22,500,000 Finally, to summarize the financial impact in the current quarter of the introduction of our new acoustic sensors and materials business into the group, It contributed 18.5% of total revenue in the quarter, and the gross profit margin was $800,000 or 65.4%. That completes my financial summary. So let me turn the call back over to Anne Marie for her closing remarks.

Thank you.

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Thank you, Gail. I am very pleased with the increase in revenue in the second quarter twenty twenty five. Although the gross profit margins of our core business decreased, I consider this exceptional for the reasons explained earlier. The weakening of the US dollar also resulted in higher operating costs being translated into US dollars by our foreign subsidiaries. These two factors resulted in lower income and earnings per share.

We continue to work to create stable long term shareholder value and execute against our strategy to grow the business which is our single biggest priority as a group. We are also very pleased with the broader progress that we’re making on the DAVID program. The DAVID is the subject of various ongoing trials and limited use on live missions. As part of this, recent trials were conducted by a major body responsible for assessing the readiness of the technology for deployment. This trial concluded that the DAVID technology is significant and unique.

It also concluded that combining DAVID with our three-dimensional sonar Echoscope makes it unique for diving operations. As part of this recognition, we see the galvanization of different development programs. We are under contract for five developments currently where other sensors that this community use is now being integrated in the DAVId ecosystem. These are strong indicators that this is the technology of choice for future diving operations in the defense space. A key milestone which we are focused on achieving this fiscal year is adoption of the DAVID by foreign navies and this is progressing well.

We will also continue to prosecute our M and A strategy in fiscal year twenty twenty five although we have put on hold the acquisition which we were working on until the global policy environment has stabilized. I want to emphasize that we have not abandoned our M and A strategy. We’re simply focusing on navigating the policy environment and ensuring that our decisions are sound for our shareholders. Through our strategy, we aim to pivot the revenue model of the marine technology business to a multi year, multi sales model as we have started to see with the David product line. To conclude, we would like to thank our shareholders for their continued support.

We’re now happy to answer any questions. Operator?

Operator: Thank Our first question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

Brian Kinstlinger, Analyst, Alliance Global Partners: Hi, guys. Thanks for taking my questions. During the last earnings call, Ann Marie, you said given the uncertainty in global trade, there was a standstill by customers as it relates to your Marine Products business. And so you thought revenue would be back end loaded this fiscal year. First, what changed that led to the stronger than expected second quarter demand from Marine Products?

Did orders pull forward quicker than expected? Or is it something more broadly, sorry, that’s changed from a demand perspective?

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Hi, Brian. Good morning. Thank you very much for your question. Look, what we’re seeing in the marine our core business, the marine technology business is really, really strong inquiries around our ex scope technology, particularly on the outright purchase side. So I think we saw really strong level of inquiries from Asia in particular, and that continues on the hardware side.

Also, we also saw a strong pickup around the DAVID program and we had in the quarter $1,200,000 worth of DAVID sales. The one thing that we saw which was the real sort of downturn in inquiries from European developers in the second quarter, but we’re now seeing that moving forward and more rentals going ahead in the third quarter. So overall, I think what we’re seeing strong level of inquiries right across the piece that’s the Marine Technology business and our engineering businesses.

Brian Kinstlinger, Analyst, Alliance Global Partners: Great. And then did you share the expected timing, the new nano at the scope release? I think you talked about back end trials. And then can you discuss how this new release addressed its customer feedback and could lead to increased adoption in use cases?

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Well, first of all, we’re really on the cusp of releasing nano. Blair Cunningham, our President of Technology has significant trials with nano, I think the end of this month for a critical defense program. So after those trials are concluded, we would expect to really make an announcement to our customer base. We’d like to see how those trials go. But Blair will talk more about this but what we’re, what NANO addresses is really the smaller classes of underwater vehicles.

So the introduction of this new generation into the mix allows our business to address the full expanse of the requirements that we see in the market from very large underwater vehicles to very very small. So I think this positions the company nicely for addressing the full market and in addition to that, we have for example, the diver taking down currently the Echoscope, which is, it’s a bit sizable. So this now removes that and Nana allows because it’s a shape bigger than the iPhone. He can easily wear the Echoscope today and also robotics really where you’ve got these small robotics platform. Again, a new application for our technology given the form factor.

So we’re pretty excited about this and as I said, the launch date will be after trials in June, the June where Blair will be leading our team with the trials with our US Navy customer base.

Brian Kinstlinger, Analyst, Alliance Global Partners: Great. And then as it relates to your five development programs, can you help range or provide a range of sizes for the different opportunities of what these might address and help us with timeline for these development programs that might be evaluated and turned into a next phase?

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Blair, can you just talk a little bit please about the development programs that we’re working on just in terms of the broad sense of requirements?

Blair Cunningham, President of Technology, Coda Octopus Group: Yeah, sure. Thank you. Thank you, Brian, again for the question. Yes, the five programs are really taking the DAVID system either to support existing equipment, so integrating that existing equipment in, or in one particular case, it’s for a completely new application, which is a kind of saturation, deep saturation dive suit. So all the biggest market opportunity still remains the untethered space.

And really, would say probably three or four of those programs all relate to integration with untethered additional dive equipment. So it’s all for the benefit of that really. The US Navy in particular along with all the foreign navies, they all use different what we call UBAs or underwater breathing apparatus equipment. So we have today one of the key parts of DAVID is providing a hands free information on critical lifeline information that they would have from this breathing apparatus. So how do we integrate that, bring that into DAVID, provide the alerts and the real time information in the hands free environment?

So a lot of the programs around, they’ve seen the interest in DAVID. They now want that to work with the existing equipment they have. And really largely, I’d say that’s three or four of the programs that we’re actively working on at the moment. So think about it as a product adoption necessity, as it were, to get the equipment in the hands of those divers. That’s correct.

Ann Marie Gale, Chair and CEO, Coda Octopus Group: So the one thing to just add on Brian there is to remember that all of the sensors that they’re using for diving currently is relevant, but what they have to do if they’re gonna adopt DAVID is to bring that within the DAVID world. So I think that for us this is very, positive because what it’s really saying is that DAVID is our choice. So we now need to bring all our senses within that ecosystem. And we’re really seeing a galvanization around that to ensure that all of the sensors that are being used by all the different community of users are now being brought into the DAVIID world and we’re extremely excited about this.

Brian Kinstlinger, Analyst, Alliance Global Partners: Okay, and then you talked about the next generation underwater vehicles and the progress is making in securing sorry, can you talk about the progress CODA is making in securing design wins? And maybe lay out any milestones or timing we should watch out for? I think we’ve been you know, we’ve talked about this opportunity for a little bit, maybe size the range of opportunities in all the different vehicles, what it might look like if you did win a production order.

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Well, it’s very difficult for us to really give numbers. What we are seeing really to the market is that we’ve got various programs of different state of, if you like maturity for these underwater vehicles. But really the important thing Brian is it’s making sure that we continue this journey of getting new programs. The ones that are ongoing and are being evaluated by from directly by the US Navy or with prime defense contractors, the technology is already part of that broader program and so that program is dependent on final evaluation, where does this program go? So what we see is a proliferation of programs where the Ecoscope is a contender because they are looking to integrate the Ecoscope onto those platforms.

So whilst I can’t say categorically, I’m saying there’s a big market out there and I think that the Echoscope is just that this final report which was assessing the readiness of David talks about the uniqueness of the Echoscope technology for spatial awareness on the water and object detection that this is the most advanced technology for that purpose. So these programs can be slow but what we’re seeing within for example, the DAVID program, we’re seeing pull through EtherScope sales there and for the other programs that we’ve been following for some years, we’re seeing additional units being bought and the program slowly moving forward. So until budgets are appropriated and some of these evaluations are concluded, we’re still waiting but we know that some programs look very very promising for the business but we still have to wait for, first of all, award and still have to wait for the evaluation process to be completed, whether it be directly with the prime defense contractor program or the Navy directly. But we have to make sure the key point that we’re not missing opportunities and so the job of the team is to make sure that the Ecoscope is part of the program that’s being considered for adoption and that’s the work that we’re doing.

Brian Kinstlinger, Analyst, Alliance Global Partners: Okay, last question I have, a numbers question. Your business is lumpy for sure at times. But you’d previously expected to have a back end loaded year, especially as it relates to marine products. Do you still expect the third and fourth quarter to be your two strongest quarters of the year? Or did some of that change given the upside in the second quarter?

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Well, I think that overall we expect the Marine Technology business to continue to improve in the way that we’re seeing this. Look, I’m very excited about the rental opportunities that we’re seeing. We’re seeing a good level of utilization of our rental pool, which is always very exciting for business. We also see lots of opportunities from Asia for hardware sales. I see very much that the third quarter and our fourth quarter will be within the balance of what our Q2 numbers looks like for the Marine Technology business.

Brian Kinstlinger, Analyst, Alliance Global Partners: Great. Thanks for answering all my questions.

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Thank you very much for the opportunity, Brian.

Operator: Thank you. Our next question comes from the line of John Deysher with Pinnacle Value Fund. Please proceed with your question.

John Deysher, Analyst, Pinnacle Value Fund: Good morning. Thanks for taking my question. I was just curious on the gross margin percentage. It’s still very attractive for the company as a whole, 64%, 65%. Should we model that percentage for the back half of the year?

Or how should we think about the overall gross margin for the balance of the year? Is it staying the same, going up, going down and for what reasons?

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Well, thank you very much. The gross profit margins for our Marine Technology business is very low. It’s very, very unusual. If I’m not mistaken, I think, Gail, I mean, gross profit margins for that business, same same time last year was about 76% compared 5%. Is that right?

Gail Jardine, Interim CFO, Coda Octopus Group: It was just over 70%, Emily. Yes.

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Yes. So that 70% is typically what we would expect the margins to be. So we would expect for the rest of the year, margins to go up. I think this quarter was an exceptional quarter for the reason I explained, which was we had a concentration of sales from Asia. What that means generally is that you’re selling via your agent’s network and then incurring commission costs.

So that was one factor. But that was further compounded by the fact that we had a single sale that triggered a much higher percentage commission because of the multiples on that order. So we expect that to be an outlier, so we expect margins to be much stronger.

John Deysher, Analyst, Pinnacle Value Fund: In the marine technology and how about

Ann Marie Gale, Chair and CEO, Coda Octopus Group: In the marine technology business, yes. But on, well precision acoustics, the range is between 57% to 65%. It will be some, it depends really there on the mix of sales and the marine engineering business, I think that there again, we don’t expect margins to really change dramatically because then it really depends on their mix of sales generally.

John Deysher, Analyst, Pinnacle Value Fund: Okay, so those two are gonna be steady. That’s good to And on the SG and A side, is there any reason to think that for the business as a whole, that percentage might come down? Think it’s up a little bit from a year ago, the SG and A percentage.

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Gay, did you want to talk to that?

Gail Jardine, Interim CFO, Coda Octopus Group: Yes, I can do. Yes, our SG and A percentage this quarter was impacted by a couple of different factors. One of it being the exchange rate variances that we’re seeing in the business. We are about 65% of our revenue and costs five percent of our revenue, 65% of our costs comes from the entities that are not in The USA, so we have some impact of exchange rate variance in there. We also have added in the position of business, and we also have some non cash equivalent impact this quarter as well.

If you look at the non cash element, that was quite a lot of the Sorry, I lost my chain of thought there, apologies. The non cash charge increased significantly. The amortization in PAL and the non cash charges for depreciation, for stock based compensation and exchange rate variances. In the current quarter, the non cash items as a component of SG and A was 24.7% or about six seventy ks compared to 0.3% or only a six ks gain in the previous quarter. That swing had an impact in this quarter here.

We don’t know what the exchange is going to do going forward, but we have to be expecting that the U. S. Dollar is going to continue to weaken against the pound and the krona.

John Deysher, Analyst, Pinnacle Value Fund: Okay. So it sounds like we should model SG and A as a percentage of sales about the same as the first half or the back half. Is that fair?

Gail Jardine, Interim CFO, Coda Octopus Group: Or just slightly lower, yes.

John Deysher, Analyst, Pinnacle Value Fund: Slightly lower. Okay, fine. That’s good. And then I guess my final question is the announcement of in third quarter we expect to deliver 16 Dabd untethered systems, which is good. What kind of revenue contribution might that generate?

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Can we talk about that when we get there? I mean, the order, just so we know, last was $800,000. We’re hoping that we are gonna be delivering all 16 units in the third quarter. So if we do, it will be around $800,000.

John Deysher, Analyst, Pinnacle Value Fund: Okay. You have a contract for delivery of 16? It’s just a question of timing or

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Yes, we are under contract, but we are our production facilities getting the items ready delivery in the third quarter. So we already have a firm contract for that. It’s just a question of delivering those.

John Deysher, Analyst, Pinnacle Value Fund: And anything that’s not delivered in Q3 would be delivered in Q4?

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Yes, certainly. Certainly. But, of course, we’re hoping to deliver all 16 units in the third quarter.

John Deysher, Analyst, Pinnacle Value Fund: Yep, I understand. Good. Well, thank you very much. Good luck.

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Thank you for your questions. Thank you.

Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I’ll turn the floor back to Ms. Gail for any final comments.

Ann Marie Gale, Chair and CEO, Coda Octopus Group: Thank you for joining our call today and for your interest in our company. Have a great day. Thank you.

Operator: Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.

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