Earnings call transcript: Coda Octopus Q4 2024 sees strong earnings beat

Coda Octopus Group reported a robust fourth quarter for fiscal year 2024, with earnings per share (EPS) of $0.32, surpassing the forecast of $0.10. Revenue also exceeded expectations, reaching $20.31 million against a forecast of $5.62 million. Despite these strong results, the stock fell by 5.01% in pre-market trading, reflecting broader market uncertainties.

Key Takeaways

• EPS of $0.32 significantly beat the forecast of $0.10.
• Revenue surged to $20.31 million, far exceeding expectations.
• Stock price dropped 5.01% despite positive earnings results.
• Gross margin improved to 69.8%, up from 67.3% last year.
• Decrease in U.S. Marine Technology revenue due to defense funding issues.

Company Performance

Coda Octopus Group demonstrated strong overall performance in Q4 2024, with a notable 5% increase in total revenue compared to the previous fiscal year. This growth was supported by innovations in their DAVID Tethered System and Echoscope Technology, which have been integrated into new undersea vehicles. However, challenges in U.S. Marine Technology revenue, due to defense funding constraints, posed a hurdle.

Financial Highlights

• Revenue: $20.3 million, a 5% increase from FY 2023.
• Earnings per share: $0.32, up from previous forecasts.
• Gross profit: $14.2 million, marking a 9.2% increase.
• Operating income: $3.6 million, a 30.8% increase.
• Cash and equivalents: $22.5 million, decreased by $2 million.

Earnings vs. Forecast

Coda Octopus reported a significant earnings surprise with EPS of $0.32, far exceeding the forecast of $0.10. Revenue also outperformed expectations, reaching $20.31 million compared to a forecast of $5.62 million. This marks a substantial beat, highlighting the company’s strong operational performance and strategic initiatives.

Market Reaction

Despite the earnings beat, Coda Octopus’s stock fell by 5.01% in pre-market trading, closing at $7.96. This decline may reflect broader market uncertainties or specific investor concerns, despite the positive financial performance. The stock’s movement is notable given its 52-week range, suggesting external factors at play.

Outlook & Guidance

The company anticipates $5 million in revenue from DAVID technology in FY 2025 and is targeting a larger acquisition than Precision Acoustics. Coda Octopus plans to increase R&D and SG&A expenses gradually while focusing on defense program integration and technology development.

Executive Commentary

Blair Cunningham, President of Technology, described the company’s innovations as "creating the smartphone revolution for the underwater world." CEO Anne Marie Gale emphasized the goal to "pivot the revenue model to a multiyear multiple sale model," indicating a strategic shift in business operations.

Q&A

During the earnings call, analysts inquired about the market potential for DAVID technology and the ship hull scanning market opportunities. The company addressed challenges in defense program funding and detailed their acquisition strategy for Precision Acoustics.

Risks and Challenges

• Defense funding challenges impacting U.S. Marine Technology revenue.
• Broader market uncertainties, particularly in an election year.
• Potential supply chain disruptions affecting product delivery.
• Increased R&D and SG&A expenses could impact short-term profitability.
• Market saturation risks in the underwater technology sector.

Full transcript - Coda Octopus Group Inc (CODA) Q4 2024:

Operator: Good morning, and welcome to CODA Octopus Group’s Fiscal Year 2024 Earnings Conference Call. My name is Robert, and I’ll be your operator today. Before this call, Cota Octopus issued its financial results for the fiscal year ended October 31, 2024, including a press release, a copy of which will be furnished in a report filed with the SEC and will be available in the Investor Relations section of the company’s website. Joining us on today’s call from Coda Octopus are its Chair and CEO, Anne Marie Gale its Interim CFO, Gale Jardine 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: Thank you, operator. Good morning, everyone, and welcome to Coda Octopus fiscal 2024 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 actual results and 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 ks for year ended October 31, 2024 and Forms 10 Q for the first, second and third quarters of our 2024 fiscal year. You may get Codor 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 CODAR Octopus website. Now I will turn the call over to the company’s Chair and CEO, Anne Marie Gale.

Anne Marie?

Anne Marie Gale, Chair and CEO, Coda Octopus: Thanks, Jeff, and good morning, everyone. Thank you for joining us for our fiscal year 2024 earnings call. Our revenue in fiscal year 2024 increased by 5% over the fiscal year 2023, and I believe that we have delivered a solid set of results, including increasing our gross profit margin, operating income, net income and earnings per share. I would now like to provide some of the key highlights relating to our financial results for fiscal year 2024. For those who are new to the Coda Oxus story, our business is made up of 2 discrete business operations, the Marine Technology business and our engineering businesses.

We also added through acquisition a 3rd business unit, Precision Acoustics Limited, a company established under the laws of England. However, it is important to note that our income statement activity for fiscal year 2024, discussed here, does not include this new business unit since it was acquired 2 days prior to our fiscal year end 2024. This newly acquired business unit had no material income statement activity for those two days and therefore are not included in our consolidated income statement for fiscal year 2024. Now turning to highlights relating to the Marine Technology business. This business sells its products and solutions globally with Asia, Europe and U.

S. Being important geographies for our products. And in the fiscal year 2024, we saw an increase in the utilization of our rental assets, resulting in an increase in our rental revenue by 84.1 percent and which was $2,320,000 compared to $1,260,000 in fiscal year 2023. We saw an increase in equipment sales in the key strategic geography of Asia. Equipment sales from Asia rose by 19% and were $5,470,000 compared to $4,600,000 in fiscal year 2023.

We also saw a significant reduction in revenue from the U. S. On defense programs. Many defense programs were funded through the continuing resolutions mechanism, which resulted in reduced allocation of funding. This affected our business and resulted in the reduction of revenue generated by the U.

S. Marine Technology Operations by 33.4 percent and which was $2,830,000 in fiscal year 2024 compared to $4,260,000 in fiscal year 2023. Notwithstanding navigating these challenges on the U. S. Defense programs, we were able to mitigate the impact of reduced funding under these programs from other global sectors and the Marine Technology business revenue increased in fiscal year 2024 by 5.7%.

I believe this demonstrates the resilience in our revenue generation structure. Now turning to highlights relating to the Engineering business. There are 2 business units which comprise our Engineering business, 1 based in the U. S, Salt Lake City and the other based in the UK. The Engineering business units are primarily subcontractors to prime defense contractors and therefore are dependent on receiving funding on the defense programs.

In fiscal year 2024, revenue generated by the Engineering business increased by 3.8% along with its gross profit margin. However, the U. S. Engineering business was also affected by the reduced funding available for defense programs, resulting in lower than anticipated order intake in fiscal year 2024. Furthermore, since the results of the U.

S. Election, many defense programs are on hold on till the new administration’s budget and policies are in place. We’re also seeing broader headwinds across the globe caused by the uncertainty around the policies of the new administration, including those relating to tariffs and offshore renewables. And therefore, many offshore projects are currently on hold, and this is likely to adversely affect our Q1 2025 results. Despite these broader headwinds, we continue to make it our priority to focus on sowing the seeds to grow our business.

And in the fiscal year 2024, we continued to make progress around our growth pillars, Etchoscope and DAVID. Blair Cunningham, our President of Technology, who is the market maker for our technologies, will today be providing a broad overview of some of our activities under these programs. Blair will also be available to answer any questions you may have on 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, where he will give a short overview of our core technologies around which we’re postulating our growth agenda.

Blair Cunningham, President of Technology, Coda Octopus: Thank you, Anne Marie, and good morning, everyone. We continue to believe that our most promising opportunities for growing our business are around our defined growth pillars, the Echoscope technology and the DAVID technology. These technologies form a powerful complementary ecosystem that revolutionizes underwater operations. We’re creating the smartphone revolution for the underwater world, providing a real time on demand information and data platform that enables operators to make critical decisions instantly. Additionally, underwater data is collected today with analysis and decision making tomorrow.

We’re disrupting this model. Our underwater technologies empower operators to make real time decisions, enabling quick informed actions whether that’s positioning an asset, navigating from point A to B or locating targets on the seabed. So turning to these technologies. The DAVID system is an advanced augmented reality display technology designed to enhance diverse performance, safety and situational awareness, especially in low visibility and technically challenging environments. It seamlessly integrates real time data, on demand information and Echoscope 3d sonar imagery projecting these onto the diverse field of vision through the DAVID augmented reality head up display.

This hands free solution enables divers to operate safely, accessing all essential information without the need to glance at external instruments or surfaces. Where are we with the adoption curve for David tethered system? The David tethered system is currently operational across 9 naval commands within the U. S. Navy.

Developed under a 3 year future naval capabilities contract with ONR and NAVSEA, this fully developed augmented reality system is commercially available. It is classified as an authorization for Navy use item and carries CE marking certifying that the DAVID system meets the essential health, safety and environmental protection requirements set by the European Union and the UK. We are aware that several of these commands have submitted budget requests through their respective process. Many of these requests were not granted in the fiscal year 2024, but we have a high level of confidence that these awards will be made in fiscal year 2025. We are therefore seeing year on year budgeting by the U.

S. Navy for acquisition of the DAVID technology. Following recent participation in international maritime warfare exercises in Norway, UK and the U. S. We are also working closely with several foreign navies and armies that have shown strong interest in DAVID.

Additionally, we are seeing strong interest from government bodies and commercial dive teams and continue to have sound engagements with these potential customers on the adoption of the technology. Following the commercialization of the DAVIDs tethered system, the Navy initiated the dust hardening program in September 2023 to adapt the DAVID technology for the untethered special operations diver market. This program funded by both the U. S. Navy and the foreign Navy has in the fiscal year 2024 seen substantial progress and the required modifications to meet customer specification.

The David Untethered variant employed the same augmented reality display technology that is used by divers wearing dive masks operating at shallower depths and not physically tethered to a surface mothership for air supply. These divers are typically military divers performing special forces operations. Despite the funding delays, we have made significant advancements in the hardening program’s objectives and we remain excited about the potential of this opportunity for the business. A key achievement under the program was the delivery of the Gen 4 head up display in fiscal year 2024. This next generation technology platform boasts a more compact design, 200% increase in resolution and an expanded visual field of view.

These enhancements significantly improved compatibility, the specialized dive helmets and masks, unlocking new possibilities for previously underutilized markets. This accomplishment represents a major milestone and the success of the DUS hardening program. We still believe the DUS system represents the largest addressable market for DAVID Technology. For example, the U. S.

Navy with approximately 4,000 active divers, 75% of these divers are using full face mask untethered systems, which aligns with the DUS solution. Similarly, the majority of public safety and law enforcement divers in the U. S. An estimated 10,000 divers use the same full face mask dive systems. We’re also experiencing pull through sales of the Echoscope technology from DAVID users.

The DAVID tethered and untethered systems seamlessly integrate with our Echoscope real time 3 d imaging sonar technology. Together, these technologies offer a comprehensive real time navigation, situational awareness and mapping solution enabling diver and supervisor to operate effectively in the most challenging zero visibility conditions. We’re also spinning off technologies from the DAVID system and introduced a new digital audio communication system, VoiceHub 4, which offers a competitive, superior quality system for diver to diver and diver to supervisor communication. This all digital communication technology incorporates AI driven features including background noise removal, diver inhalation noise isolation and active helium voice correction. The VoiceHub 4 system has already been purchased by NAVSEA and it addresses 2 key markets beyond defense, commercial diving and public safety.

This is an exciting accessible price point product which diversifies our revenue spread and gets us in front of the same customer base for the main DAVID technology. I want to wrap up my briefing on the DAVID technology by stating that I am truly excited by this technology. The new DAVID Gen 4 HUD delivered under the DUS program cement the technology now as mature and leverageable. We can also see the pathway for taking the David technology to adjacent markets. Our achievements with the development of this technology is stunning and will pay off in time for our shareholders.

Turning to the Ectoscope technology, another of our growth pillars. The Ectoscope is the world’s 1st and highest resolution real time volumetric 3 d sonar. By generating a complete 3 d image from each acoustic transmission, it is the only commercially available sonar technology capable of both imaging moving objects in 3 d in real time and complex three d mapping. This unique combined capability enables real time decision making. Pluto Octopus are well established in the commercial offshore sector and our Echoscope solutions have revolutionized subsea operations and inspections for decades, delivering significant time savings, cost reduction and enhanced operational efficiency in the most challenging conditions.

The Echoscope sonar is utilized globally across a wide range of applications in the commercial offshore and subsea markets and continues delivering game changing economies of scale to customers. The breakwater market is a good example where we have moved the market from placing only 4 blocks per day up to 360 blocks. The acquisition and utilization profile of the commercial sector differs significantly from that of the established defense programs. While we do have commercial customers who purchase multiple exoscope systems in a single order, this is relatively uncommon. The commercial market typically favors minimal capital investment over operational project costs.

We see further evidence of this trend with customer preference for EchoScope Rentals over direct purchase. Our growth strategy is therefore focused on opportunities in the defense sector and specifically the increase in new generation of undersea vehicles and associated robotic programs. The new undersea vehicles whether remotely controlled and operated or fully autonomous are currently designed for either mapping and information gathering such as creating a detailed e bed map to identify targets of interest or performing specialized prosecution tasks such as neutralizing mines. By embedding Echoscope technology into these vehicles, it allows a hybrid approach to engage targets in real time as they are detected eliminating the need for separate follow-up missions. We view this as significant growth opportunity enabling a seamless fusion of Echoscope’s capabilities with advanced undersea operations.

The result is a smarter, more capable vehicle and not only improves mission efficiency but also amplifies overall effectiveness. We have successfully integrated Echoscope systems into at least 4 new undersea vehicles in collaboration with prime defense contractors. These vehicles whilst multiyear developments are in the early stages, but critically have the Echoscope design into the system from the outset. We are currently undergoing test and evaluation. While these represent longer term opportunities, they provide a valuable platform for expanding our technology within these defense program initiatives.

Direct short term opportunities exist with the active undersea vehicle programs of record such as the VideoRay Defender ROV program for the EOD. We recently completed a successful 6 month test and evaluation period with a video ray vehicle NIWEC. As a direct result of this success, our latest Echoscope SIBS sonar has demonstrated its capability and potential for high resolution target detection and ship hull inspection operations. We are also actively pursuing several DoD contracts with both U. S.

And foreign navies that wish to integrate both DAVID and Echoscope Technologies for subsea vehicle control and diver teaming missions. As we reported previously, we developed and delivered under a multi year defense funded Navy program a comprehensive ship hull scanning solution embedding the Echoscope and DAVID technologies. Under this application, customers are performing critical target identification such as parasites on a hull, which can compromise security. Being able to assess whether a hull is compromised is a matter of global concern for all incoming vessels in all ports located in the U. S.

Or elsewhere. This is currently a technology white space and we believe we have developed and demonstrated a solution for this application. This is still being evaluated by our customer, but initial results have been overwhelmingly positive and we believe this program will move forward. In summary, we continue to develop opportunities with our Echoscope technology within the defense programs which have recurring long tail revenues associated with them. We believe we are making progress and this is a key part of our strategy to grow the business.

Finally, I want to cover the recent acquisition of Precision Acoustics, a recognized leader in the ultrasound and acoustic measurement field. Specializing in acoustic hydrophone design and innovative acoustic materials, Precision Acoustics provides comprehensive range of products and solutions with a primary focus on medical imaging and NDT. Their expertise extends to working closely with national and global standard setting bodies, contributing to the establishment of the primary measurement standards in the industry. This acquisition brings valuable and recognized acoustic expertise to the group, expanding our knowledge base in the domain that has previously been under leveraged in the underwater acoustic space in which we operate. We believe this acquisition opens up significant opportunities to integrate precision acoustics capabilities with our existing technology platform, particularly advancing our echoscope technology.

This will also enable us to penetrate new market sectors such as passive acoustics and ultrasound imaging, critical areas for defense applications. Furthermore, the combined strengths of our group position us to qualify for larger defense related programs as well as explore exciting research and development opportunities that were previously beyond reach. Anne Marie will cover any questions on the commercial aspects of this transaction.

Anne Marie Gale, Chair and CEO, Coda Octopus: Thank you, Blair. Finally, as mentioned earlier, in fiscal year 2024, we started to implement our M and A strategy and completed the first of a number of acquisitions, which we are targeting subject to the satisfactory completion of due diligence. Precision Acoustics Limited was acquired in the group to gain access to their expertise in the field of acoustics and medical imaging technologies, which are potentially transferable to the subsea market in which the marine technology business operates. Furthermore, this addition expands the group’s collective capabilities and positions it to qualify to compete for larger defense contracts. They also sell a wide range of products and generate revenue of approximately $5,000,000 with margins of 52%.

Let me now turn the call over to our Interim CFO, Gail Jardine, to take you through our financials for the fiscal year 2024 before I provide my closing remarks. Gail?

Gail Jardine, Interim CFO, Coda Octopus: Thank you, Anne Marie, and good morning, everyone. Let me take you through our full year 2024 financial results, which are all reported in U. S. Dollars. As Ann Marie mentioned previously, due to the timing of our recent acquisition of Precision Acoustics, we had no material income statement activity, and therefore, our income statement results discussed here today do not include Precision Acoustics.

Starting with revenue. In fiscal year 2024, we recorded total revenue of $20,300,000 compared to $19,400,000 in the fiscal year 2023, an increase of 5%. The Products segment generated revenue of $12,800,000 compared to $12,100,000 a 5.7% increase from the prior fiscal year 2023. As reported earlier by Anne Marie, this increase in our consolidated revenue was a result of improved demand from strategic markets and geographies, particularly for rentals and for equipment sales in Asia. In the services segment, our U.

K. Arm was key to the 3.8% improvement in revenue in this segment compared to fiscal year 2023. However, like the products business, U. S. Engineering business unit was also affected by the reduced funding allocations under defense program.

Moving on to gross profit and margin. In fiscal year 2024, we generated gross profit of $14,200,000 compared to $13,000,000 in fiscal year 2023. Gross margin was 69.8% versus 67.3% in the prior year. In our product segment, gross margin increased to 77.9 percent in fiscal year 2024, up from 76.7% in 2023, reflecting changes in the mix of sales. With increased revenue from rentals, which generate a higher margin, combined with lower commission costs in the period.

Our services segment gross margin also increased to 55.8% in fiscal year 2024 versus 51.6% in 2023, again reflecting the mix of sales. Now moving on to our operating expenses. Total (EPA:TTEF) operating expenses for 2024 rose 2.9 percent to $10,600,000 compared to $10,300,000 in fiscal year 2023. This was caused by a 7% increase in research and development attributable to the investment we are making in our Thermi Optal range of mission computers. Our selling, general and administrative, or SG and A costs, in fiscal year 2024 totaled $8,300,000 an increase of 1.8% over the fiscal 2023 expense of $7,900,000 As a percentage of revenue, our SG and A costs for the fiscal year 2024 improved, reducing to 41.1% of total revenue compared to 42.3% in the fiscal year 2023.

SG and A increased in real terms due to salary inflation, resulting in an increase in payroll expenses. Marketing also increased in accordance with our strategy. Looking forward to our cost structure, we expect the addition of Precision Acoustics will increase our R and D expenditure as we seek to leverage their expertise across the group. We also anticipate that SG and A will grow, reflecting increases in payroll, marketing and investor relations expenses. Operating income in fiscal year 2024 was £3,600,000 compared to £2,700,000 in fiscal year 2023, an increase of 30.8%.

Operating margin was 17.6% compared to 14.2% in the fiscal year 2023, driven by the increase in revenues as previously explained and the resulting impact the mix of sale type had on lowering our cost of revenues. Net income before taxes in the fiscal year 2024 was £4,600,000 compared to £3,400,000 in the fiscal year 2023. Net income after taxes, fiscal year 2024, was $3,600,000 or $0.32 per diluted share compared to $3,100,000 or $0.28 per diluted share in the fiscal year 2023. We have a notable increase in tax expense year on year. Current tax expense increased by 187 percent to $700,000 in the fiscal year 2024.

We expect that your tax expense will continue to increase in the future since we have no material net operating losses to offset this liability. Moving now to our balance sheet. Please note the published balance sheet figures do include Precision Acoustics Limited and our post acquisition combined figures. As of October 31, 2024, we had $22,500,000 in cash and cash equivalents on hand and no debt. This represents a decrease of $2,000,000 over fiscal year 2023, where the reported figure was $24,500,000 The cost of acquisition of Precision Acoustics, net of cash acquired, was $4,600,000 That completes my financial summary.

So let me turn the call back over to Anne Marie for her closing remarks.

Anne Marie Gale, Chair and CEO, Coda Octopus: Thank you, Gail. I am very pleased with our fiscal year 2024 results, which saw an increase in revenue, gross profit and earnings per share. We continue to work to create stable long term shareholder value and execute against our strategy to increase the number of defense programs that our technologies are embedded in with a goal of securing recurring sales of multiple units onto these programs. We are also seeing the vindication of this strategy. To summarize, Davitt’s TevaT system is now operational across 9 naval commands within the U.

S. Navy. We are seeing annual budgeting for this product line by the U. S. Navy and expect purchases in fiscal year 2025 for this variant of the DABID.

The DABID user base is also adopting the ETCO technology as part of the DABID solution. We have reached a pivotal point in the DABID on tethered system hardening program and we anticipate the first phase of this variant in fiscal year 2025. The David technology has now matured and the key step forward was the delivery of the David Gen 4 Head Up display, which now is a more compact display unit and a much higher resolution. This has opened up many new opportunities for this for the technology and we expect the award of 3 new programs around this technology. Our Echoscope SIDS technology, a short range high resolution sonar used for close-up visualization and mapping has been demonstrated to several defense customers and is a contender for several opportunities for ship hull applications and close range target inspection.

We will also continue to prosecute our M and A strategy and in financial year 2025, subject to the satisfactory completion of due diligence, we anticipate completing another acquisition in the group. Through our strategy, we aim to pivot the revenue model of the Marine Technology business to a multiyear multiple sale model as we have started to see with a David product line. To conclude, we would like to thank our shareholders for their continued support. We are now happy to answer any questions. Operator?

Operator: Thank you. At this time, we’ll be conducting a question and answer Our first question comes from Brian Kingslinger with Alliance Global Partners (NYSE:GLP). Please proceed with your question.

Brian Kingslinger, Analyst, Alliance Global Partners: Hi, great. Thanks for taking my questions. I’ve got a handful. The first, as it relates to the 4th quarter results, can you talk about the mix of revenues that led to lower than usual gross margins in both segments?

Anne Marie Gale, Chair and CEO, Coda Octopus: Are you thinking about Q4 itself?

Brian Kingslinger, Analyst, Alliance Global Partners: Yes. I mean, full year doesn’t matter. It’s a long time ago. So I’m just kind of thinking about the Q4. Yes, if I look at the gross margin in marine, it was about 76%, which is kind of below where it was the last two quarters.

And then if I look at the marine engineering, it was 52% and revenue didn’t fall off there. So again, it was also a little bit lower than it was recently.

Anne Marie Gale, Chair and CEO, Coda Octopus: Well, I can’t provide the details, but as we always report, margins are subject always in both parts of the business, the mix of sales. For example, if equipment sales carry less margins than rentals, for example. So it really depends on the types of sales that we have in the quarter. Unfortunately, I don’t have the breakout of the Q4 mix, but generally it’s driven by simply the mix of sales that we have in the revenues.

Brian Kingslinger, Analyst, Alliance Global Partners: Okay. I know it looks like rentals then was lower in the Q4 compared to the last 2, so that speaks to some of

Anne Marie Gale, Chair and CEO, Coda Octopus: that. It could be yes.

Brian Kingslinger, Analyst, Alliance Global Partners: Yes. And then moving on, can you tell us how much revenue the DAB IT programs generated in fiscal 2024? And with the funding challenges in the U. S, how do you think about the range of outcomes for this product in the current fiscal year? I know you mentioned you’re confident in 3 new programs around the technology, maybe you can size those.

Anne Marie Gale, Chair and CEO, Coda Octopus: Yes. So I mean, overall, in fiscal year 2024, we saw really a significant reduction in funding from U. S. Programs. And that’s really typical first of all, that’s typical in an election year.

Also, that also carries on a period of hiatus between the outcome of the elections and the new administration going into place. So I think overall, many programs were only partially funded. So the DABIT program, for example, we didn’t get the funding we were expecting for, for example, on the hardening program and for purchases of the David Gen 3 systems that we have. So overall, in fiscal year 2024, I think that we saw revenues from the U. S.

Decreased by 33.4% because of reduced funding. Now most of the things that we anticipated, they’ve not gone away. They’ve just moved from last year and hopefully into this year. So I think that we expect, for example, Q1 to be challenging for the business because programs continue to be funded by continuing resolutions. But we expect to see that changing in our Q2 onwards.

So overall, I think all the DABE programs that we have in the pipeline and when we think about the DABE, we should think about the DABBID Tebbit system, which is already in the field. And as Blair explained, that’s being used by 9 commands currently and year on year. We’re seeing acquisitions and budgeting for that product line. The untethered variant is still going under a program of development, but I think we’ve reached this pivotal point under the hardening program and the biggest milestone has been achieved and that was the new head up display for fitting in those types of masks that we’ve delivered. So again, onto that program, we anticipate in fiscal year 2025 to see the first initial purchases of that system.

So I’m really, really excited. And please remember, as we have already said, the untethered variant is the most promising and the biggest market for the business to see that we have delivered the biggest barrier to the success of the program in fiscal year 2024, despite the funding challenges, very, very pleased with the team and what we’ve achieved.

Brian Kingslinger, Analyst, Alliance Global Partners: Well, can you you’re talking about 3 new programs. You’re talking about your first initial orders. Can you size it at all? Are we talking very marginal sized programs? Are we talking very large programs somewhere in between?

Any kind of numerical discussion would be helpful.

Anne Marie Gale, Chair and CEO, Coda Octopus: So on the, tablet systems on the Navy side this year in terms of purchasing, systems, we would expect $2,000,000 of purchases of equipment For purchases of the initial OnTebert system, we would expect that to be $1,000,000 And for the other development programs around the technology, we expect $2,000,000 So in all, we are tracking for David $5,000,000 in this fiscal year. But I think that the thing that we are focused on and what we feel to be pivotal for our business is the fact that the ONTETHER variant is moving from its R and D phase into an acquisition phase. That is really and what we have visibility and what we’re talking about here, just to be clear, it’s only the opportunity with the U. S. We’re talking about here.

We have not begun to talk about all of the other opportunities that we’re tracking with foreign navies. And we should also remember that the untethered program was is a joint funded program between the U. S. And a significant foreign navy. They also will be in lockstep with the U.

S. In terms of acquisitions. We simply don’t have their budget at this stage. So I think what I am saying, I can see on the U. S.

Side, we expect $5,000,000 worth of DAPT revenues of different makeup this year, but that excludes opportunities that we think are close globally for the DAVID technology.

Brian Kingslinger, Analyst, Alliance Global Partners: Okay. And then switching gears, you commented on foreign customers being careful right now related to uncertainty around tariffs and the current administration. Can you talk about how you’re thinking about tariffs potentially impacting your business?

Anne Marie Gale, Chair and CEO, Coda Octopus: Yes. In general, as you know, tariffs can in general stymie the business environment because it impinges on the free flow of goods and services. And the broader implication is that it could contract demand or reduce demand because simply it becomes much more difficult to export items. So I think generally, as I said, what we’re seeing is a general caution in the environment or the environment being very cautious. And the infrastructure budget, it’s a big budget in the U.

S, for example, and many, many European off offshore service providers were in the queue for many big programs this year in the U. S. For some of the infrastructure projects like offshore renewables. So until we can gauge the new shift in policies, what they mean, it is still a lot of unknowns. So that’s pretty much what I’m hearing from our customer base, just cautious and just a lot of unknowns until the policies are in place.

Brian Kingslinger, Analyst, Alliance Global Partners: Great. One on Precision Acoustics. It sounds like it can be much greater under the Coda umbrella, but it sounds like they’ve underinvested. Can you talk about any increased investments you have to make to achieve these potential revenue synergies? And then do you think this acquisition will be accretive to operating profit or diluted to operating profit in the 1st 12 months?

Anne Marie Gale, Chair and CEO, Coda Octopus: Jeff, I’m going to ask you to take questions on Precision Acoustics, please.

Jeff Turner, Investor Relations, Coda Octopus: Okay. Hello, Brian. You asked 2 questions there. First of all, Precision Acoustics is actually quite well equipped. We’ve bought very little equipment in the last 3 months since we’ve had ownership of the business.

So I don’t think we have a worry there about having to plow in a load of capital. The company has been profitable for the last however many years if you look at the publicly available figures. And I see no reason why that would change. I think the business will continue to be profitable. Okay.

Brian Kingslinger, Analyst, Alliance Global Partners: Last question I have, Emil.

Anne Marie Gale, Chair and CEO, Coda Octopus: Sorry, Brian. I just wanted to add there. So just the way we what’s exciting about Precision Acoustics is what I would call it’s a business that was just really operating almost without any business development because it just whatever it does, it just has the market for those things. So we think that we can plow in business development in that area to grow the revenue. So that’s the aspect that I’m particularly excited about.

I’m also excited about the capabilities that it brings to the group and therefore collectively we can, if you like, compete for larger defense contracts. So those are the two headline things for the acquisition.

Brian Kingslinger, Analyst, Alliance Global Partners: Thank you. Last questions are first, is there any seasonality in Precision? And then as you think about another acquisition this year, should we be thinking similar size to Precision? Or might it be something larger?

Anne Marie Gale, Chair and CEO, Coda Octopus: Jeff, can you speak to the seasonality and I’ll talk to the other acquisitions.

Jeff Turner, Investor Relations, Coda Octopus: Yes, sure. There’s no discernible seasonality really to the business. There’s some dependence a lot of the customers are universities. So there is some dependence on the budgets appropriate for the university academic year, but there’s no real appreciable seasonality, no.

Anne Marie Gale, Chair and CEO, Coda Octopus: And in terms of the acquisition that we’re currently looking at, it’s larger than Precision Acoustics.

John Deysher, Analyst, Pinnacle: Great.

Blair Cunningham, President of Technology, Coda Octopus: Thank you so much, guys.

Anne Marie Gale, Chair and CEO, Coda Octopus: Thank you, Brian. Thank you for your questions.

Operator: Our second question comes from Richard Deutsche with Sutter Securities. Please proceed with your question.

Richard Deutsche, Analyst, Sutter Securities: Yes. Thank you. Thank you for taking the asking my questions. I have several questions myself. In the underwater vehicle work that you’re trying to get involved in with the drones and the other vehicles, what differentiates your technology from the competition?

Anne Marie Gale, Chair and CEO, Coda Octopus: Blair?

Blair Cunningham, President of Technology, Coda Octopus: Yes. Thank you, Richard, for kind of welcome to the question. I think really the key differential is, as we’ve always said with the Echoscope technology, it performs really essentially 2 things at one time. You can do the mapping, which is predominantly, as I think I said in my comments in the filing, a vehicle is either trying to create a map of the seafloor, which then gets processed later on and then perhaps something else goes out to take custody or prosecute that target in whatever manner that may be. What we are changing on its head is allowing the vehicle to not only make the map, but also then be able to say stay station on a target and then prosecute that target in whatever way they want.

So for example would be in the vehicle space, there’s a number of new vehicles, which I would call hybrid autonomous vehicles or hybrid ROVs, where they can perform the mapping mission, which could be covering several kilometers of sea bled and then go back and identify the targets and then either do something with those targets. So they have manipulators or other tools on board the vehicle, which it transforms into once it’s completed the mapping mission. Traditionally, that would require multiple different sensors to be able to complete that same mission profile. And what we are providing is a single sensor that can do those things together. Not only that, we’re also then providing additional benefits to the vehicles such as three-dimensional forward looking obstacle avoidance, where traditionally that’s always 2 dimensional and the ability to reduce the payload and the power requirements for these vehicles.

I think those are 2 critical aspects that the vehicle markets are looking at. What’s my duration I can run on the available batteries I can carry and then what mission profiles I can perform.

Richard Deutsche, Analyst, Sutter Securities: Okay. So why would there be any competition? Is it price? I’m trying to understand why this wouldn’t be the expected winner of these competitions?

Blair Cunningham, President of Technology, Coda Octopus: I think with a lot of the yes, sorry, Emily.

Anne Marie Gale, Chair and CEO, Coda Octopus: Yes, we’re going to see it and I’ll get go ahead, Bli. But what I wanted to say that question, Richard is to say, if lots of these underwater vehicles are still in their evaluation phase. So we haven’t lost anything, but they still have to go through their evaluation on different technologies and what they offer. So you’re right, I mean, for us, it’s a slam dunk. It is the Echoscope is more advanced because, as Blair explained, it’s a single sensor for multiple applications, whereas if you use other sensors, you’ve got many different sensors for different missions.

So by combining a single sensor for multiple applications, you’re reducing cost and you’re reducing your payload and power requirements, as Blair said. So I just wanted to chip in and say that we’ve got a number of programs that are ongoing and we believe the ETCO is a contender for many of these programs. So sorry, Blair, over to you.

Blair Cunningham, President of Technology, Coda Octopus: Yes. No, I think you answered most of what I was going to say. I think the only other thing I would say here is that, yes, of course, with all defense programs, a lot of these have been underway for many, many years. So yes, we are coming in as an incumbent. However, it’s clear that not only the commercial industry, but the defense industry are looking at ways to do better teaming.

So that teaming could be a diver to a vehicle, could be a vehicle to the prosecution of, as I say, the specific task. Yes, the olden way is to actually use the lawnmower approach. You can go out and mow the lawn and then you come back and see what we have and what do we need to do next. That’s what everyone is now considering as being a realistic opportunity. So as Amerind said, these opportunities are certainly not gone and a number of programs are looking to embed us into the outside design of their vehicles with the Echoscope in mind.

So I see that as really positive, highly beneficial for the product line moving forward.

Richard Deutsche, Analyst, Sutter Securities: I happen to agree with you. I’m just wondering why all of these projects don’t choose you as your bolt on for their system as opposed to some other sonar? That was really my question.

Operator: Sure. Yes.

Anne Marie Gale, Chair and CEO, Coda Octopus: And then, obviously, if you’re assuming that though that we’re not chosen and I can’t speak for what the customer is thinking, but what we are seeing from what we are doing, we’re seeing all of the programs that we are engaging in. We see, 1st of all, something which is interesting. We will engage, for example, with prime contractor A and initially they would say to us, okay, we want you for this scope. Then the next thing we see that they expand the scope and the next program they have, they include the echoscope. So that’s how, we see that once we are in a program, the program is expanded for other uses of the echoscope.

So I can’t say why everyone doesn’t see what we see, but what I am seeing in where we are, I feel we’re making good progress in getting the esterscope designed in these programs at the front end.

Richard Deutsche, Analyst, Sutter Securities: Okay. Thanks for that. The next question I have is the heads up display. Can it be used for other indications like aircraft, NASA, non underwater or gaming? Was there any other opportunities for your heads up technology to expand beyond underwater visibility?

Blair Cunningham, President of Technology, Coda Octopus: That’s a great, great question actually and something of course we are working on actively at the moment. I think the biggest switch point for us definitely was in the dust hardening program where we’ve created our new Gen 4 HUD. That is a game changing enabler for, yes, not only perhaps the smaller full face masks, scuba mask type market of which there’s much, much higher volume as I’ve stated than hard hat diving, but you’re correct. All other adjacent markets above water, between water and above water, Those are absolutely opportunity spaces that we are actively looking at the moment. So yes, we do see that as an opportunity.

The one key thing I would say is in the fighter pilot kind of type market, yes, that could still be an opportunity space. But however, we have focused on our deliverables is always generally conditions of low visibility, noise in the water column. So this is generally not what I would call a daylight heads up display. That doesn’t mean we cannot enter that space. But our primary focus today has been in solving the much harder problem of dealing with vision in occluded or very disruptive and noisy environments.

That’s really so of course, all adjacent markets surrounding those same facets are absolutely opportunity for us to explore.

Richard Deutsche, Analyst, Sutter Securities: Okay. Well, you just hit my next two questions. So I’ll just elaborate on one of them. Can you get into a little bit more detail about what hardening involves?

Blair Cunningham, President of Technology, Coda Octopus: Sure. So let me start by saying, and this is going to worthwhile point. The data technology, the data tether technology encompasses a lot of features to address a lot of different mission profiles. So thus hardening was addressing multiple different aspects. So number 1, we’re now going between a diver who perhaps walks on the sea floor with a hard hat helmet, who’s tethered to a surface ship to now an agile swimmer that will be swimming in a rebreather, much lighter equipment.

So we had to repackage the equipment, make that form fit function with existing rebreather equipment. So really you can think of it as miniaturizing as much as possible, taking as much weight out of the system and form fitting around the other dive equipment that they also have to carry such that the DAVIDs system with all its benefits doesn’t carry a payload obligation for the diver. The second point, which is the DAVID HUD, so the Gen 4 HUD, our current optics or our previous optics in the Gen 3, they could not fit into the smaller mass. They were too large, the waveguide optics that we previously used. So this complete ground up development, which will eventually replace all of our huds, is incredibly much smaller payload that allows us to fit in the smallest of dive masks, which perhaps EOD type community, that’s what they are very, very interested in.

Richard Deutsche, Analyst, Sutter Securities: Okay. Well, I followed you guys for years now and I’m very, very excited to see how you’re entering this exponential phase of opportunity and potential profitability. So keep up the good work. I’m really impressed. Thank you.

Blair Cunningham, President of Technology, Coda Octopus: Thank you, Richard.

Anne Marie Gale, Chair and CEO, Coda Octopus: Thank you, Richard. Thank you very much.

Operator: Our next question our third question comes from Steve Emerson (NYSE:EMR) with Emerson Investment Group. Please proceed with your question.

Steve Emerson, Analyst, Emerson Investment Group: I’m so happy to see your excellent progress in these very large markets. But now that we’re facing poor short term results, Perhaps you could give us a better idea of the addressable markets, for instance, U. S. Underwater Warfare scuba divers, how big are some of these markets that you’re addressing, of course, give a range? And how big are these contracts that are that you’ve alluded to, that are, let’s say you’re competing with and I am certainly aware of the $5,000,000 from U.

S. For scuba. But if you could size some of these markets, it would help us.

Anne Marie Gale, Chair and CEO, Coda Octopus: Steve, Blair, go ahead. Yes.

Blair Cunningham, President of Technology, Coda Octopus: Yes. I was just going to say from the yes. From the market of David, as we’ve always said, the dust, which is the untethered full face mask market, there is a considerable number more of those divers in different types of applications than the hard hat diver. However, getting the hard hat diver in with the Navy was the door opener for these other markets. I definitely feel we’ve achieved that and that’s what’s bringing the promise of these new contracts.

Just to give some form of size, I think, Steve, there’s something like 2,200 SEALS, 120 EOD divers, 1225 of other divers just within the U. S. Alone. The way that we view that is we’re looking to convert roughly about 15% of those, which would give us a target of $40,000,000 over 5 years just within the U. S.

Sector.

Steve Emerson, Analyst, Emerson Investment Group: Okay, excellent. And can you give TAM and why would 15% be an appropriate number for TAM?

Walter Ramsey, Analyst, Walrus Partners: Do you

Blair Cunningham, President of Technology, Coda Octopus: want to take that one, Amari? Or I can take that one.

Anne Marie Gale, Chair and CEO, Coda Octopus: Well, I think when we started, 1st of all sorry, I think I’m having some trouble here. Sorry.

Steve Emerson, Analyst, Emerson Investment Group: Blair, you’re fine. Blair, you’re fine.

Anne Marie Gale, Chair and CEO, Coda Octopus: Yes. So when we started this, first of all, Blair, sorry, we have to understand how customers would adopt the technology. Because despite the fact that we see, okay, there are X number, let’s say, 4,000 divers in the U. S, we still need to understand how the customer would adopt the technology. Is it a one for one adoption?

And those are things that are unknown to date. So we’ve really just modeled and said that our target is 15% based on trends that we see in the adoption of the technology. Sorry, Blair, over to you.

Blair Cunningham, President of Technology, Coda Octopus: Yes. Yes. I think that’s correct, Anne Marie. I think many of the new groups, if we take EOD as a good example, we’re in the early stage discussions with those groups. I think the promising fact is everyone has been able to see, witness and dive the tethered system DAVID and now of course the initial variant of the untethered system.

So we’re in active discussion and they themselves are trying to understand what other sensors can they bring into the DAVID system. I think as I said in my initial remark, we’re trying to make the cell phone revolution underwater. That only works if you can incorporate other sensor data or other information. For example, that could be biomedical information, the stress on divers, for example, or could be other type of sensors, like magnetometers, NDT and all of those factors. Those are all critical because that creates the swell around the use of the technology and we become the linchpin in the center.

And I think we definitely are feeling that we are becoming the linchpin there. It’s now about working together with those teams so that they don’t display technology, a, we integrate with the previous generation of their technology and then it’s a seamless migration for them. I’ll give one case in point. The majority of perhaps seals or EOD divers would swim with, let me just say, an iPad underwater. They have a display underwater.

So clearly, the next evolution of that is to have that in the heads up display. However, it’s not as quite simple to take all of that information and put that in the heads up display, much like the automotive market that it takes on board. Augmented reality is a skill set and it’s owned to display the right level of information at the right time for the diver also based upon what they’re doing. So there is a skill and an art there and it isn’t just a complete one to one. So we are looking at the overall market to try and bring the adoption curve up.

Clearly, the focus for us is to be involved in the most high volume applications, which we’ll then see as the biggest yield. So but I think we felt the 15% conversion over our initial modeling over the 5 years felt a very reasonable target for us to achieve.

Anne Marie Gale, Chair and CEO, Coda Octopus: Yes. And I think we can’t I mean, regardless how big the market is over time, the biggest priority for this business is to get the untethered variant in the field operational, and that will set the precedent for global adoption in the military community with foreign Navy. So we have to do this well, And I think we’ve reached this pivotal point with in the program where we’re now reaching to the phase where there’s acquisition of a small number of units in this year. And I think that, that will be the stepping stone for increasing the adoption curve over time. I really think that’s an important milestone for business.

Steve Emerson, Analyst, Emerson Investment Group: Okay. Thank you. I’m looking forward to receiving perhaps in your presentation some more detailed addressable market by segment information.

Anne Marie Gale, Chair and CEO, Coda Octopus: Okay.

Steve Emerson, Analyst, Emerson Investment Group: 2nd question, can you give us some metrics or better feel for this acquisition? You said it’s in due diligence phase?

Anne Marie Gale, Chair and CEO, Coda Octopus: Well, at this stage actually, Steve, we’re really I gave you a rough order of the size. Is that by revenue are you thinking about? Or are you thinking about what we’re looking to spend?

Steve Emerson, Analyst, Emerson Investment Group: Yes. Give us what you feel comfortable telling us.

Anne Marie Gale, Chair and CEO, Coda Octopus: Well, the most I can see given that we’re going through due diligence at this point is that the target purchase price is at $12,000,000 sorry, dollars $14,000,000 sorry, got that wrong.

Steve Emerson, Analyst, Emerson Investment Group: Okay. And can you give us revenue and EBITDA? What kind of overlay?

Anne Marie Gale, Chair and CEO, Coda Octopus: I prefer not to at this stage, Steve, to talk anymore about the target because we are under NDA at this moment and we’re still just early days of the due diligence. So, I’d much prefer to wait until we progress more with the target.

Steve Emerson, Analyst, Emerson Investment Group: Okay. And sub segment or again, you’d rather wait?

Anne Marie Gale, Chair and CEO, Coda Octopus: At this stage, I don’t want to preannounce something that is really at its nascent stage. So, if you don’t mind, I’d like to not say much more about this.

Steve Emerson, Analyst, Emerson Investment Group: Certainly.

Anne Marie Gale, Chair and CEO, Coda Octopus: Thank you. Thank you for your

Steve Emerson, Analyst, Emerson Investment Group: question.

Operator: Our 4th question comes from John Deysher with Pinnacle. Please proceed with your question.

John Deysher, Analyst, Pinnacle: Good morning. Thanks for taking my question. Most of my questions have been answered, but I was curious on the Precision Acoustics purchase. When you say you’re going to enhance business development, what exactly does that mean? More salespeople, more offices, what does increasing business development mean for that company?

Anne Marie Gale, Chair and CEO, Coda Octopus: More salespeople, sales and marketing. As I said, when we acquired them, they really weren’t doing any sales and marketing because the sales just trot in. As I said, I think we can introduce business development via sales personnel to grow the business. And that’s one area we’re looking to invest in.

John Deysher, Analyst, Pinnacle: Any idea of how many additional sales people you’re hiring?

Anne Marie Gale, Chair and CEO, Coda Octopus: Well, initially, it’s a small business. So if we sort of put in 2 salespeople initially, I think that would be plenty in the 1st year.

John Deysher, Analyst, Pinnacle: Okay. That makes sense. And you mentioned that the business did, I think, about $5,000,000 dollars last year and $24,000,000 gross margins were 52%. What were operating margins for 2024 for that business?

Anne Marie Gale, Chair and CEO, Coda Octopus: Jeff, do you have their operating margins?

Jeff Turner, Investor Relations, Coda Octopus: It’s not a simple question to answer as it might seem actually, because it was largely privately owned and it was run as almost as a subsidiary of another company. And some of the charges to and from are a little bit oblique. So I prefer really not to be drawn on operating margin, except to say that it’s I expect it to be positive.

John Deysher, Analyst, Pinnacle: Okay. Will it be in line with the operating margins for the legacy go to business, which were, I don’t know, 15% or 16%?

Anne Marie Gale, Chair and CEO, Coda Octopus: 17.2%. So it’s no, I don’t think so.

Jeff Turner, Investor Relations, Coda Octopus: Yes, I would hope it was something like that, yes.

John Deysher, Analyst, Pinnacle: Okay. So all right, fine. And I think you said that you’re going to increase the R and D and the SG and A this fiscal year. By what percentage might you think each of those might go up for R and D and SG and A?

Jeff Turner, Investor Relations, Coda Octopus: Well, I think that let’s take the SG and A first. We would probably put in a couple of people over the course of the year, as Anne Marie said. I think they’ll probably be in the, let’s say, towards the latter half of the year. We’re running at about 22 people at the moment. So it would be equivalent to about one head over the course of the financial year.

In terms of R and D, there are a number of projects that we are running, which I think we would hope to get some results out of in terms of product.

John Deysher, Analyst, Pinnacle: Okay. So R and D last year was $2,300,000 What percentage increase do you think we should model for this year?

Jeff Turner, Investor Relations, Coda Octopus: I think we would look towards perhaps 4 or 5 projects over the course of the year of varying sizes. But we’re towards the start of the year at the moment, so it’s difficult to be precise.

John Deysher, Analyst, Pinnacle: Do you

Anne Marie Gale, Chair and CEO, Coda Octopus: think it might go on? Yes. And I don’t think in terms of internal R and D, just to answer that question, I don’t see just collectively, I think our goal would be to keep an increase of 5% on in terms of monetizing the capabilities of Precision Acoustics in the group.

John Deysher, Analyst, Pinnacle: Okay. Well, that’s helpful. And SG and A was, I think, $8,300,000 last year. How should we model that for the fiscal year? As I said,

Anne Marie Gale, Chair and CEO, Coda Octopus: I think It also will depend on the pace at which we take on these costs at the moment, really in terms of our R and D effort, cross group R and D effort. It’s really time at this time, really thinking about what our priorities are in terms of near term goals to monetize what they have in the broader group. So currently, this is internal resources. Later on, it will involve really just buying kits to start working on. So I think it’s going to be incremental increase in our R and D for Precision Attoustics leveraging what they have in the group.

So it’s a gradual increase in our costs over the year.

John Deysher, Analyst, Pinnacle: Okay. That’s helpful. And finally, do you anticipate segmenting out Precision Acoustics? Or will you include that with either product or services?

Anne Marie Gale, Chair and CEO, Coda Octopus: That’s a great question. So the broader in terms of segment reporting, it will fall on the products. But just to be clear, that will be when we report products, there will be the marine technology business products and then there will be PA business because it’s a different business unit within products.

John Deysher, Analyst, Pinnacle: Okay. On the operating income line, will you break that out as well, marine versus

Anne Marie Gale, Chair and CEO, Coda Octopus: I don’t know at this stage. I mean, we’ll do what’s required for reporting purposes. So I don’t know. Gail, do you have a view on this?

Gail Jardine, Interim CFO, Coda Octopus: I believe our current plan, Anne

Jeff Turner, Investor Relations, Coda Octopus0: Marie, thanks for the question, is to keep

Gail Jardine, Interim CFO, Coda Octopus: it under the products segment reporting is

Jeff Turner, Investor Relations, Coda Octopus0: to keep it clean and not to break it out separately.

John Deysher, Analyst, Pinnacle: Okay. So you break out the sales, but not the operating margins.

Anne Marie Gale, Chair and CEO, Coda Octopus: Yes.

John Deysher, Analyst, Pinnacle: Okay. I guess finally, is there a public disclosure of how or will it be a public disclosure, maybe an 8 ks or something in terms of how Precision did for the year?

Anne Marie Gale, Chair and CEO, Coda Octopus: No, I don’t think there’s a required no, there is no requirement for an 8 ks for Precision Autistics. And we finished our Q1, I think, 2 days from now, we’ll be filing our consolidated Q1 results, 45 days after the end of January.

John Deysher, Analyst, Pinnacle: Okay. So no separate disclosure. Okay,

Anne Marie Gale, Chair and CEO, Coda Octopus: great. Thanks so

John Deysher, Analyst, Pinnacle: much and good luck to you.

Anne Marie Gale, Chair and CEO, Coda Octopus: Thank you very much. Thank you for that.

Operator: Our next question is from William Bremer with Vanquish Capital Partners (WA:CPAP). Please proceed with your question.

Jeff Turner, Investor Relations, Coda Octopus1: Good morning, Anne Marie.

Anne Marie Gale, Chair and CEO, Coda Octopus: Good morning, Bill.

Jeff Turner, Investor Relations, Coda Octopus1: And Blair, welcome. And thank you for the commentary and the articulation of

John Deysher, Analyst, Pinnacle: so many of our future products

Jeff Turner, Investor Relations, Coda Octopus1: as we go into commercialization. My first question and really only question is on the whole scanning.

Steve Emerson, Analyst, Emerson Investment Group: How are we going to

Jeff Turner, Investor Relations, Coda Octopus1: sell this product or service? Is this going to be maybe a yearly like a multi service agreement? Is this going to be by vessel? Is it going to be an equipment sale? If you could just enlighten us a little bit on your sales approach there?

Blair Cunningham, President of Technology, Coda Octopus: Thank you, Bill. Yes, it’s a great question. And I guess I should clarify also for everyone in terms of what we extensively mean by Chapelle scanning. Our initial customer, which is the U. S.

Navy, specifically had in mind ship hull scanning or either parasites on a hull or for incident reporting of a hull, so to save on what I’d call dry docking fees. So you can call that in some respects, ship husbandry in some respects. The market opportunity is quite massive, however. And I would say over the last 3 to 4 years actually, I’ve been trying to group many of the customers or potential markets that are required the same solution, but are trying to do different things. So if I give you just a case point, we have the group that want to avoid, say, maintenance and repair costs by doing that underwater.

So we call that dry docking fees. You secondly have a battle damage assessment where perhaps, and I know we can have commented on this a couple of years ago, was several incidents where U. S. Navy vessels came in contact with either other vessels or other objects and they had battle damage. How can the ship hull scanning solution provide an instant view under the water before going into port.

We then have what I would call the parasite kinotype humidity. So that is either EOD or what I would call naval vessels. But in the commercial sector, that is anyone coming into major ports and these things always get flagged up to be able to scan those holes for looking for unknown objects. And then, of course, you have the whole customs type route as well, which looks at other attachments to the hull, such as false panels in the hull where they’re attacking narcotics and drugs. So this solution that we have is intended to address all of those markets.

The second point I should make out is that although for our initial customer, we developed the hull sled, which is a solution for a diver to go in, create a real time map underwater under the hull and to do prosecution, the same solution platform could be deployed on perhaps a surface vessel or it could be deployed more commonly on an ROV. And in actual fact, our EOD customers are using the ROV approach instead of the diver approach. So really, I think as we stated in the filing, this is a global market opportunity and it’s got multiple different sectors to it. Currently, what we’re addressing is the Navy requirements, which is really the ship husbandry and EOD type aspects, and that’s what we’re looking at. But I do suspect this will be an investment.

This is probably not going to be a service thing, I would say. And as it currently runs at the moment, the Navy employs contractors to do either ship all cleaning, the dry docking fees. And I would suggest that perhaps they would be involved in this process and we’re providing the solution for them to do that job quicker and faster.

Jeff Turner, Investor Relations, Coda Octopus1: I thank you for the color, Blair. I truly do. Will given all those different end markets, I’m assuming it’s going to be different SKUs or different models of this technology over time?

Anne Marie Gale, Chair and CEO, Coda Octopus: Sorry, just to jump in there. The ship house canning solution we put forward, it’s not going to be different from our model of selling the technology or renting the technology. So it’s going to follow one of those, Bill. So we will not be providing a service around the technology. We are selling the package and the customer will use this in their operations as they currently do with what we sell in the market today.

So it will be either outright sale or a rental.

Jeff Turner, Investor Relations, Coda Octopus1: Okay. Agreed. Blair, is it possible and I guess I’m assuming that the vessel is in port at the time of the scanning, but is it possible over time that the next couple of generations this type of technology can be equipped that the vessel doesn’t need to be import?

Blair Cunningham, President of Technology, Coda Octopus: Great question. And yes, I guess the 2 models, I would say, that are under evaluation and this is where we think the next opportunity with our customers looking at. I do know, for example, the Coast Guard have jurisdiction out to a certain number of nautical miles away from the port and then it becomes the port’s authority at that point. There is 2 models. There’s the ship at anchor at steady state out in the open water.

That generally

Anne Marie Gale, Chair and CEO, Coda Octopus: could easily

Blair Cunningham, President of Technology, Coda Octopus: be an augmentation of the current solution. And I don’t think that would necessarily represent a significant challenge. It depends on the sea state, of course, if the ship itself is dynamically moving, we’d need to be able to capture that information in addition to our own movement. So there’s some math to go on to solve that problem. I think what is was a desire of many people was, I would call it, the car wash type shuttle scanning solution where sensors are placed on the seabed and as the ships pass over them, then they would instantly be scanned.

I think that model, I’m not saying it’s been disproven, but it’s much harder than I think either the customers or the technology people thought that it may be simply because the ship is underway, it’s creating its own cavitation, different sizes of vessels, a ship can’t slow down to the speed perhaps required for scanning. There’s many more complications. But certainly scanning offshore should be exactly the same as the ship necessarily being at dock. Also recall that an entire 3 d model of the hull is generally required for people like ship husband, Dre, battle damage assessment, for example. When we look at the narcotics type of thing, there’s a certain region of the hull of what’s their interest.

So we’ve become much more localized in terms of where we have to do the search and where we look at the information. And sometimes it could be real time search. We don’t have to create the what I would call the high resolution 3 d map. And that’s really where our technology comes into play. We can do the real time inspection and we can build the map.

Jeff Turner, Investor Relations, Coda Octopus1: You just answered my final question. I thank you for your time.

Blair Cunningham, President of Technology, Coda Octopus: Thank you, Guy. I really appreciate it. Thank you very much.

Operator: Our next question comes from Walter Ramsey with Walrus Partners.

Walter Ramsey, Analyst, Walrus Partners: Partners. I got a couple of more financially oriented questions. The company did $5,500,000 in revenue to Asia. You say China is your biggest offshore market and that the export controls could prevent you from selling to China anymore. Can you quantify that?

How much you’re going to be at risk for if those export controls are retained?

Anne Marie Gale, Chair and CEO, Coda Octopus: Just to be clear, Walter, thank you for your question. Most of the composition of Asia is Japan actually. So we’ve been impacted in terms of sales to China for many years now. So it’s getting less and less a problem for us because since I think 2022, we have had reduced ability to sell to China. So most of the composition is Japan.

Walter Ramsey, Analyst, Walrus Partners: Okay. All right. Good enough. And as far as the Precision acquisition, Precision we got the Acoustics acquisition. It’s in the 10 ks that amortization pro form a was $477,000 Is that going to be the number going forward for the amortization?

Jeff Turner, Investor Relations, Coda Octopus0: I can take that, Anne Marie.

Gail Jardine, Interim CFO, Coda Octopus: That’s the number for 4 years. Yes. So for the 1st 4 years, that’s the number. And then it reduces slightly when it reduces slightly when our non competes stop after 4 years. So then it will slightly go down slightly and it lasts for a total of 7 years is what we’ve modeled.

Okay.

Steve Emerson, Analyst, Emerson Investment Group: No, I see. Well, no

Walter Ramsey, Analyst, Walrus Partners: worry about those years when we get there, but for the time being, that’s good. And okay. And the earn out target is a pretax number of 1,050,000 dollars Is that before the amortization or after?

Gail Jardine, Interim CFO, Coda Octopus: Before.

Walter Ramsey, Analyst, Walrus Partners: Okay. So they have to make $105,000,000 and then you would for your financial reporting subtract that from there, but to calculate the earn out that’s really all I have to get. Okay. I think that sounds good. Appreciate it.

Anne Marie Gale, Chair and CEO, Coda Octopus: Thank you, Walter. Thank you.

Operator: At this time, this concludes our question and answer session. I’d now like to turn the call back over to Anne Marie Gale for closing comments.

Anne Marie Gale, Chair and CEO, Coda Octopus: Thank you, operator. Thank you for your participation today. Have a great day. Thank you, everyone.

Operator: Thank you for joining us today for Coda Octopus’ conference call. You may now

Gail Jardine, Interim CFO, Coda Octopus: disconnect.

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