Coda Octopus Group, Inc. (CODA) Earnings Call Transcript

Thanks, operator. Hello, everyone, and good morning. We're glad you could join us for Coda Octopus' conference call on earnings for the third quarter of fiscal 2025. Before the management team gives its official comments, we want to point out that certain things we say today might fall under securities law as forward-looking statements, and they carry various risks and uncertainties. Consequently, we must warn you that numerous factors exist—many outside our ability to control—that might lead actual outcomes and occurrences to vary substantially from what those forward-looking statements describe. For a fuller picture of the risks, uncertainties, and assumptions tied to our forward-looking statements, kindly review the disclosures in our earnings release and the public documents we have filed with the Securities and Exchange Commission. We renounce any duty or commitment to revise forward-looking statements so they mirror situations or happenings arising after the point when such statements are issued, unless the law demands it. We direct you to our Securities and Exchange Commission filings for thorough disclosures and explanations of our operations, along with uncertainties and other shifting conditions, including—though not restricted to—the risks and uncertainties set out in our Form 10-K covering the year that concluded October 31, 2024, plus our Forms 10-Q for the first, second, and third quarters of fiscal 2025. You can obtain Coda Octopus' Securities and Exchange Commission filings at no cost by going to the SEC's site, www.sec.gov. I want to note that we are recording this call, and it will be accessible for replay through a link located in the Investor Relations portion of the Coda Octopus site. As one last reminder, this represents our reporting for the third quarter of fiscal 2025, and every comparison, unless we say otherwise in explicit terms, is against our third quarter of fiscal 2024. I'll now hand things over to Annmarie Gayle, the company's Chair and CEO. Annmarie?

Appreciate that, Geoff, and good morning to all of you. We're glad you could be with us on this call covering the third quarter of fiscal year 2025. Even with a tough policy landscape around the world, our top line for Q3 2025 came in 29% higher, and I feel we've posted a strong set of numbers. If you're just getting acquainted with Coda Octopus, our company consists of 3 separate operating divisions: the Marine Technology Business, the Marine Engineering Businesses, and the Acoustics Sensors and Materials unit that we brought in not long ago. Among these, the Marine Technology business stands as our central operation. It accounts for the bulk of what we earn; during the third quarter, 56.4% of our net revenue came from it. Our expansion plan is constructed around this very business. The Marine Technology business competes in the subsea sector and holds the key disruptive underwater technologies. Through a full real-time information platform, these technologies are delivering the smartphone revolution onto the water, enabling our customers to decide in real time while also cutting the cost of these operations dramatically and boosting safety. The particular addressable markets where we compete are the imaging sonar market along with the diving market. Our growth strategy centers on these two market segments. Now let's discuss our imaging sonar, the Echoscope. The Echoscope is a real-time 3-dimensional volumetric imaging sonar capable of producing real-time dimensional images beneath the surface when water visibility is zero; it sees wide use in the commercial offshore marine market across a variety of underwater applications. A large portion of what we earn each year comes from the commercial offshore marine market. For the growth shareholders expect from us, we must grow our share of the underwater imaging sensor market within defense. Around the globe, numerous defense programs are underway in which new classes of underwater vehicles are being brought into service. Considerable budgets get allocated toward this. As a single sensor handling multiple on-the-sea activities, the Echoscope offers a major edge relative to competing technologies. It permits combining several sensors into one power-efficient unit, all without sacrificing the different missions the customer needs to carry out. We recently introduced our next generation of ultra small form factor 3 dimensional sonars, the NANO GEN Series. The 3 dimensional sonars in our NANO GEN Series are slightly larger than a smartphone and were purpose-built for the small class of underwater vehicles, drones and diver wearable applications. Our second key technology is the DAVD, the diver augmented vision display system. The DAVD delivers the real-time information platform for diving operations, boosting safety and efficiency. The addressable market for DAVD spans both the defense and commercial driving sectors. The untethered variant serves the special forces type of divers and, in our view, makes up the biggest addressable market for the DAVD technology. After the funded DUS Hardening Program wrapped up successfully, during Q3 we handed over the 16 DAVD untethered system to the Navy so special forces could use it. A chosen set of special forces operators can now begin assessing DAVD technology on actual missions. We're supplying every form of assistance needed to make this program work and to get the technology rolled out across the special forces market. Under the funded DAVD untethered system hardening program, we also handed the final deliverables to the foreign Navy sponsor. That foreign navy can now begin employing the technology on live missions. Moving now to Q3 highlights. Turning to our core business, the Marine Technology business. This business sells products and solutions across the globe and grew revenue by 30.7% in Q3. Notable highlights include 57.7% of revenue produced by this business tied to Echoscope, while 42.3% relates to DAVD. Hardware sales rose by 103.6%, reaching $2.7 million versus $1.3 million in Q3 2024. Hardware sales into Asia fell by roughly 27.9%, coming in at $1.1 million versus $1.5 million in Q3 2024. That produced lower commission costs. Rental assets saw significantly weak utilization during Q3, which meant fewer rental units and associated services. The gross profit margins of this business were affected as well. This mirrors the shift in U.S. policy regarding funding for offshore renewables, which led many projects to be shelved, as Shell, Orsted and BP have reported. Moving now to highlights for the Marine Engineering business. During Q3, revenue for our Marine Engineering Business dropped by 33.2% because of delays in receiving contract awards. Gross profit margin for Q3 2025 came in at 58.9% versus 62.6% in Q3 2024, reflecting the mix of engineering projects during the period. This business holds long-standing relationships with prime defense contractors and has served the defense market for more than 48 years. It depends on receiving funding for the defense programs. Throughout Q3, it kept seeing a rising level of inquiries regarding the defense programs. Even so, many programs are still awaiting funds appropriated under the federal budget, and as a result, that impacted contract awards to the engineering business during the period. The marine engineering business succeeds based on growing the number of programs to which it supplies proprietary parts. Moving now to highlights for the newly acquired business unit, Precision Acoustics Limited. During Q3, this newly added business unit contributed 20.6% to our net revenue and 18% to our operating income. This business unit has brought some diversification and resilience to our revenue structure. We remain very pleased with this acquisition, which we made in October 2024, and we reiterate that it positions the group to collectively respond to larger defense requirements, particularly in the underwater acoustics space. Executing against our growth strategy remains our top priority. During Q3, we recorded higher sales for both Echoscope and DAVD. Blair Cunningham, our President of Technology, who serves as the market maker for our technologies, will bring you up to speed on the progress and the various milestones tied to our core technologies. Blair will also be on hand to address any questions you might have regarding our technologies, so please take the chance to bring those up during the Q&A session, should any arise. I'll now hand the call over to Blair Cunningham.

Thanks, Annmarie, and good morning to all of you. I'll use my time today to talk about where we stand on the advances we've achieved with our core technologies, Echoscope and DAVD. Our flagship offering, the Echoscope, remains the single biggest avenue we see for growth at scale, above all in the defense and security market. That sector is going through a sweeping transformation, pushed along by more and more deployment of next-generation underwater vehicles and platforms, spanning manned, unmanned, surface, subsurface and fully autonomous robotic systems. Newer generations of underwater vehicles, drones among them, are moving toward smaller form factors, which opens up fresh possibilities in the subsea market. To capture that demand, over the past 2 years we have devoted effort to creating a new line of compact real-time 3D imaging sonars, backed by a substantial commitment of capital to our next-generation custom technology chipset; this breakthrough IP investment has let us shrink our advanced imaging technology down to size for key defense and commercial applications. The first products in this line are now on the market, and I want to commend our R&D team for their exceptional work in making this possible. Built to serve the changing requirements of underwater vehicles and platforms in the defense sector, we are pleased to report the launch of our ultra compact real-time 3D imaging sonars, the Echoscope PIPE NANO GEN Series. With these next-generation sonars, small platforms can boost situational awareness and bring multiple sensors together into one power efficient unit, providing 3D spatial awareness as well as forward-looking obstacle avoidance. In addition to subsea vehicles, the NANO GEN SERIES is also a great fit for diver wearable systems, diving platforms and a broad array of underwater robotics. During the quarter, we already completed several successful trials with our NANO GEN Series sonars alongside key defense customers, who are enthusiastic about the technology and have begun exploring its integration into programs. Looking forward, I will personally take part in 3 additional trials in Q4 with both the U.S. and international naval forces, covering integration into subsea vehicle platforms and special forces diver systems; engagement at this level shows the strong market interest we expected and confirms how strategically important this product line is. Additional funding came in this quarter for our Ship Hull scanning solution, which was developed under a multiyear funded defense program, marking a key milestone in the continued validation and deployment of this technology. This expanded investment covers integrating another variant of our real-time 3D imaging sonar, Echoscope PIPE CIVS, which is used for close-in inspection missions. We have significantly enhanced the original SLIDE platform so it can support a wider range of diver missions; beyond its core applications for ship hull scanning, the platform now includes capabilities for infrastructure inspection and sea dive mapping, enabled by forward and downward-looking imaging functionality. This expansion follows successful trials and continued confidence from the defense customers. Integrating our CIVS close-up visualization sonar has shown exceptional performance in delivering real-time close range imaging, which is critical for detailed target detection and for carrying out complex inspection tasks in confined or challenging under water environments. An October Phase 3 final evaluation is on the calendar with the original U.S. defense customer, and it will center on proving out the ship hull scanning solution under operational conditions. During the quarter, a second SLIDE system went to a foreign Navy, forming part of a broader DAVD special forces development program. That international fielding draws on the identical technology platform, among them our DAVD Diver augmented vision display software plus supporting seabed and infrastructure mapping applications; with these 2 deployments now in place across separate defense customers, our technology has crossed a pivotal threshold from R&D into genuine operational use. In our view, the integrated diver SLIDE solution delivers the most advanced capability on the market today for inspection and mapping performed by divers underwater. Valued at $4.8 billion in 2024, the unmanned underwater vehicle market should hit $11.1 billion by 2030, propelled by maritime threats growing more complex and by demand for technologies that are cost-effective and low-risk. Consequently, ROVs, UUVs and underwater drones are turning into essential elements of modern defense strategies around the globe. Broadly speaking, the Echoscope presently represents roughly 80% of revenues in the Marine Technology business. Thanks to the NANO GEN Series launch and robust, ongoing customer engagement, we are strongly positioned to capture meaningful value across the expanding defense and underwater robotics markets. DAVD, the other major pillar of our growth strategy, is the DAVD, diver augmented vision display, a state-of-the-art mounted reality technology, engineered specifically to boost diver safety, performance and situational awareness in low visibility and technically demanding underwater environments. The DAVD Untethered System, which holds the greatest growth potential for this transformative technology, hit 2 critical milestones during the quarter. For context, within the U.S. by itself, 14,000 divers make up the potential community of government and defense users for the untethered system. First, the initial order of 16 complete DAVD Untethered Systems received in Q1 was successfully delivered in Q3 and is now ready for fleet evaluation by U.S. special forces. These systems are the combination of extensive field testing and direct feedback from operational divers, funded under the DUS Hardening program. The advancement in this specific deployment is the system's seamless integration with the U.S. Navy's Mark 16 underwater breathing apparatus. This integration allows real-time life support data, including system status and alerts to be projected directly into the DAVD augmented reality head-up display. The second key milestone achieved during the quarter was the completion of all remaining system component deliveries to the foreign Navy sponsor of the DUS Hardening program. This marks a significant step forward in demonstrating international alignment and growing global interest in our data technology. Together, these milestones validate the technological maturity of both the DAVD tethered and untethered systems and marks a critical inflection point in our trajectory from development and field testing to active fleet evaluation and operational deployment. Importantly, both U.S. Plus, our global program collaborators are still dedicated to thorough fleet assessments and live mission trials all year long, which highlights how strategically important and near-term promising our data tech is for next-gen underwater missions. During Q3, we got a first order for DAVD systems from a big European Navy that does a lot of diving work and holds regional sway, a group we've been helping out actively. Come Q4, I'd personally guide our team in assisting that navy through actual dive operations in real-world waters, rolling out our newest DAVD tethered systems together with the Echoscope underwater inspection system, which is a quick-response, portable inspection and mapping setup built for easy DAVD integration. It's worth noting this matches the exact UIS setup employed by the U.S. Navy supervisor of salvage and the U.S Army Corps of Engineers when the Francis Scott Key Bridge fell; this coming use highlights even more the operational readiness and adaptability of both the DAVD and Echoscope UIS tech, plus our ongoing backing for frontline military and infrastructure response efforts globally. Lastly, we're happy to share there's been a big rise in active development efforts focused on our DAVD tech, showing strong momentum in growing DAVD Systems abilities, merging DAVD with other platforms and expanding support, naturally, to a broader variety of operational settings. Among the standout new efforts, DAVD, together with the just-released Echoscope PIPE NANO GEN Series is getting integrated into the U.S. Navy's Deepsea expeditionary with no decompression or DSEND system. The DSEND system includes a light, tough atmospheric dive suit made for severe underwater tasks, the suit has rotating detachable joints that give divers better dexterity, flexibility and maneuverability in tough conditions. This effort is backed by the Office of Naval Research working with 3 U.S. Department of Defense entities, NAWC, NUIC and NSWC. DAVD is being used as a key life support and visualization part of the DSEND system, boosting diver safety and mission success by providing real-time life support info through the DAVD Head of Display and 3D situational awareness via the small Echoscope PIPE NANO GEN sonar attached right to the DSEND suit. This project shows the rising acknowledgment of DAVD and Echoscope tech as mission-critical instruments in the changing world of advanced military diving and underwater tasks; we're now waiting on results from 4 more U.S. Department of Defense proposals, all in final review stages and expected to go straight into execution once awarded. Every one of these suggested efforts centers on merging our DAVD system and Echoscope sonar tech with robotics platforms, further growing our part in the development of autonomous and semi-autonomous underwater systems. The timing of these chances lines up ideally with 2 big recent milestones. The completion of the DAVD untethered system and the debut of our new Echoscope PIPE NANO GEN Series, a set of small real-time 3D imaging sonars built for compact and robotic platforms. The need for underwater, vision, and augmented reality tech keeps rising in next-gen defense systems, and that's what these pending awards show — plus we're set up nicely to back this strategic change. Annmarie, over to you, and I'll be around for your questions in the Q&A.

Thanks, Blair. At this point I’ll hand things over to Gayle Jardine, our interim CFO, so she can walk you through the numbers for the third quarter of 2025, and after that I’ll give my closing comments. Gayle?

Thanks, Annmarie, and hello everybody on this call. Now I'd like to walk you through the financial results we posted for the third quarter of fiscal 2025; just so you know, every income statement comparison I make is against the third quarter of fiscal 2024, and every figure is stated in U.S. dollars. Let's begin with revenue. For the third quarter of 2025, total revenue came in at $7.1 million, up from $5.5 million during the third quarter of 2024, which works out to a 29.0% gain. Our core operation, the Marine Technology business, brought in revenue of $4.0 million, versus $3.0 million, which represents a 30.7% rise relative to last year's third quarter. Our Acoustic Sensors and Materials business, brought into the group during October 2024, posted revenue of $1.5 million. Our Marine Engineering business, or Services business, produced revenue of $1.6 million, compared with $2.4 million, which marks a 33.2% decline relative to the third quarter of 2024. To sum up, net revenue grew by 29%, and the business we newly added, Precision Acoustics, contributed 20.6% to our consolidated revenue during the third quarter of 2025. Let's turn to gross profit and margin. During the third quarter of 2025, gross profit came to $4.8 million, versus $4.0 million in the third quarter of 2024. Consolidated gross margin stood at 68.3%, compared with 73.9% in last year's third quarter; within our Marine Technology business, gross margin fell to 77.0% during the third quarter of 2025, down from 82.9% in 2024, which mirrors the sales mix, since we had more hardware unit sales rather than rental sales. The Acoustic Sensors and Materials business delivered a gross margin of 54.8%, somewhat below the prior 2 quarters, which mirrors higher commission costs along with the mix of sales. Gross margin for our marine engineering business dropped to 58.9% during the third quarter of 2025, versus 62.6% in the third quarter of 2024, which again mirrors the mix of engineering projects across the third quarter of 2025; turning now to operating expenses. Total operating expenses for the third quarter of 2025 rose to $3.4 million, versus $2.7 million during the third quarter of 2024. The primary drivers behind the rise in total operating expenses were bringing Precision Acoustics Limited into the group, which contributed 16.0% to those costs, along with the U.S. dollar weakening against the British pound and the Danish krone, which affects costs when they are translated into U.S. dollars from the base currencies used for reporting purposes. Our selling, general and administrative costs during the third quarter of 2025 came to $2.9 million, which is 32.8% higher than the $2.2 million recorded in the third quarter of 2024, mirroring the addition of the new business unit to the group, plus the contingent liability accrual for the year 1 earn-out tied to the acquisition of Precision Acoustics Limited and exchange rate adjustment charges. Measured as a percentage of revenue, our selling, general and administrative costs for the third quarter of 2025 were 40.6%, versus 39.5% during the third quarter of 2024. For the third quarter of 2025, operating income came in at $1.38 million, versus $1.39 million during the same period in 2024 — that works out to a 0.8% decline. Operating margin stood at 19.5%, down from 25.4% in the third quarter of 2024, and we tie that to higher cost of revenue along with operating expenses, for the reasons we walked through earlier. Pretax income for the third quarter of 2025 reached $1.5 million, compared with $1.6 million in the third quarter of 2024. Net income after taxes for the third quarter of 2025 totaled $1.28 million, or $0.11 per diluted share, versus $1.27 million, which was also $0.11 per diluted share, in the third quarter of 2024. Let me shift attention to the balance sheet. As of July 31, 2025, we held $26.2 million in cash and cash equivalents, with no debt. That marks a rise of $3.7 million relative to October 31, 2024, when the comparable figure stood at $22.5 million. Last, to wrap up how the introduction of the Acoustic Sensors and Materials business into the group affected finances this quarter: it accounted for 20.6% of revenue, while gross profit margin was $0.8 million, or 54.8%. That brings my financial summary to a close. I'll now hand the call back to Annmarie for her closing remarks.

Thank you, Gayle. I'm quite happy about how much revenue grew during Q3 of 2025, along with our financial performance overall. I'm equally encouraged by how far we've come on the major milestones tied to expanding the business. A few of those are: handing over the 16 DAVD systems so the U.S. Special Forces can evaluate them. Delivering the last DAVD items to the foreign navy sponsor as part of the funded DUS Hardening Program. In our view, that Hardening Program worked out well, and the benefits are beginning to show. Rolling out the NANO GEN Series sonars, which, alongside the sonar lineup we already have, lets us go after a meaningful share of the imaging sonar market. Getting our very first order from a foreign navy for the DAVD untethered system — this order covers 2 systems and comes from a highly influential European navy; that makes us glad, since we see it as the first step toward wider uptake by this influential European Navy. We keep striving to deliver steady, long-term value for shareholders and to carry out our plan for business growth, which stands as our number one priority as a group. On the cash deployment side, we'll keep pushing forward with our M&A strategy throughout fiscal year 2025 while we keep developing our M&A pipeline. Through this approach, our goal is to shift the Marine Technology business's revenue model toward a multiyear multiple sales model, as we've begun to observe with the DAVD product line. To wrap up, we want to express our gratitude to shareholders for sticking with us; we're ready now to take any questions. Operator?

Kevin here, sitting in for Brian. Now that the Echoscope PIPE NANO GEN Series has come out and been trialed over the quarter, what kind of response have you fellas gotten up to this point?

Blair, could you handle that one, please?

Absolutely, Annmarie. I appreciate it, and thanks once more for raising that. What I'd highlight as the most notable reaction we're hearing from every customer who's laid eyes on the system is how dramatically the form factor, size, and weight have come down — and that matters a great deal, as we can lay out, for the new vehicles entering the market. So honestly, it's been a game-changing thing. A lot of these customers already know how the Echoscope performs, so we were once again delivering that same performance, except within a form factor that is much, much, much smaller. So I'd say everybody's quite enthusiastic about hunting for fresh opportunities — places where they can now put the Echoscope into their platforms in cases where size or weight, maybe, had stood in the way of doing that within earlier development organizations.

I'd also like to build on what Blair mentioned regarding DSEND — it's an excellent illustration of a sonar mounted inside a diving suit, something our earlier sonar generation couldn't achieve due to form factor constraints. Being able to shrink a sonar down to roughly the size of a smartphone truly widens the aperture for our business, along with the possibilities for growing our opportunity base. That makes us extremely enthusiastic, since our prior-generation sonars are somewhat larger and would be shut out of use cases such as DSEND. So expanding that aperture and achieving more — cutting down sonar's form factor and thereby gaining the chance to broaden what we're capable of doing on smaller vehicles — represents a seismic step forward for our business.

Fantastic. And congratulations on everything moving forward with the DAVD — the untethered DAVD initiative. Back on the March conference call, you mentioned the company was aiming at $4.5 million in revenue tied to DAVD. Could you discuss what has happened in the meantime such that the figure in today's press release is $3.5 million to $4 million?

Well, we still — I mean, our belief is that we will reach $4 million in DAVD revenues for this fiscal year, which we consider truly, truly meaningful when you factor in that a year ago, we brought in $1.2 million; so we continue to see a really meaningful step forward for the DAVD product line, and I feel very, very pleased that this year could potentially reach $4 million in revenue versus $1.2 million a year ago at the same time. So really pleased about that.