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' earnings conference call covering the first quarter of fiscal 2026. Ahead of management's prepared comments, we want to note that certain things said on this call could fall under the definition of forward-looking statements per securities law, and they carry various risks and uncertainties. Because of that, we should warn you that numerous factors exist — lots of them outside our ability to control — that might lead actual outcomes or occurrences to diverge substantially from what those forward-looking statements describe. If you'd like a fuller picture of the risks, uncertainties and assumptions tied to our forward-looking statements, kindly consult the disclosures included in our earnings release and the public filings we've submitted to the Securities and Exchange Commission. We take on no duty or commitment to revise forward-looking statements so they capture situations or developments arising after the moment such statements are issued, unless the law demands it. For thorough disclosures and descriptions of our business, along with uncertainties and other shifting circumstances, we point you to our filings with the Securities and Exchange Commission, including — though not limited to — the risks and uncertainties laid out in our Form 10-K covering the year that ended October 31, 2025, and our Form 10-Q for the first quarter of fiscal year 2026. You can obtain Coda Octopus' Securities and Exchange Commission filings at no cost by going to the SEC website, www.sec.gov. One more thing to keep in mind: this call is being recorded, and a replay will be accessible through a link located in the Investor Relations section of Coda Octopus' website. And lastly, please remember that this marks our first quarter fiscal 2026 reporting, so unless we say otherwise explicitly, every comparison is against our first quarter fiscal 2025. At this point, I'll hand things over to the company's Chair and CEO, Annmarie Gayle. Annmarie?

Thanks, Dillon, and good morning everyone. We’re glad you could join us for this call about our results in the first quarter of fiscal year 2026. Despite a challenging policy environment around the globe, our revenue for Q1 2026 was up 28.8%, and I believe we delivered a solid performance. If you’re new to Coda Octopus, you should know that we’re made up of 3 distinct operating segments: the Marine Technology business, the Defense Engineering Services Business, and our Acoustic Sensors and Materials business unit. Of these, the Marine Technology business is our core operation. It generates most of our earnings; in the first quarter of 2026, it made up 50% of our consolidated net revenue. Our growth strategy is built around this operation. The Marine Technology business operates in the subsea sector and is home to key disruptive underwater technologies. Using a comprehensive real-time information platform that provides underwater vision and enables our customers to make decisions in real time, these technologies are bringing the smartphone revolution below the waves. Because it delivers real-time 3D perception, this technology is a critical enabler for the AI-enabled autonomous capability the subsea market requires, allowing such autonomous systems to perceive, navigate and decide independently beneath the surface. This technology reduces the cost of these operations while improving safety. The specific addressable markets we serve are the imaging sonar market and the diving market. Our growth strategy is centered on these market segments. Now let’s talk about our imaging sonar, the Echoscope. The Echoscope is a real-time 3-dimensional volumetric imaging sonar that can generate real-time 3-dimensional images underwater even with zero visibility; it is widely used throughout the commercial offshore marine market for many underwater applications. A significant portion of our annual revenue comes from the commercial offshore marine market. To achieve the growth shareholders expect from us, we need to expand our market share for underwater imaging sensors in the defense space. Many defense programs are underway worldwide in which new classes of underwater vehicles are being introduced. Large budgets have been set aside for this. The Echoscope’s uniqueness as a single sensor supporting multiple at-sea activities gives it a major advantage over competing technologies; it allows multiple sensors to be combined into one power-efficient unit without giving up the different missions to be performed; we recently launched our next generation of ultrasmall form factor, 3-dimensional sonars, the NANO Gen Series, which expands the imaging sonar market we can serve across large and small payloads. Our second key technology is for DAVD, the Diver Augmented Vision Display system. DAVD provides a real-time information platform for diving operations, improving safety and efficiency. The addressable market for the DAVD technology covers both the defense and commercial diving sectors. The untethered DAVD variant is aimed at the special forces type of divers, and we believe it represents the largest addressable market for the technology. Total assets increased by $1.1 million to $65.6 million in the first quarter of 2026. The approved Navy use evaluation for this version is currently in progress, and we anticipate finishing it in the second quarter of 2026. If approval comes through, the military sizing market would have a wider opening to adopt the DAVD technology. Now turning to first quarter 2026 highlights for our core business, the Marine Technology business. This unit sells its products and solutions worldwide, and revenue for it climbed 47.4% in the first quarter of 2026. Among the notable items, hardware sales increased 31%, reaching $2.3 million compared with $1.7 million in the first quarter of 2025, with Echoscope sales in the Asia region carrying particular weight. Rental asset utilization improved, pushing rental revenue up 232.8% to about $0.7 million from roughly $0.2 million in the prior quarter, which helped drive the gross profit margin improvement for this business unit. Let's turn to highlights for the Defense Engineering Services Business. In the first quarter of 2026, revenue for our Defense Engineering Services Business increased 9.2%. This business has maintained long-standing relationships with prime defense contractors and has served the defense market for over 48 years; the funding it receives hinges on defense programs getting money. Currently, a number of defense programs are being funded through continuing resolutions. In practical terms, that reduces the money available to many programs, and as a result, this business has experienced contract awards coming in later than anticipated. Although a federal budget is in place, appropriations for line items are still pending, and that continues to pressure our Defense Engineering Services Business. Now to highlights for our Acoustics, Sensors and Materials business. This business sells its products and solutions globally and raised revenue 20.7% in the first quarter of 2026. Gross profit margin was higher, at 66.8% compared with 61.7%. We continue to be very pleased with this unit's performance. Blair Cunningham, our President of Technology, who acts as the market maker for our technologies, will update you on progress and the various milestones related to our core technologies. Blair will also be available to take any questions regarding our technologies. Total assets rose by $1.1 million to $65.6 million in the first quarter of 2026. With that, I'll turn the call over to Blair Cunningham.

Thanks, Annmarie, and good morning to all of you. Growing our market share in disruptive underwater technologies—particularly our real-time 3D sonar systems along with our DAVD technology—is where our core business attention lies. I'll keep my comments short today and zero in on the crucial milestones that move us toward that goal. As we've mentioned during earlier earnings calls, the biggest market opportunity for this technology sits with the untethered version of DAVD. Within the U.S. by itself, roughly 14,000 divers in the government and defense community could potentially use this untethered DAVD system. During fiscal year 2025, we finished the hardening program for the DAVD untethered variant successfully. Building on that, we handed over the first batch of the new-generation DAVD untethered system to our Navy customer. With that delivery, the U.S. Navy is now able to begin the product's safety qualification. So at present we are waiting for the authorization for Navy Use, or ANU, assessment to wrap up. Our hope is that it will be completed during our second quarter. Securing ANU approval matters greatly, since it must happen before the military untethered diving community can adopt the product more widely. In the second quarter, we remain on schedule to carry out DAVD site acceptance test training alongside a key European Navy, and we anticipate this will act as a stepping stone toward wider discussions about adopting the technology. This naval diving group is an influential European defense customer, and we're encouraged that they've already put an initial investment into DAVD Tethered Systems and are assessing the DAVD technology platforms for broader fleet adoption; we keep working on a number of defense programs that aim to use DAVD as a critical life support and visualization component, and we see these as strong signals that DAVD is now viewed as a mature technology. Around our NANO Gen Series, we continue to observe robust global momentum, and we expect that during the third quarter, initial adoption of NANO will start coming through several defense-funded product improvement programs. Those first quantities will be a small batch meant for ongoing fleet assessment. For our business, NANO marks a significant step forward. Its ultracompact form factor, which draws on the proven Echoscope technology lineage, can support multiple mission profiles using just one system. That makes it well suited to a market that increasingly wants to consolidate imaging sonar capabilities while also meeting growing demand from foreign navies for multi-utility sensors able to perform several independent tasks, instead of depending on the traditional approach of one sensor per task. Through its built-in AI readiness and its capacity to supply deployable 3D data for AI workflows, the NANO technology pushes our business further ahead. This fits nicely with the new generation of subsea AI platforms, which are smaller, use less power, and frequently operate in swarms to cover large areas quickly and efficiently. NANO's AI readiness extends past merely delivering 3D perception data. It produces several real-time 3D data sets plus imagery that can be adapted for particular AI tasks, which allows for analysis that is more efficient and accurate along with real-time decision-making. Take, for instance, an autonomous platform that is inspecting a seabed pipeline — it might need to spot structural damage, recognize unsupported spans or burial, and pinpoint leaks. Without extra sensors or processing, NANO can supply 3 separate AI-ready real-time data sets along with 3D images tuned for each task, instead of depending on one image that first has to be processed and segmented so the needed information can be extracted. Simultaneously, NANO keeps delivering standard real-time imaging and 3D forward-looking obstacle avoidance. Protection of undersea cables and subsea infrastructure is another area where we see strong customer engagement, since these assets face rising risk and are vital for national connectivity and security. Through real-time 3D visualization, the Echoscope technology holds a unique position to assist continuous monitoring of these critical assets, while also making possible swift damage assessment, repair support and protection — which further strengthens the multi-mission capability of our technology. As an illustration, roughly 99% of Japan's international communications depend on subsea cables, highlighting both how important these assets are and how difficult it is to monitor, protect and quickly repair them. Growing heavy shipping traffic and natural disasters together create mounting dangers for this critical infrastructure. Our goal for fiscal year 2026 is to reach key milestones with our disruptive technologies, among them broader DAVD adoption in the global commercial market and among foreign navies, plus deployment of our Echoscope technology, NANO included, on next-generation autonomous AI-enabled platforms as a primary perception center for navigation, obstacle avoidance and target guidance. I'll hand the call over to Annmarie, and during this call's Q&A session I'll be available to answer your questions.

Thanks, Blair. At this point I'd like to hand things over to Gayle Jardine, our Interim CFO, so she can walk you through the numbers from Q1 2026, and after that I'll share some final thoughts. Gayle?

Thank you, Annmarie, and good morning to all of you. I'd like to walk you through the financial results for our first quarter of 2026. Beginning with revenue: during Q1 2026, our total revenue came in at $6.7 million, up from $5.2 million in the first quarter of 2025 — a rise of 28.8%. Turning to our core operation, the Marine Technology Business, revenue reached $3.4 million versus $2.3 million, which works out to a 47.4% jump over Q1 2025. For the Acoustic Sensors and Materials business, revenue for this period was $1.6 million, compared with $1.3 million in the first quarter of 2025, marking a 20.7% gain. And our Defense Engineering Services Business brought in $1.8 million in revenue against $1.6 million, a 9.2% improvement over Q1 2025. Now let's discuss gross profit and margin. During Q1 2026, gross profit came to $4.4 million, versus $3.4 million in the first quarter of 2025. On a consolidated basis, gross margin stood at 65.1%, compared with 65.8% a year earlier in Q1 2025. That decline is a reflection of the revenue mix coming out of the Defense Engineering Services Business. Within our Marine Technology Business, gross margin climbed to 75.3% in Q1 2026, up from 73.1% in the same period last year, mostly driven by higher rental sales, which rose 232.8% compared with the first quarter of 2025. The Acoustic Sensors and Materials business saw gross margin rise to 66.8% in Q1 2026 from 61.7% in the first quarter of 2025, a reflection of the sales type mix. At our Defense Engineering Services Business, gross margin fell to 44.1% during Q1 2026, versus 58.9% a year ago, which reflects a shift in the mix of engineering projects across the first quarter of 2026. Let's now turn to operating expenses. For Q1 2026, total operating expenses rose 21.3% to $3.4 million, compared with $2.8 million in the first quarter of 2025. The primary driver behind that rise in total operating expenses was the U.S. dollar weakening against the British pound as well as the Danish kroner. That had an effect on our costs as they were translated into dollars from the base currencies used for reporting. Our selling, general and administrative costs for the first quarter of 2026 came to $2.8 million, which is 23.7% higher than the $2.2 million recorded in the first quarter of 2025; this reflects a $0.5 million swing, from an exchange rate gain in Q1 2025 to an exchange rate expense in Q1 2026. As a percentage of consolidated net revenue, SG&A was 41.0% in Q1 2026, versus 42.7% in the first quarter of 2025. Operating income for the first quarter of this year reached $1.0 million, compared with $0.6 million in the first quarter of 2025 — an increase of 52.6%. Operating margin came in at 15.1% versus 12.7% in Q1 2025, reflecting the growth in our consolidated net revenue during the first quarter. Pretax income for Q1 2026 was $1.2 million, compared with $0.9 million in the first quarter of 2025. After taxes, net income for this period came to $0.93 million, which works out to $0.08 per diluted share. That compares with $0.91 million, also $0.08 per diluted share, in first quarter 2025. During this period, we recorded a tax expense provision of $0.3 million, versus $0.05 million in first quarter 2025. Let me now move on to our balance sheet. On January 31, 2026, cash and cash equivalents on hand totaled $30.5 million, and we carried no debt. That marks a rise of $1.8 million from October 31, 2025, when the comparable figure stood at $28.7 million. Total assets grew by $1.1 million, reaching $55.6 million in the first quarter of 2026. At this point, I'll hand the call back to Annmarie for her closing remarks.

Thanks, Gayle. The revenue growth we saw in Q1 of 2026, along with our overall financial performance, makes me quite happy. I'm equally encouraged by how we're advancing on the major milestones tied to expanding the business, specifically involving our DAVD and Echoscope technologies; broader uptake of these technologies within the defense sector is, we believe, genuinely gaining traction. When it comes to deploying cash, we'll keep pushing forward with our M&A strategy during fiscal 2026, and our pipeline of potential opportunities keeps growing; closing one more acquisition in fiscal 2026 is something we're very eager to do. Our strategy is aimed at shifting the Marine Technology Business's revenue model toward multiyear, program-based adoption, which backs a multiple sale model across the lifespan of major programs, as we've begun to observe with our DAVD product line. We remain focused on generating stable, long-term shareholder value and on carrying out our strategy for growing the business, which stands as our single biggest priority as a group. In closing, we'd like to express our thanks to shareholders for their ongoing support. We're ready now to take any questions. Operator?

You pointed out that the United States has 14,000 divers. Given that, could you estimate the total addressable market, in dollars, within the U.S., for the DAVD?

Brian, I really appreciate that question. Honestly, Brian, that's a tough one to answer, since it hinges on our seed price — what the Navy agrees to pay for the item. That's still under negotiation. So providing a figure at this point is quite hard for us. That said, historically, for the military diving system, we've offered it at USD 50,000 per unit; but like I mentioned, we're constantly examining ways to sharpen our pencil on that, and it truly comes down to whether the customer accepts that price.

Understood. And you mentioned — and this has been the case for a while — that the unmanned underwater vehicle market is undergoing some pretty exciting shifts. From a revenue standpoint, when might this become an opportunity for Coda? Are there any design wins for Coda worth mentioning? And when do you think UUV production might start?

Well, as Blair told the market on our previous earnings call and again today, for the NANO Gen Series specifically, we're seeing some quite near-term opportunities tied to the product improvement program, what we call PIPs. So during the third and fourth quarters, we'd anticipate seeing small NANO batches being purchased through some of those programs.

So under the vehicles that are already out there, those are swaps? Is that the idea you're putting across?