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

Thanks, operator. Morning, everybody, and thanks for joining Coda Octopus' conference call covering earnings for the second quarter of fiscal 2026. Ahead of management's formal comments, we want to remind all of you that certain things said today might count as forward-looking statements under U.S. securities laws. A number of risks and uncertainties apply to these statements. Consequently, we caution that many factors exist, a lot of them outside our control, that could make actual results and events differ materially from what those forward-looking statements describe. To get a fuller picture of the risks, uncertainties, and assumptions that relate to what we've said about future expectations, we encourage you to look at the disclosures included in our earnings release as well as the documents we file publicly with the Securities and Exchange Commission. With respect to any forward-looking statements, we make no commitment and take on no duty to revise them in light of situations or developments arising after the point at which those statements were issued, unless the law demands otherwise. For a thorough look at our disclosures, plus descriptions of what we do and the uncertainties and other shifting conditions we face—among them, though not limited to, the risks and uncertainties laid out in our Form 10-K covering the year that closed October 31, 2025, along with our Form 10-Q for the first and second quarters of fiscal year 2026—we direct you to the documents we file with the Securities and Exchange Commission. Coda Octopus' SEC filings can be accessed at no charge via the SEC's site, www.sec.gov. One more thing: this call is being recorded, and a replay will be offered through the investor relations portion of Coda Octopus' website. Last thing from me: since we're now reporting results for the second quarter of fiscal 2026, any comparison you hear today refers back to the same period in fiscal 2025, except where someone says otherwise. Now I'll pass things along to Annmarie Gayle, our Chair and CEO. Annmarie?

Thanks, Dillon, and hello everybody on this morning's call. We appreciate you being with us for the earnings discussion covering our second quarter of fiscal year 2026. In my view, the results we posted were solid, showing better gross profit margins along with gains in net income and earnings per share, despite the fact that consolidated net revenue came in 1.6% lower. Demand from customers located in the Middle East region and portions of Asia has weakened because of the geopolitical circumstances in Iran and the instability that has spread across that area. Even so, what we achieved demonstrates how durable our revenue space is and how strong our financial fundamentals remain. The way the business keeps performing amid a difficult environment makes me very pleased. Three separate business operations make up our company: the Marine Technology business, the Defense Engineering Services businesses, and our Acoustic Sensors and Materials business unit. Marine Technology continues to be the heart of our company, producing most of our revenue and representing 41.1% of consolidated net revenue during the second quarter of 2026, and it stays the strategic centerpiece for our long-term growth ambitions. The particular addressable markets where we compete are the imaging sonar market and the diving market, and in both, the potential for technological disruption is considerable; by leveraging our disruptive underwater technologies, we are putting ourselves in position to lead at the forefront. Technologies that are redefining what can be done underwater sit at the core of this business; in effect, we are transporting the real-time, data-rich smartphone experience beneath the surface, giving our users instant visibility, intelligence, and the ability to make decisions in real time. Our Echoscope, DAVD, and our digital audio communication system amount to more than just products. They serve as building blocks for a new underwater operating paradigm; consider the DAVD, for instance, which lets divers, operators, and mission-critical teams work with clarity, safety, and efficiency at levels never seen before. As these technologies advance, new markets are opening up, our addressable opportunities are growing, and the foundation is being set for the next chapter of growth for our company. Growth is a process rather than an event, and we are carrying out the strategies that put our company in position to deliver it consistently over time. Within the commercial offshore marine market, our Echoscope technology sees wide use across a range of underwater applications. A substantial portion of annual revenue comes from that commercial offshore marine market. To achieve the growth shareholders expect, we have to keep growing our market share in underwater imaging sensors in the defense sector, and toward that goal we are committing efforts and resources. All around the globe, numerous defense programs have set aside budgets for new classes of underwater vehicles, which creates a major long-term opportunity. For adoption in these programs, our Echoscope is well-positioned. Because it is a single sensor that can support multiple undersea activities, it holds a distinct advantage over traditional technologies, delivering a multi-application sensor within one power-efficient unit while mission performance stays uncompromised. Not long ago we launched the NanoGen series, our next generation of ultra-miniaturized 3D sonars, which widens the family of imaging sonars in our portfolio. Nano offers a solution built specifically for very compact platforms, creating fresh possibilities in the emerging light and autonomous systems space. On our first quarter earnings calls, we noted that we expected a modest quantity of NanoGen sonars to be part of a new vehicle program. We are thrilled to share that within the quarter, we booked an initial order for a modest quantity of NanoGen series sonars to be integrated into an established vehicle program. These systems deliver a major enhancement to this vehicle program, which is going to undergo thorough evaluation. Should it succeed, we think this opportunity might scale quickly. For more specifics on our underwater technologies, which are central to our growth strategy, I would point you to our earlier earnings calls, where we gave a thorough overview of those technologies and how we intend to grow market share. Now moving to second quarter 2026 highlights for our core business, the Marine Technology business; this business markets its products and solutions around the world, and the Middle East and Asia are strategically significant markets for our technology. The continuing conflict in Iran, along with the instability it has caused throughout the Middle East, has cut customer activity in that region and in Asia. The effective closure of the Strait of Hormuz, through which a substantial portion of global maritime shipping travels, has disrupted commercial operations, further weakening demand for our goods and services. That is the primary factor behind this business segment's reported revenue falling by 26.8% in our second quarter. Notable aspects of our core business revenue structure in second quarter 2026 include hardware sales, which dropped by 46.9% and came to $1.8 million in the second quarter 2026, versus $3.3 million in the 2025 period. Rental assets utilization in the second quarter 2026 improved, lifting rental revenue by 351.1% to roughly $0.7 million, versus roughly $0.2 million in the previous quarter. This plays a role in the rise in gross profit margin in the second quarter for this business unit; now turning to highlights for the Defense Engineering Services business. In the second quarter 2026, revenue for our Defense Engineering Services business rose by 37.9%. This business has long-standing relationships with prime defense contractors and has served the defense market for more than 48 years. Its performance is tightly linked to funding under defense programs. The U.K. arm of this business experienced more opportunities and delivered greater revenue during the quarter. In the United States, though, numerous defense programs are still funded under continuing resolutions, which has pushed back contract awards and, as a result, the timing of revenue. Now, turning to highlights for our Acoustic Sensors and Materials business; this business markets its products and solutions globally and grew revenue in the second quarter 2026 by 17.5%. Blair Cunningham, our President of Technology, who is the market maker for our technologies, will bring you up to date on progress and various milestones involving our core technologies. Blair will also be on hand to answer any questions you have about our technologies. Blair Cunningham is going to take over the call at this point.

Thanks, Annmarie, and good morning to all of you. As a company, what we're mainly aiming at is growing our share of the market for the disruptive technologies we offer — our real-time 3D sonars and our DAVD technology. I'll keep my remarks short today and concentrate on the important milestones toward reaching those objectives. If anyone wants additional detail about our underwater technologies, please see our prior earnings call, in which we laid out a thorough overview of those technologies and of how we intend to grow market share. DAVD progress. A major milestone toward broader uptake of the DAVD among military divers is finishing the approved Navy use assessment. I'm happy to report that the DAVD Untethered System has received approval for Navy use. That marks a significant inflection point, because any command can now acquire the product, and it supports full fleet deployment of the 20 systems that were previously issued. The approval confirms the system's operational suitability and opens the door to wider adoption throughout the naval diving community. Another significant milestone is that DAVD adoption has spread beyond the United States. To support that goal, we successfully delivered training to a European navy that recently bought an initial quantity of systems. Now that training is finished, we keep working closely with this influential naval customer, and the positive feedback we've gotten so far is encouraging. We stay optimistic about the chance to further broaden deployment and operational use of the DAVD within this navy, creating a solid base for future growth in the international military diving market. The DAVD program keeps growing. We remain at work on multiple awards for defense programs, which are looking to use DAVD as a critical life support and visualization component and which we regard as strong signs that DAVD is now viewed as a mature technology. We are still waiting for final U.S. Navy DAVD procurement budget approval. Although that approval and the procurement activity tied to it has slipped past this quarter, we presently expect to receive the corresponding orders in the third quarter; we also received an initial order for a small number of NanoGen Series sonar, our ultra-miniaturized 3D sonar, for delivery on an established vehicle program. These first systems provide a significant upgrade to the vehicle, with full 3D perception visualization and vehicle control, 3D obstacle avoidance, and they will be used for extensive evaluation. Should that prove successful, we believe the opportunity for Nano on this vehicle program could grow quite quickly. We're pleased by the continued interest in our newest NanoGen Series sonar, with a rising number of credible vehicle integration opportunities appearing across both the U.S. and European defense markets; these opportunities reflect growing recognition of the unique capabilities Nano offers, including its ultra-compact form factor, real-time 3D perception, and advanced autonomous navigation support. The interest we're seeing from potential clients and partners continues to be encouraging, and we think these possibilities could fuel significant expansion in the defense sector. For fiscal year 2026, our primary objective is to hit fresh milestones with our disruptive technologies — for example, wider adoption of DAVD among foreign navies, and Echoscope being taken up on certain new autonomous AI-enabled platforms as a core perception sensor for navigation, obstacle avoidance, and target guidance. I'll hand things over to Annmarie now, and during this call's Q&A session, I'll be on hand to answer your questions.

Thanks, Blair. At this point I'll pass things over to Gayle Jardine, who is serving as our interim CFO, so she can walk everyone through the numbers for the second quarter of 2026, and after that I'll share some final thoughts. Gayle?

Thanks, Annmarie. Good morning, everyone. I'll take you through the financial results for the second quarter of 2026. Starting with revenue: in Q2 of 2026, total revenue was $6.9 million. That's versus $7.0 million in the second quarter of 2025, a slight decrease of 1.6%. Now for our core operation, Marine Technology, where revenue came to $2.8 million. Compared with $3.9 million before, that's a decline of 26.8% against the second quarter of 2025. In Acoustic Sensors and Materials, we recorded $1.5 million of revenue in second quarter 2026. In the same period of 2025, the figure was $1.3 million, so that's an increase of 17.5%. Defense Engineering Services generated $2.5 million of revenue, compared with $1.8 million, reflecting growth of 37.9% over second quarter 2025. Moving to gross profit and margin: in the second quarter of 2026, gross profit was $4.6 million, versus $4.5 million in the same period of 2025. Consolidated gross margin came to 66.3%, compared with 64.1% a year earlier. That improvement is due to the composition of our revenue. Notable items include higher rental revenue and a reduction in net commission costs. In Marine Technology, gross margin increased to 77.0% in second quarter 2026 from 67.7% in second quarter 2025, largely because rental sales grew 351.1% compared with the second quarter of 2025. Meanwhile, commission expenses dropped 68.7%, or $0.3 million, since we sold less equipment through agents in Asia. Gross margin for Acoustic Sensors and Materials declined to 53.7% in second quarter fiscal 2026 from 65.4% in second quarter 2025, reflecting the mix of sale types, as sales of our acoustic test environment product increased relative to second quarter 2025. Defense Engineering Services posted gross margin of 62.0% in the second quarter of 2026, up from 55.5% in the second quarter of 2025, reflecting the engineering project mix during the period shown. Now to operating expenses: for second quarter 2026, total operating expenses decreased 18.3% to $2.8 million, from $3.4 million in second quarter 2025. The main driver of that reduction was movement in the US dollar against the British pound and the Danish krone, which lowered reported costs when translated into US dollars for financial reporting. Selling, general and administrative expenses were $2.1 million, down 21.4% from $2.7 million the prior quarter. That improvement reflects a favorable $0.4 million swing, from an exchange rate expense in second quarter 2025 to an exchange rate gain in second quarter 2026, along with lower employee-related costs from a reduced headcount. SG&A represented 30.9% of consolidated net revenue in the second quarter of 2026, compared with 38.8% in second quarter 2025. Operating income for second quarter 2026 was $1.8 million, compared with $1.1 million in second quarter 2025, an increase of 64.8%. Our operating margin landed at 26.0%, compared with 15.5% in the second quarter of 2025 — that's a reflection of reduced SG&A and operating expenses across the second quarter. For second quarter 2026, pre-tax income arrived at $2.1 million, an increase over the $1.3 million recorded in second quarter 2025. Net income after taxes in second quarter 2026 came to $1.7 million, which works out to $0.15 per diluted share, compared with $0.9 million, or $0.08 per diluted share, in second quarter 2025. In second quarter 2026, a tax expense provision of $0.44 million was recorded, against $0.36 million in second quarter 2025. Turning now to the balance sheet. On April 30th, 2026, our cash and cash equivalents stood at $30.6 million, with no debt on the books; that marks a $1.9 million increase from October 31st, 2025, when the comparable figure was $28.7 million. Total assets rose by $2.8 million, hitting $67.3 million in the second quarter of 2026; on top of that, we saw a $2.4 million improvement in our overall financial position; that concludes my financial summary. I'll pass the call back to Annmarie for her closing remarks. Thank you.

Thanks, Gayle. Even with a tough geopolitical backdrop that has weighed on portions of our customer base, notably across the Middle East and Asia, I'm quite happy with how we performed financially in the second quarter and, just as importantly, with the resilience and diversification our revenue structure demonstrates. I also take encouragement from the strides we are making on the key milestones tied to growing the business, above all where our DAVD and Echoscope technologies are concerned. The standout item is that the Navy has approved the DAVD untethered system as an approved for Navy use item, which represents a pivotal milestone for the DAVD, one of the core technology offerings underpinning our long-term growth ambitions. The orders we received recently for our NanoGen sonars, which will upgrade an existing vehicle program, provide another positive signal of the traction our technology is gaining. Should post-purchase integration and evaluations go as we anticipate, this opportunity could scale quickly. In our view, meaningful progress is underway toward broader adoption of these technologies across the defense sector. Turning to capital deployment, we will keep pushing our M&A strategy forward in fiscal year 2026 and are actively constructing and advancing a pipeline of opportunities. Our appetite remains to get a transaction closed this fiscal year, while staying disciplined about due diligence and strategic fit. With this strategy, our aim is to pivot the revenue model of the Marine Technology business toward multi-year program-based adoption, which supports a recurring multi-sale model across the life of major programs, as we are starting to observe with the DAVD product line. We stay focused on building stable, long-term shareholder value and on executing our growth strategy, which remains our highest priority as a group. In closing, we thank our shareholders for their continued support. We are now ready to take your questions. Operator?

Hello, Annmarie. I appreciate you fielding my questions. There are quite a few. To start, regarding the Authorization for Navy Use, what's your outlook on how demand for the untethered DAVD will ramp up during the second half of the year in fiscal year 2027 — perhaps a range of units or revenue? Does a contract exist, such as a BPA or an IDIQ, through which the Navy could make purchases? If there isn't one, what does the procurement process require now that the authorization has been granted?

Good morning, Brian. I appreciate that question. See, the untethered system's approval as a Navy Use item truly represents a significant inflection point for the DAVD technology, since, as you're aware, procurement for the untethered variant couldn't proceed without that approval in place. Predicting the precise timing is hard, but what we do know is that DAVD funding appears in this fiscal year's budget, and we anticipate some orders during our third quarter. What remains unknown is the configuration mix — whether commands will procure tethered or untethered variants. Also significant: the 20 untethered systems bought previously are now able to be allocated and fielded now that Navy Use approval has come through, which marks a very important step. As divers start using the system operationally, we anticipate that real-world deployment will help drive additional demand for the DAVD Untethered System in this extremely important market sector for our technology; currently, no IDIQ is in place, and we don't expect one for the DAVD Untethered System; these orders came directly to our company, and we believe things will continue that way.

Great, that helps. So, you mentioned that demand has been slower in some areas because of the conflict with Iran. Is that pressure still showing up this quarter? If a resolution comes—maybe one happens today, maybe it doesn't—how fast do you think demand could bounce back in those areas?

To begin with, predicting how long this geopolitical instability in the region will last is hard for anybody. What I can tell you is that we're keeping in very close contact with our customers. One thing is certain here, Brian: this isn't something structural—it comes down to timing. From what we observe, the fundamentals supporting these projects exist; the only issues are timing and security. Take the UAE, for instance: many offshore projects have been paused over safety concerns. We think that once that pressure eases, since these are live projects, they'll hopefully restart quickly.

Thanks. So you mentioned the first orders for the NanoGen Echoscope, and that seems like something being retrofitted onto an existing kind of underwater vehicle. What sort of timeframe do you expect for that evaluation to take? And after the evaluation wraps up, is there anything else that has to happen before it's fully integrated or fully retrofitted? Also, how many of those underwater vehicles get sold annually?

Pardon me, could you repeat that final question?

I'm interested to know what number of vehicles are already being built at this point, and perhaps what number get sold each year?

When it comes to those NanoGen sonars we're looking at, sizing up yearly volume is genuinely premature, since the customer continues to work out what the platform's final configuration will be. What we can tell you is this: should the evaluation go well and the system get written into the vehicle specification, then for us it turns into a recurring production opportunity tied to how the platform's development cycle unfolds. Even more significant on our side, and the reason we're excited, is that it fits together with our wider strategy of expanding how many underwater vehicle programs we have, and those take in our real-time 3D volumetric imaging sonar. The reason this program excites us is that it already stands as an established program, and what we're looking at here is an upgrade to the technology that's already on the platform.

Sure. Can you tell us what portion of these subsea craft could potentially be upgraded, and what number are purchased brand new annually?

At this point, I'm honestly unable to give a figure. I'm honestly unable to give a figure. It goes without saying that we'd view this as significant for us compared with the prior year. Outfitting these craft represents a long-term prospect, and should we get past the assessment stage, we think it would be significant for us year over year.

All right. Could you discuss how things are going with the other next-gen subsea vehicles? This has been a topic for some time now. Perhaps you could share the number of OEMs you're currently in talks with. From what Blair said, it sounded like you're hoping to make an announcement before the year is out. At what stages are those discussions with the OEMs?

Well, Blair is in a position to elaborate somewhat on how the evaluation process works, since, as you're aware, the moment an active conflict is underway that has global impact. When such dynamics are in play, spending priorities and tempo invariably change. What counted as a priority yesterday no longer holds that status today. What we've really observed is a bit of a slowdown in tempo, given that today's priorities center on addressing the conflicts currently underway, and we're seeing reduced tempo when it comes to procurement. The moment we believe the conflict issue has been settled, we could then witness tempo picking up again. Blair, would you please walk us through a bit of the programs and the process that's involved?

Yes, of course. Absolutely. And once more, Brian, thank you for asking that. My view is that these really split into two groups, essentially. The first is typically initiated by the customer, like the one we recently announced regarding the sale of initial orders, where the customer we've collaborated with for a while genuinely wanted the Echoscope technology built into their vehicle. These are new vehicles being acquired for a program that already exists, as Annmarie mentioned. This is genuinely just the beginning; that's what makes it exciting for us; it truly is at the outset; what we're delivering is fundamental perception, obstacle avoidance, and navigation control; they already know what the Echoscope can do since they've been working alongside us for several years, and they understand how far they can push their vehicle's capabilities. That's one instance. I'd say there are another three or four instances in which the nanotechnology delivers distinct capabilities for each vehicle, and I believe one of the things that makes this unique is that we don't only handle mapping, and we don't only handle forward-looking obstacle avoidance. All of those functions are within our abilities. There are another three vehicle companies seeking to integrate our sensor, and each is at a different level of maturity. As Annmarie pointed out, we can plan as well as anyone; typically we're pretty aggressive once we engage with these kinds of opportunities; we aim to get them moving fast and to back the end customer to the greatest extent possible. Then again, they have their own priorities too. At times it takes a while before you can get in the water and run the technical trials that are needed to determine how well the technology matches up between the two. I'd say two or three of those are at quite advanced stages, which is encouraging; then the second group, for underwater vehicles, consists of situations where we've had a collaborative conversation with a manufacturer, not because they're necessarily part of direct programs, but where we can see, and they can see, the value of combining the two technologies. That's essentially an internally funded opportunity for us to advance those and to deliver our capability on their platform. If that makes sense. Some are driven by customers-

Yeah

and some are technology manufacturer-driven.

Blair, that was genuinely useful. Will the revenue from those NanoGen series deliveries be coming in during the quarter we're in right now? My understanding is each one runs a couple $100,000. Does that land in this quarter?

May I respond?

Yes.

Regarding that first order we booked, it's obvious these won't move the needle much on our top line for this quarter. What matters most here isn't the size of that opening shipment — it's what lies ahead, assuming the integration and evaluation work out the way we expect. During the quarter, we did hand over those first systems to the customer, and that money shows up in our revenue for the quarter.