Coda Octopus Group, Inc.

Good morning, and welcome to COTA Octopus Group's second quarter fiscal year 2023 earnings conference call. My name is Christine, and I will be your operator for today. Before this call, COTA Octopus issued its financial results for the fiscal second quarter ended April 30, 2023, 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, and its acting CFO, Mrs. Gale Jarden. Following their remarks, we will open the call for questions. Before we begin, Jackie Keschner from the Gateway Group will make a brief introductory statement. Ms. Keschner, please proceed.

Thank you. Good morning, everyone, and welcome to COTA Octopus's second quarter fiscal year 2023 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 required by law. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified in our Form 10-K and Form 10-Q for the second quarter. You may get Cota Octopus's 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 Cota Octopus's website. Now I will turn the call over to the company's chair and CEO, Anne-Marie Gale. Anne-Marie?

Thanks, Jackie, and good morning, everyone. Thank you for joining us for our second quarter 2023 earnings call. As a management, we have established over many years a good track record of running a profitable and sound business. We have also spent the last four years on the development of our new generation of underwater products and solutions, including our Ecoscope pipe and our diver augmented vision display system, DAVIS, which underpin our growth strategy. Management's core focus is now on organically growing the business. Our current business target is growing the marine technology business this year by 22.2% to reach $18 million and growing the services business by 6.7% to reach $8 million. We have a strong balance sheet. and do not envisage the requirement for new capital to fund our growth. Although at the end of this quarter, we are behind on our full year 2023 business plan financial goals, we continue to be laser focused on our growth strategy and executing against this. Some Ecoscope rental and sales projects we are working on have unpredictably slowed, mainly in Asia, and therefore, in the second quarter, we did not achieve our revenue target for Ecoscope solution. I'd now like to summarize our second quarter highlights. Within our current business strategy, The two pillars of growth for our company are our Ecoscope real-time 3D imaging sonar, the new generation of Ecoscope pipe, and our recently launched Diver Augmented Vision Display System, DAVID system, which is in adoption by the U.S. Navy. I will therefore focus my remarks on these two pillars. Turning firstly to the Etis Group, the underwater imaging sonar market is growing largely due to the new generation of underwater vehicles focused on bringing new capabilities to the subsea and underwater markets. One of the key requirements for the defense market for these new vehicles is real-time 3D spatial perception and scene awareness technology. It is therefore our strategy to work on increasing the number of defense underwater vehicle programs which the Ecoscope technology is embedded in. If we are successful with our strategy, this would open up long tail and recurring revenues for the business under these programs which is similar to the business model of our engineering business. In the second quarter, Ecoscope sales were down, and this is largely due to anticipated sales in Asia territory that did not come through in the second quarter as expected. We, however, continue to focus on our overriding strategy to increase our market share of the imaging sonar market. In this quarter, we provided support to two of the defense programs that utilize our Ecoscope. These programs are now entering their customer trial phase. Turning to David. The tethered David system has now moved from the Navy's R&D phase to their field adoption phase. And in the second quarter, we sold $1 million David systems, which will be distributed to new commands within the Navy. Within our 2023 financial year fiscal projections, we have $2 million revenue targeted for David. Thus, in the second quarter, we have achieved a 50% of our targeted revenues for this product. And with the opportunities we are currently pursuing, we believe we will meet our 2023 fiscal year target for the David. We continue to pivot from and R&D focused the sales and marketing and brands are building. The second quarter saw us having top quality engagements. Some of these were closed door invitation only events with our target markets and we continued to raise awareness about our technology. We participated in several events for the promotion of our products and services, including two key events, which were by invitation. Special Operations Forces Week 2023, which was hosted in partnership with United States Special Operations Command and Military Diver Training Continuum, in Panama City, which had in excess of 250 military divers participating, a significant target market for the untethered version of DAVID. We also showcased and presented the DAVID tethered solution as the Dutch diving regulatory body SWAD, Special Weapons Ordnance Device Exchange Event, in Papendree, Netherlands, which had a large turnout of diving companies, fire department, and the defense labor inspectorate in attendance. We had successful demonstration of David to the Dutch Navy in a vessel rescue penetration training facility in the Netherlands. We also had successful completion of David trials with a major European offshore provider who is actively discussing options for adoption. We also had successful engagement and demonstration of David to new market opportunities for the deep saturation diving sector and multiple nations special forces on tethered diving solutions. We successfully supported two different defense underwater vehicle programs of U.S. prime defense contractors with their Ecoscoop pipe integration in preparation for their ongoing sea trials with their end-user customers. In the quarter, we also saw strong inquiries for rental of the David solution for projects that had hindered by low visibility water conditions. In the second quarter, therefore, we had solid momentum and progress around our key pillars of growth, both the DAVID and Ecoscoop pipe. Looking forward, we are also discussing potential adoption by a Japanese construction company Sales of Evaluation System for the David Untethered Solution, and working with US project sponsor for the full adoption of the David Untethered System in 2024. Turning to the David Adoption Curve. David is an important part of our growth strategy, and we think it is important to update the market on the likely adoption curve for this recently launched technology. The customer adoption curve for nearly all such opportunities is the same. Stage one, initial demonstration and trials to establish interest. Then stage two, customer specific trials, which are designed around their workflow, typically on live operational mission. And stage three, decision on adoption and investment plan. This process can take up to two years to culminate in a decision. To summarize where we are with some of these initiatives around the David, therefore, turning firstly to David Tethered Variant. David Tethered Variant is an approved Navy use item and is now in the field and adopted by the U.S. Navy. The Navy has started purchasing field assistance as distinct from R&D systems. In this second quarter, we sold $1 million David Tevid systems. We're now actively marketing this variant in both the commercial and defense sectors, including extending our model to lease and rental options. Turning to David on Tethered Variant, the David on Tethered Variant is now delivered and under evaluation with project sponsors, and we expect some initial evaluation systems to be purchased for broader field assessment in the third quarter. This variant was the centerpiece of the special operation forces and military diver training continuum events we attended in the quarter. CODA Octopus will continue to support the field evaluation by providing training and other technical support that may be required by the project sponsor. Interest has grown in the DAVID in new diving communities, and we are working with teams in the saturation diving community for both the US Navy and commercial european dive contractors turning now to ongoing trials and adoption discussions we have four second stage of foreign defense agencies trials scheduled in our third and fourth quarters one european offshore service provider in third stage and discussing investment plans one european offshore service provider in second stage and we have already done david customization work on the technology for this service provider we are actively discussed discussing adoption options with one major japanese offshore construction company who is an established user of our Ecoscope and who owns up to 15 Ecoscopes within their operations. Due to their established use of our Ecoscope technology, we believe the adoption process is likely to be much quicker and we have provided commercial terms on the adoption to this customer. Turning to expansion of the business model for David technology, allowing market access. We also believe from recent business development efforts that we could fast track adoption through rental and lease of the David technology. This will also broaden the accessibility of the technology in the marketplace. We continue to believe that the likely inflection point for the David, therefore, is in financial year 2024, where we hope to have acquisition budget lines established with other customers outside of the U.S. Navy and where the U.S. military command has started purchasing David on Tethered System, our biggest opportunity for the product. following completion of their evaluation period. To conclude, therefore, we remain comfortable targeting approximately $25 million in revenue for our technology business on a standalone basis in financial year 2024. In financial year 2022, this business, that is the marine technology business, had revenue of approximately $15 million. And this year, we're targeting $18 million for this business on a standalone basis and at the same time maintaining our profitability. Turning now to new products and other progress. A number of key technologies were developed as part of the DAVID system, including the digital audio communication module and the subsea edge enhanced video module. The first of these has already been requested as a standalone product by the U.S. Navy, and we have a purchase order to deliver the first small batch in our third quarter. We're also in discussions with several vehicle manufacturers for the integration of our subsea edge enhanced video modules. These technologies allow us to expand our product portfolio through discrete packaging of already developed technology to further add and diversify our market reach and revenue. This product is also exciting for the company as the purchase process is significantly shorter due to the price point of these modules. We also believe that there is a real need to advance underwater communication systems by moving from analog communications to digital communications, which is what this new digital audio communications module is designed for. The addressable market for this, we believe, is significant if our product meets the addressable market brief. Now turning to our marine engineering business, we continue to reiterate that this segment is important for our group as it has strong pedigree in defense engineering, with stellar relationships with prime defense contractors spanning decades. These are important relationships for a group strategy. There is a strong crossover of engineering skills, which is vital for us to maintain our competitive lead in real-time 3D imaging sonar and our diving technology. This business, that is the marine engineering business, supplies sub-assemblies into broader mission-critical programs under subcontracts with prime defense contractors. This gives them the opportunity to have repeat orders for these sub-assemblies for the life of the program. Within this business segment, we are navigating headwinds from supply chain issues across various defense programs. The supply chain difficulties apply not only to our own sourcing of components, but also crucially to our customers' own supply chain issues in parts of the program unrelated to us. This is resulting in the broader program design requirements being slower to lock in due to the general unavailability of components. This has led to many instances of multiple iterations of the design proposal being submitted for the same work package, which in turn has resulted in slower order take order intake in our first and second quarters. However, we have two new programs which are now moving from their prototype phase into production phase where we expect to receive purchase orders for the manufacturing of these sub-assemblies. We have successfully completed the environmental assessment test for one of these programs recently and we expect to receive the manufacturing order for these in the financial year. We have also started to deliver the first of a small batch of thermite mission computers to a NATO country. This will cumulatively positively impact this business and is an important first step in restoring the services business to its $10 million revenue profile over the next two years. Let me now turn the call over to our Acting CFO, Gayle Jardine, to walk you through our financials before I provide my closing remarks. Gayle?