Coda Octopus Group, Inc.

Good morning and welcome to CODA Octopus Group third quarter fiscal year 2023 earnings conference call. My name is Sherry and I will be your operator today. Before this call, CODA Octopus issued its financial results for the fiscal third quarter ended July 31st, 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 Gell, its acting CFO, Gail Jarden, and following remarks, we will open the call for questions. Before we begin, Jackie Kershner from Gateway Group will make a brief introductory statement. Ms. Kershner, please proceed.

Thank you. Good morning, everyone, and welcome to COTA Octopus's third 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 in other variable circumstances, including, but not limited to, risks and uncertainties identified in our Form 10-K and Forms 10-Q for the first, second, and third quarters of this fiscal year. 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 Coda 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 third quarter 2023 earnings course. As a management, we have established over many years a good track record of running a profitable and sound business. In addition to remaining profitable in the third quarter, we have been profitable for 45 of the last 50 quarters and every year for the last 12 years. We have also spent the last four years on the development of our new generation of underwater products and solutions, including our Ecoscoop type, and our Diver Augmented Vision Display System , which underpin our growth strategy. We believe that the company has almost unrivaled potential with a unique product set at a time when the market will expand. Against these impressive metrics, management's core focus continues to be on organically growing the company. Despite disappointing results due to low order take in the third quarter, we remain optimistic about our business and the pipeline of opportunities we're pursuing and the strong momentum we're having in our core target market, the defense space. In addition, we have maintained a strong balance sheet and do not envisage the requirement for new capital to fund our growth plans. Our marine technology business has two business models. These are outright sale of our technology and rental and associated services. The main reasons we have not met our third quarter financial goals are firstly, although our marine technology business continues to increase its quality of pipeline of opportunities, order conversions have slowed principally outright sales from Asia and in Europe for rentals and associated services due to a fall in the number of offshore wind projects. Secondly, our UK services business has also experienced significant delays in receiving orders because the priorities of its defense customers have temporarily shifted to land-based defense applications to support the requirements in Ukraine. This has affected naval requirement parties, the areas where we provide our solutions. Turning to the company's outlook for Q4, although we continue to be profitable at the end of this third quarter, we are behind on our full year 2023 business plan financial goals. As a reminder, we have been working to a revenue plan of 26 million overall for fiscal 2023. Due to the delays we have experienced year to date in converting opportunities into firm orders, we are reforecasting fiscal 2023 and now believe our results will be more in line with our financial year 2022 results. We continue to be later focused on our core strategy to grow the business, and as a management, we remain completely committed to this. As we focus on growing the business, we continue to believe we have significant opportunities around our Ecoscope type and DAVD solutions, including spin-off products such as the DAVD digital audio standalone product, I'd now like to summarize our third quarter results. In the third quarter, our marine technology business order take was down significantly. This is due to two reasons. First, we have seen a slowdown in new European offshore wind projects being initiated. This has impacted on our rental and associated rental services revenues. It is widely reported, including on Bloomsburg, that the cost of these fixed-price offshore wind projects has soared 40% compounded by higher interest rates, thus requiring renegotiations. Ørsted, Vattenfall, and Siemens, the big players in the wind market, have all reported significant revenue decreases in this sector. Our Ecoscope cable monitoring and lanes solution is used in this market. Second, we also saw reduced order take in key geographies, Japan, China, and South Korea. In these geographies, our technology is used primarily in underwater construction and offshore wind applications. Though we have continued to increase our pipeline of opportunities and believe that our inquiries and quotation levels are good, we have experienced significant delays in converting these into orders for the business. As a result of these factors, revenue fell in the marine technology business and was 2.9 million in the third quarter compared to 4 million in the previous third quarter 2022. Despite the decrease in revenue in the third quarter, we do not believe that this is due to anything systemic or a loss of our market position in the areas in which we excel. We believe it reflects the slowdown in offshore wind in the European market, the delays in European offshore service providers entering the US offshore wind market, as reported by the likes of Orsted, and delays in converting opportunities emanating from Asia into firm orders. We believe that in the fourth quarter of 2023, we will see some of these opportunities materializing into orders. Within our current business strategy, the two pillars of growth for our company are our Ecoscope Pipe Real-time 3D Imaging Sonar and our recently launched Diver Augmented Vision Display System, DAVD, which is in adoption by the US Navy. I will therefore focus the rest of my remarks on these two pillars. Firstly, turning to the Ecoscope and progress in this area in the third quarter. 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. Recently, it was announced that the U.S. Navy has now standardized the Vidiary Defender as its preferred solution in the small underwater vehicles category. In general, the new generation of underwater vehicles presents new capabilities, which in turn is fueling the demand for more capable sensors such as ours. One of the key emerging requirements for the defense market for this class of vehicle is real-time 3D spatial perception and scene awareness technology. And in keeping with the U.S. Navy selection of the video ray defender, we were selected for and executed trials on this platform with Naval Information Warfare Center, NIWIC, in our third quarter. It continues to be our strategy to work on further increasing the number of new defense underwater vehicle programs in which the ECHOSCOPE technology is embedded, and trials like these are a key precursor to such success. In the third quarter, as part of a second phase defense Navy program, we completed and delivered for customer evaluation a full survey-grade diver handheld solution which embeds our Ecoscope pipe imaging sonar and the DAVD for the Navy and which will be used for high-resolution real-time 3D mapping and inspection in ship hull applications. Also in the third quarter, a coordinated trial was planned and executed at the San Diego Naval Information Warfare Center, NIWIC facility, to support the need for real-time 3D inspection and critical mapping from a small man-portable remotely operated vehicle, ROV. The trials flawlessly and successfully showcased the ECOSCOPE's capability to perform real-time 3D inspection target identification, and high resolution mapping, as well as uniquely allowing the ROV pilots to fly the ROV in zero visibility conditions using the live real-time 3D display from the X-scope pipe. In addition to the NiWave vehicles team, other US and UK Navy attendees were able to witness the demonstration. Evaluation of the trial results is ongoing with different related departments. We also received in the third quarter very favorable mission results from three of our defense customers who have selected integrated and recently demonstrated our Ecoscope technology on their subsea vehicles. These programs vary from small vehicles to larger vehicles, all greatly benefiting from the real-time 3D volumetric data unique to our patented Ecoscope technology. Notable also, as these defense customers have success with the technology on one of their programs, they take the same solution into other programs. For example, one defense customer has expanded the use of our technology on four different vehicle programs. We continue to believe that there is significant momentum around our Ecoscope-based solutions. Secondly, Now turning to our progress on the DAVD in the third quarter. As a reminder, the TAVR DAVD system has now moved from the Navy's R&D phase to their field adoption phase. As part of the continued fleet field rollout in the third quarter, we performed two crucial training events, SWOMIC, in San Diego received their initial DABD training as a new user group to the DABD family. SWAMIC is responsible for all ship maintenance and diver salvage in the busy San Diego area, and they have already been able to utilize the DABD system on a live mission. Additionally, UCT in Port Hueneme received additional DAVD units. In the third quarter, we trained the Navy's newly appointed field DAVD super user who has been brought on board to work with the Navy DAVD program managers specifically to ensure the operational success of the newly fielded DAVD system. On an ongoing basis, we will support joint field missions as part of the field DAVD super users onboarding process. During the quarter, we also supported U.S. Navy dive inspection and salvage operations in Maui in response to the recent devastating wildfires where the DAVD Ecoscope Inspector System was used for real-time 3D mapping and monitoring the underwater environment. In the third quarter, we continued to make progress on the two variants of the DAVD system, tethered and untethered. By way of progress on adoption, a major European offshore provider has completed its findings on the DABD Tethered System Trial, which they performed in our second quarter. Quoting directly from their report, they concluded that, beginning of the quotation, the advantage of the DABD alone compass, depth, taking snapshots, and presenting graphical information for diver and supervisor, all combined with a 3D live sonar video stream is clear and increases safety and efficiency. The 3D sonar fits well within our scope of work, and our survey division is aware of it. we think that the combination of DAVD and 3D sonar has potential within our organization. End of quotation. This provider is one of the bid for global dredging companies that together control 80% of the global dredging capacity and has confirmed their intention to adopt the DAVD and we are working on a model for initial adoption. We also have made progress with the DAVD on tethered variants. DAVD on tethered prototype systems were delivered to our project sponsor earlier this year as part of their evaluation program. We have made further progress in this quarter and have been awarded initial further funding of approximately $750,000 out of a total contract value of 1.8 million. The scope of delivery for this funding is supplying each evaluation system and performing further customization work. This is significant because for the first time, another foreign Navy has co-opted into the U.S. Navy DABD program. We're still optimistic that this variant will move forward to field operation in financial year 2024, subject to successful completion of the evaluation stages and we continue to focus on completing the funded customization work package. Turning now to trials and adoption discussion. We have good quality discussions ongoing with a second major European offshore provider where we have completed customization work necessary for their specific helmet and rebreather system and we planned some field work with this customer later this year with a DAVD system. We also provided in the second quarter commercial terms to a major Japanese offshore construction company who is an established user of our Ecoscope. We have since made further progress and have been invited to conduct a pre-adoption DABD training with this customer later this month. Also in this month, we will also be demonstrating the DABD to several interested Japanese customers in both the defense and the commercial sectors at the same time. We're also excited about the second phase trials with the Spanish Navy later this month in Alicante, Spain, which forms part of our continued DAVD world engagement program. They are interested in both the tethered and untethered variants. We continue to believe that the likely inflection point for the DAVD is in financial year 2024 where we hope to have acquisition budget lines established with a broader customer base including foreign navies and commercial offshore service providers. To restate, despite challenges with order take during the quarter, We have good traction and momentum behind our solutions and believe we have achieved key milestone targets around these. As we work towards closing fiscal 2023, we remain confident about our longer-term goals to grow the business and we believe we are well positioned for this. Now turning to our marine engineering business, This business supplies subassemblies into broader mission-critical programs under contract with prime defense contractors. This gives them the opportunity to have repeat orders for these subassemblies through the life of the program. We continue to reiterate this segment is important for our group as we have a strong pedigree in defense engineering with stellar relationships with prime defense contractors spanning decades. These are important relationships for our group strategy. There is also 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. Year-to-date, the UK part of our services business has experienced significant delays in receiving orders. This is largely due to their defense customers' priorities having switched temporarily onto land-based applications related to Ukraine, which has temporarily put naval-based requirements on hold. This delay has affected order take and has also contributed to our business being off-plan. Approximately $2.5 million worth of orders anticipated in the first quarter of our 2023 financial year have not yet been released for the reasons outlined earlier. We will continue to work towards restoring the services business to its $10 million revenue profile over the next two years. Finally, before we discuss our third quarter financial performance in greater detail, I wanted to briefly mention our most recent leadership appointment. Last week, we announced the appointment of John Price as our new permanent chief financial officer, effective on November 27th of this year. John is joining Codo with more than 28 years of experience working in financial roles, having served as the CFO of Nasdaq-listed Assure Holdings Corporation since 2021. John brings a seasoned background in corporate finance and accounting, along with key public company and technology industry experience, We look forward to welcoming John to the company later this year, and we would like to thank Gail Jardine for her work as Acting CFO in the interim. Let us now turn the call over to Gail to walk you through our financials before I provide my closing remarks. Gail?