Coda Octopus Group, Inc.

Good morning and welcome to Coda Octopus Group's fiscal year 2024 earnings conference call. My name is Robert and I'll be your operator today. Before this call, Coda Octopus issued its financial results for the fiscal year ended October 31st, 2024, 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, its interim CFO, Gail Jardine, and its president of technology, Blair Cunningham. Following their remarks, we will open the call for questions. Before we begin, Jeff Turner from our investor relations team will make a brief introductory statement.

Jeff, please go ahead.

Thank you, Operator. Good morning everyone and welcome to Coder Octopus fiscal 2024 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 may be 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 for year ended October 31, 2024 and Forms 10-Q for the first, second and third quarters of our 2024 fiscal year. You may get Coder Octopus 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 the Coder Octopus website. Now, I will turn the call over to the company's chair and CEO, Anne-Marie Gale. Anne-Marie?

Thanks, Jeff, and good morning, everyone. Thank you for joining us for our fiscal year 2024 earnings call. Our revenue in fiscal year 2024 increased by 5% over the fiscal year 2023, and I believe that we have delivered a solid set of results, including increasing our gross profit margin, operating income, net income, and earnings per share. I would now like to provide some of the key highlights relating to our financial results for fiscal year 2024. For those who are new to the CODA Oxford story, our business is made up of two discrete business operations, the marine technology business and our engineering businesses. We also added through acquisition a third business unit, Precision Acoustics Limited, a company established under the laws of England. However, it is important to note that our income statement activity for fiscal year 2024 discussed here does not include this new business unit since it was acquired two days prior to our fiscal year end 2024. This newly acquired business unit had no material income statement activity for those two days and therefore are not included in our consolidated income statement for fiscal year 2024. Now turning to highlights relating to the marine technology business. This business sells its products and solutions globally with Asia, Europe, and US being important geographies for our products. And in the fiscal year 2024, we saw an increase in the utilization of our rental assets resulting in an increase in our rental revenue by 84.1% and which was $2.32 million compared to $1.26 million in fiscal year 2023. We saw an increase in equipment sales in the key strategic geography of Asia. Equipment sales from Asia rose by 19% and were $5.47 million compared to $4.60 million in fiscal year 2023. We also saw a significant reduction in revenue from the US on defense programs. Many defense programs were funded through the continuing resolutions mechanism, which resulted in reduced allocation of funding. This affected our business and resulted in the reduction of revenue generated by the U.S. Marine Technology Operations by 33.4% and which was $2.83 million in fiscal year 2024 compared to $4.26 million in fiscal year 2023. Notwithstanding navigating these challenges on the U.S. defense programs, we were able to mitigate the impact of reduced funding onto these programs from other global sectors and the marine technology business revenue increased in fiscal year 2024 by 5.7%. I believe this demonstrates the resilience in our revenue generation structure. Now turning to highlights relating to the engineering business. There are two business units which comprise our engineering business. One based in the US, Salt Lake City, and the other based in the UK. The engineering business units are primarily subcontractors, the prime defense contractors, and therefore are dependent on receiving funding on the defense programs. In fiscal year 2024, revenue generated by the engineering business increased by 3.8% along with its gross profit margin. However, The U.S. engineering business was also affected by the reduced funding available for defense programs, resulting in lower than anticipated order intake in fiscal year 2024. Furthermore, since the results of the US election, many defense programs are on hold until the new administration's budget and policies are in place. We're also seeing broader headwinds across the globe caused by the uncertainty around the policies of the new administration, including those relating to tariffs and offshore renewables, and therefore many offshore projects are currently on hold and this is likely to adversely affect our first quarter 2025 results. Despite these broader headwinds, we continue to make it our priority to focus on sowing the seeds to grow our business and in the fiscal year 2024, we continued to make progress around our growth pillars, Etiscope and David. Blair Cunningham, our President of Technology, who is the market maker for our technologies, will today be providing a broad overview of some of our activities under these programs. Blair will also be available to answer any questions you may have on our technologies, so please use the opportunity to raise such questions during the Q&A sessions if you have any. I will now turn the call over to Blair Cunningham, where he will give a short overview of our core technologies around which we're postulating our growth agenda.

Thank you, Anne-Marie, and good morning, everyone. We continue to believe that our most promising opportunities for growing our business are around our defined growth pillars, the Ecoscope technology and the David technology. These technologies form a powerful, complementary ecosystem that revolutionizes underwater operations. We're creating the smartphone revolution for the underwater world, providing a real-time, on-demand information and data platform that enables operators to make critical decisions instantly. Additionally, underwater data is collected today with analysis and decision-making tomorrow. We're disrupting this model. Our underwater technologies empower operators to make real-time decisions, enabling quick, informed actions, whether it's positioning an asset, navigating from point A to B, or locating targets on the seabed. Returning to these technologies, the David system is an advanced augmented reality display technology designed to enhance divers performance, safety, and situational awareness. especially in low visibility and technically challenging environments. It seamlessly integrates real-time data, on-demand information, and Ecoscope 3D sonar imagery, projecting these onto the diver's field of vision through the David augmented reality head-up display. This hands-free solution enables divers to operate safely, Accessing all essential information without the need to glance at external instruments or surfaces. Where are we with the adoption curve for David Tethered's system? The David Tethered system is currently operational across nine naval commands within the U.S. Navy. Developed under a three-year future naval capabilities contract with ONR and NAVSEA, this fully developed augmented reality system is commercially available. It is classified as an authorization for Navy use item and carries CE marking certifying that the David system meets the essential health, safety, and environmental protection requirements set by the European Union and the UK. We are aware that several of these commands have submitted budget requests through their respective process. Many of these requests were not granted in the fiscal year 2024, but we have a high level of confidence that these awards will be made in fiscal year 2025. We are therefore seeing year-on-year budgeting by the U.S. Navy for acquisition of the David technology. Following recent participation in international maritime warfare exercises in Norway, UK, and the US, we are also working closely with several foreign navies and armies that have shown strong interest in David. Additionally, we are seeing strong interest from government bodies and commercial dive teams and continue to have sound engagements with these potential customers on the adoption of the technology. Following the commercialization of the David tethered system, the Navy initiated the dust hardening program in September 2023 to adapt the David technology for the untethered special operations diver market. This program, funded by both the U.S. Navy and the Foreign Navy, has, in the fiscal year 2024, seen substantial progress in the required modifications to meet customer specification. The David untethered variant employs the same augmented reality display technology, but is used by divers wearing dive masks, operating at shallower depths, and not physically tethered to a surface mothership for air supply. These divers are typically military divers performing special forces operations. Despite the funding delays, we have made significant advancements in the hardening program's objectives, and we remain excited about the potential of this opportunity for the business. A key achievement under the program was the delivery of the Gen 4 head-up display in fiscal year 2024. This next-generation technology platform boasts a more compact design, 200% increase in resolution, and an expanded visual field of view. These enhancements significantly improved compatibility with specialized dive helmets and masks, unlocking new possibilities for previously underutilized markets. This accomplishment represents a major milestone in the success of the dust hardening program. We still believe the dust system represents the largest addressable market for David technology. For example, the U.S. Navy, with approximately 4,000 active divers, 75% of these divers are using full face mask untethered systems, which aligns with the dust solution. Similarly, the majority of public safety and law enforcement divers in the U.S., an estimated 10,000 divers, use the same full face mask dive systems. We're also experiencing pull-through sales of the Ecoscope technology from David users. The David tethered and untethered systems seamlessly integrate with our Ecoscope real-time 3D imaging sonar technology. Together, these technologies offer a comprehensive real-time navigation, situational awareness, and mapping solution, enabling diver and supervisor to operate effectively in the most challenging zero-visibility conditions. We're also spinning off technologies from the David system and introduced a new digital audio communication system, Voice Hub 4.0. which offers a competitive, superior quality system for diver-to-diver and diver-to-supervisor communication. This all-digital communication technology incorporates AI-driven features, including background noise removal, diver inhalation noise isolation, and active helium voice correction. The Voice Hub 4 system has already been purchased by NAVSEA, and it addresses two key markets beyond defense, commercial diving and public safety. This is an exciting, accessible price point product which diversifies our revenue spread and gets us in front of the same customer base for the main David technology. I want to wrap up my briefing on the David technology by stating that I am truly excited by this technology. The new David Gen4 HUD delivered under the DUS program cements the technology now as mature and leverageable. We can also see the pathway for taking the David technology to adjacent markets. Our achievements with the development of this technology is stunning and will pay off in time for our shareholders. Turning to the Ecoscope technology, another of our growth pillars, The Ecoscope is the world's first and highest resolution real-time volumetric 3D sonar. By generating a complete 3D image from each acoustic transmission, it is the only commercially available sonar technology capable of both imaging moving objects in 3D, in real time, and complex 3D mapping. This unique combined capability enables real-time decision making. Soda Octopus are well established in the commercial offshore sector, and our Ecoscope solutions have revolutionized subsea operations and inspections for decades. Delivering significant time savings, cost reduction, and enhanced operational efficiency in the most challenging conditions, the Ecoscope sonar is utilized globally across a wide range of applications in the commercial offshore and subsea markets. and continues delivering game-changing economies of scale to customers. The breakwater market is a good example where we have moved the market from placing only four blocks per day up to 260 blocks. The acquisition and utilization profile of the commercial sector differs significantly from that of the established defense programs. While we do have commercial customers who purchase multiple Ecoscope systems in a single order, this is relatively uncommon. The commercial market typically favors minimal capital investment over operational project costs. We see further evidence of this trend with customer preference for Ecoscope rentals over direct purchase. Our growth strategy is therefore focused on opportunities in the defense sector. And specifically, the increase in new generation of undersea vehicles and associated robotic programs. The new undersea vehicles, whether remotely controlled and operated or fully autonomous, are currently designed for either mapping and information gathering, such as creating a detailed seabed map to identify targets of interest, or performing specialized prosecution tasks, such as neutralizing mines. By embedding Ecoscope technology into these vehicles, it allows a hybrid approach to engage targets in real time as they are detected, eliminating the need for separate follow-up missions. We view this as significant growth opportunity, enabling a seamless fusion of Ecoscope's capabilities with advanced undersea operations. The result is a smarter, more capable vehicle that not only improves mission efficiency, but also amplifies overall effectiveness. We have successfully integrated Ecoscope systems into at least four new undersea vehicles in collaboration with prime defense contractors. These vehicles, whilst multi-year developments, are in the early stages, but critically have the ecosystem design into the system from the outset. They are currently undergoing tests and evaluation. Whilst these represent longer-term opportunities, they provide a valuable platform for expanding our technology footprint within these defense program initiatives. Direct short-term opportunities exist with the active undersea vehicle programs of record, such as the Video Ray Defender ROV program for the EOD. We recently completed a successful six-month test and evaluation period with a video ray vehicle with NIWIC. As a direct result of this success, our latest Ecoscope SIVS sonar has demonstrated its capability and potential for high-resolution target detection and ship hull inspection operations. We are also actively pursuing several VOD contracts with both U.S. and foreign navies that wish to integrate both David and Ecoscope technologies for subsea vehicle control and diver teaming missions. As we reported previously, we developed and delivered under a multi-year defense-funded navy program a comprehensive ship hull scanning solution embedding the Ecoscope and David technologies. Under this application, customers are performing critical target identification, such as parasites on a hull, which can compromise security. Being able to assess whether a hull is compromised is a matter of global concern for all incoming vessels in all ports located in the U.S. or elsewhere. This is currently a technology white space, and we believe we have developed and demonstrated a solution for this application. This is still being evaluated by our customer, but initial results have been overwhelmingly positive, and we believe this program will move forward. In summary, we continue to develop opportunities with our Ecoscope technology within the defense programs, which have recurring long-tail revenues associated with them. We believe we are making progress, and this is a key part of our strategy to grow the business. Finally, I want to cover the recent acquisition of Precision Acoustics, a recognized leader in the ultrasound and acoustic measurement field. Specializing in acoustic hydrophone design and innovative acoustic materials, Precision Acoustics provides a comprehensive range of products and solutions with a primary focus on medical imaging and NDP. Their expertise extends to working closely with national and global standard-setting bodies, contributing to the establishment of the primary measurement standards in the industry. This acquisition brings valuable and recognized acoustic expertise to the group, expanding our knowledge base in a domain that has previously been underleveraged in the underwater acoustic space in which we operate. We believe this acquisition opens up significant opportunities to integrate precision acoustics capabilities with our existing technology platform, particularly advancing our Ecoscope technology. This will also enable us to penetrate new market sectors, such as passive acoustics and ultrasound imaging, critical areas for defense applications. Furthermore, the combined strengths of our group positioned us to qualify for larger defense-related programs, as well as explore exciting research and development opportunities that were previously beyond reach. Anne-Marie will cover any questions on the commercial aspects of this transaction.

Thank you, Blair. Finally, as mentioned earlier, in fiscal year 2024, we started to implement our M&A strategy and completed the first of a number of acquisitions which we are targeting subject to the satisfactory completion of due diligence. Precision Acoustics Limited was acquired in the group to gain access to their expertise in the field of acoustics and medical imaging technologies which are potentially transferable to the subsea market in which the marine technology business operates. Furthermore, this addition expands the group's collective capabilities and positions it to qualify to compete for larger defense contracts. They also sell a wide range of products and generate revenue of approximately $5 million with margins of 52%. Let me now turn the call over to our interim CFO, Gail Jardine, to take you through our financials for the fiscal year 2024 before I provide my closing remarks. Gail?

Thank you, Anne-Marie, and good morning, everyone. Let me take you through our full year 2024 financial results, which are all reported in US dollars. As Anne-Marie mentioned previously, due to the timing of our recent acquisition of Precision Acoustics, we had no material income statement activity, and therefore our income statement results discussed here today do not include Precision Acoustics. Starting with revenue. In fiscal year 2024, we recorded total revenue of 20.3 million compared to 19.4 million in the fiscal year 2023, an increase of 5%. The product segment generated revenue of 12.8 million compared to 12.1 million, a 5.7% increase from the prior fiscal year 2023. As reported earlier by Anne-Marie, This increase in our consolidated revenue was a result of improved demand from strategic markets and geographies, particularly for rentals and for equipment sales in Asia. In the services segment, our UK arm was key to the 3.8% improvement in revenue in this segment compared to fiscal year 2023. However, like the products business, US Engineering Business Unit was also affected by the reduced funding allocations under Defence Programme. Moving on to gross profit and margin. In fiscal year 2024, we generated gross profit of $14.2 million compared to $13.0 million in fiscal year 2023. Gross margin was 69.8% versus 67.3% in the prior year. In our product segment, gross margin increased to 77.9% in fiscal year 2024, up from 76.7% in 2023, reflecting changes in the mix of sales, with increased revenue from rentals, which generate a higher margin, combined with lower commission costs in the period. Our services segment gross margin also increased to 55.8% in fiscal year 2024, versus 51.6% in 2023, again reflecting the mix of sales. Now moving on to our operating expenses. Total operating expenses for 2024 rose 2.9% to 10.6 million, compared to 10.3 million in fiscal year 2023. This was caused by a 7% increase in research and development, attributable to the investment we are making in our thermo octal range of mission computers. Our selling general and administrative or SG&A costs in fiscal year 2024 totaled 8.3 million, an increase of 1.8% over the fiscal 2023 expense of 7.9 million. As a percentage of revenue, our SG&A costs for the fiscal year 2024 improved reducing to 41.1% of total revenue, compared to 42.3% in the fiscal year 2023. SG&E increased in real terms due to salary inflation, resulting in an increase in payroll expenses. Marketing also increased in accordance with our strategy. Looking forward to our cost structure, we expect the addition of Precision Acoustics will increase our R&D expenditure, as we seek to leverage their expertise across the group. We also anticipate that SG&A will grow, reflecting increases in payroll, marketing, and investor relations expenses. Operating income in fiscal year 2024 was 3.6 million compared to 2.7 million in fiscal year 2023, an increase of 30.8%. Operating margin was 17.6% compared to 14.2% in the fiscal year 2023, driven by the increase in revenues as previously explained and the resulting impact the mix of sale type had on lowering our cost of revenues. Net income before taxes in the fiscal year 2024 was 4.6 million compared to 3.4 million in the fiscal year 2023. Net income after taxes fiscal year 2024 was 3.6 million or 32 cents per diluted share. compared to 3.1 million or 28 cents per diluted share in the fiscal year 2023. We have a notable increase in tax expense year on year. Current tax expense increased by 187% to 0.7 million in the fiscal year 2024. We expect that our tax expense will continue to increase in the future since we have no material net operating losses to offset this liability. Moving now to our balance sheet. Please note the published balance sheet figures do include Precision Acoustics Limited and our post-acquisition combined figures. As of October 31, 2024, we had £22.5 million in cash and cash equivalents on hand and no debt. This represents a decrease of £2 million over fiscal year 2023, where the reported figure was £24.5 million. The cost of the acquisition of Precision Acoustics, net of cash acquired, was $4.6 million. That completes my financial summary, so let me turn the call back over to Anne-Marie for her closing remarks.

Thank you, Gayle. I am very pleased with our fiscal year 2024 results, which saw an increase in revenue, gross profit and earnings per share. We continue to work to create stable long-term shareholder value and execute against our strategy to increase the number of defense programs that our technologies are embedded in with a goal of securing recurring sales of multiple units onto these programs. We are also seeing the vindication of this strategy. To summarize, DAVID system is now operational across nine naval commands within the US Navy. We are seeing annual budgeting for this product line by the US Navy and expect purchases in fiscal year 2025 for this variant of the DAVID. The DAVID user base is also adopting the Ecoscope technology as part of the DAVID solution. We have reached a pivotal point in the DAVID untethered system hardening program, and we anticipate the first sales of this variant in fiscal year 2025. The DAVID technology has now matured And a key step forward was the delivery of the David Gen 4 head-up display, which now is a more compact display unit and a much higher resolution. This has opened up many new opportunities for the technology, and we expect the award of three new programs around this technology. Our Ecoscope SIVS technology, a short-range high-resolution sonar used for close-up visualization and mapping, has been demonstrated to several defense customers and is a contender for several opportunities for ship hull applications and close-range target inspection. We will also continue to prosecute our M&A strategy and in financial year 2025, subject to the satisfactory completion of due diligence, we anticipate completing another acquisition in the group. Through our strategy, We aim to pivot the revenue model of the marine technology business to a multi-year, multiple sale model as we have started to see with a David product line. To conclude, we would like to thank our shareholders for their continued support. We are now happy to answer any questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Brian Kingslinger. with Alliance Global Partners. Please proceed with your question.

Hi, Greg. Thanks for taking my questions. I've got a handful. The first, as it relates to the fourth quarter results, can you talk about the mix of revenues that led to lower than usual gross margins in both segments?

So, hi, Brian.

Good morning.

Good morning.

Are you thinking about Q4 itself?

Yeah. I mean, full year doesn't matter. That's a long time ago. So I'm just kind of thinking about the fourth quarter. Yeah. If I look at the gross margin in marine, it was about 76%, which is kind of below where it was the last two quarters. And then if I look at the marine engineering, it was 52%. And revenue didn't fall off there. So again, it was also a little bit lower than it was recently?

Well, I can't provide the details, but as we always report, margins are subject always in both parts of the business, the mix of sales. For example, equipment sales carry less margins than rentals, for example. So it really depends on the types of sales that we have in the quarter. Unfortunately, I don't have the breakout of the Q4 mix, but generally it's driven by simply the mix of sales that we have in the revenues.

Okay. I know it looks like rentals then was lower in the fourth quarter compared to the last two, so that speaks to some of that.

It could be, yes.

Yeah. And then moving on, can you tell us how much revenue the DAVID programs generated in fiscal 2024 and with the funding challenges in the U.S., how do you think about the range of outcomes for this product in the current fiscal year? I know you mentioned you're confident in three new programs around the technology. Maybe you can size those.

Yes. So, I mean, overall in fiscal year, we saw really a significant reduction in funding from U.S. programs. And that's really typical. First of all, that's typical in an election year. Also, that also carries on a period of hiatus between the outcome of the elections and the new administration going into place. So I think overall, many programs were only partially funded. So the David program, for example, we didn't get the funding we were expecting for, for example, on the Hardening program and for purchases of the David Gen 3 systems that we have. So overall in fiscal year 2024, I think that we saw revenues from the U.S. decrease by 33.4% because of reduced funding. Now, most of the things that we anticipated, they've not gone away. They've just moved from last year and hopefully into this year. I think that we expect, for example, Q1 to be challenging for the business because programs continue to be funded by continuing resolutions. But we expect to see that changing in our second quarter onwards. So overall, I think all the DAVID programs that we have in the pipeline and when we think about the DAVID, we should think about the david tethered system which is already in the field and as blair explained um that's being used by nine um commands currently and year on year we're seeing acquisitions and budgeting for that product line the untethered variant is still um going on the program of development but i think we've reached this pivotal point under the hardening program and the biggest milestone has been achieved. And that was the new head-up display for fitting in those types of masks that we've delivered. So again, under that program, we anticipate in fiscal year 2025 to see the first initial purchases of that system. So I'm really, really excited. And please remember, as we've always said, The untethered variant is the most promising and the biggest market for the business to see that we have delivered the biggest barrier to the success of the program in fiscal year 2024, despite the funding challenges. Very, very pleased with the team and what we've achieved.

Well, you're talking about three new programs. You're talking about your first initial orders. Can you size it at all? We're talking very marginal-sized programs. Are we talking very large programs, somewhere in between? Any kind of numerical discussion would be helpful.

So on the tethered systems on the Navy side this year, in terms of purchasing systems, we would expect $2 million of purchases of equipment for... purchases of the initial untethered system, we would expect that to be $1 million. And for the other development programs around the technology, we expect $2 million. So in all, we are tracking for, David, $5 million in this fiscal year. But I think that the thing that we are focused on and what we feel to be pivotal for our business is is the fact that the untethered variant is moving from its R&D phase into an acquisition phase. And what we have this ability and what we're talking about here, just to be clear, it's only the opportunity with the US we're talking about here. We have not begun to talk about all of the other opportunities that we're tracking with foreign navies. And we should also remember that the untethered program is a joint funded program between the U.S. and a significant foreign Navy. They also will be in lockstep with the U.S. in terms of acquisitions. We simply don't have their budget at this stage. So I think what I am saying, I can see on the U.S. side, we expect $5 million worth of dabbed revenues of different makeup this year. but that excludes opportunities that we think are close globally for the David technology.

Okay. And then, um, switching gears, um, you commented on, um, foreign customers, um, being careful right now, uh, related to uncertainty around tariffs and the current administration. Can you talk about how you're thinking about tariffs potentially impacting your business?

Yeah, you know, in general, as you know, tariffs can in general stymie the business environment because it impinges on the free flow of goods and services. And the broader implication is that, you know, it could contract demand or reduce demand because simply the it becomes much more difficult to export items. So I think generally, as I said, what we're seeing is a general caution in the environment or the environment being very cautious. And the infrastructure budget, it's a big budget in the US, for example, and many, many European offshore service providers were in the queue for many big programs this year in the u.s for some of the infrastructure projects like offshore renewables so until we can gauge the new shift in policies what they mean it is still a lot of unknowns so that's pretty much what i'm hearing from our customer base just cautious and just a lot of unknowns until the policies are in place.

Great. One on precision acoustics. It sounds like it can be much greater under the CODA umbrella, but it sounds like they've underinvested. Can you talk about any increased investments you have to make to achieve these potential revenue synergies? And then do you think this acquisition will be accretive to operating profit or diluted to operating profit in the first 12 months?

Jeff, I'm going to ask you to take questions on precision acoustics, please.

Okay. Hello, Brian. You asked two questions there. First of all, precision acoustics is actually quite well equipped. We've bought very little equipment in the last three months since we've had ownership of the business. So I don't think we have a worry there about having to plow in a load of capital. The company has been profitable for the last however many years, if you look at the publicly available figures. And I see no reason why that would change.

I think the business will continue to be profitable.

Okay. Last question I have, Ann-Luc.

Sorry, Brian. I just wanted to, sorry, Brian. I just wanted to add there. So just the way we, what's exciting about precision acoustic is what I would call it's a business that was just really operating almost without any business development because it just, whatever it does, it just has the market for those things. So we think that we can plow in business development in that area to grow the revenue. So we, That's the aspect that I'm particularly excited about. I'm also excited about the capabilities that it brings to the group and therefore collectively we can, if you like, compete for larger defense contracts. So those are the two headline things for the acquisition.

Thank you. Last questions are first, is there any seasonality and precision? And then as you think about another acquisition this year, Should we be thinking similar size of precision or might it be something larger?

Jeff, can you speak to the seasonality and I'll talk to the other acquisitions?

Sure. There's no discernible seasonality really to the business. There's some dependence. A lot of the customers are universities, so there is some dependence on The budget's appropriate for the university academic year, but there's no real appreciable seasonality, no.

Great. And in terms of the acquisition that we're currently looking at, it's larger than precision acoustics.

Great. Thank you so much, guys.

Thank you, Brian. Thank you for your questions.

Our second question comes from Richard Deutsch with Sutter Securities. Please proceed with your question.

Yes, thank you. Thank you for letting me ask my questions. I have several questions myself. In the underwater vehicle work that you're trying to get involved in with the drones and the other vehicles, what differentiates your technology from the competition?

Blair? Yes.

Thank you, Richard, for that kind of well-considered question. I think really the key differential is, as we've always said with the Ecoscope technology, it performs really essentially two things at one time. You can do the mapping, which is predominantly, as I think I said in my comments in the filing, A vehicle is either trying to create a map of the seafloor, which then gets processed later on, and then perhaps something else goes out to take custody or prosecute that target in whatever manner that may be. What we are changing on its head is allowing the vehicle to not only make the map, but also then be able to, say, stay stationed on a target and then prosecute that target in whatever way they want. So, for example, would be in the vehicle space, there's a number of new vehicles, which I would call hybrid autonomous vehicles or hybrid ROVs, where they can perform the mapping mission, which could be covering several kilometers of seabed, and then go back and identify the targets and then either do something with those targets. So they have manipulators or other tools on board the vehicle, which it transforms into once it's completed the mapping mission. Traditionally, that would require multiple different sensors to be able to complete that same mission profile. And what we're providing is a single sensor that can do those things together. Not only that, we're also then providing additional benefits to the vehicle, such as three-dimensional forward-looking obstacle avoidance, where traditionally that's always two-dimensional, and the ability to reduce the payload and the power requirements for these vehicles. I think those are two critical aspects that the vehicle markets are looking at. What's my duration I can run on the available batteries I can carry? And then what mission profiles I can perform?

Okay. So... why would there be any competition? Is it price? I'm trying to understand why this wouldn't be the expected winner of these competitions.

I think with a lot of the, yes.

Yeah. I was going to say, and I'll go ahead, but what I wanted to say that question, but Richard is to say it's, it's, it's, Lots of these underwater vehicles are still in their evaluation phase. So we haven't lost anything, but they still have to go through their evaluation on different technologies and what they offer. So you're right. I mean, for us, it's a slam dunk. It is. The Ecoscope is amazing. more advanced because, as Blair explained, it's a single sensor for multiple applications, whereas if you use other sensors, you've got many different sensors for different missions. So by combining a single sensor for multiple applications, you're reducing costs and you're reducing your payload and power requirements, as Blair said. So I just wanted to chip in and say that, you know, We've got a number of programs that are ongoing, and we believe that Ecoscope is a contender for many of these programs. So, sorry, Blair, over to you.

Yeah, no, I think you answered most of what I was going to say. I think the only other thing I would say here is that, yes, of course, with all defense programs, a lot of these have been underway for many, many years. So, yes, we are coming in as an incumbent. However... It's clear that not only the commercial industry, but the defense industry are looking at ways to do better teaming. So that teaming could be a diver to a vehicle, could be a vehicle to the prosecution of, you know, as I say, the specific task. Yes, the olden way is to actually use the lawnmower approach. You can go out and mow the lawn, and then you come back and see what we have and what do we need to do next. That's what everyone is now considering as being a realistic opportunity. So as Anne-Marie said, these opportunities are certainly not gone, and a number of programs are looking to embed us into the outside design of their vehicles with the ecoscope in mind. So I see that as really positive, highly beneficial for the product line moving forward.

I happen to agree with you. I'm just wondering why all of these projects don't choose you as their bolt-on for their system as opposed to some other sonar. That was really my question.

Sure. But you're presuming that we're not chosen, and I can't speak for what the customer is thinking, but what we are seeing from what we're doing, we're seeing... all of the programs that we're engaging in, we see, first of all, something which is interesting. We will engage, for example, with prime contractor A, and initially they would say to us, okay, we want you for this scope. Then the next thing we see that they expand the scope and the next program they have, they include the Ecoscope. So that's how we see that once we are in a program, the program is expanded for other uses of the Ecoscope. So I can't say why everyone doesn't see what we see, but what I am seeing in where we are, I feel we're making good progress in getting the Ecoscope designed in these programs at the front end.

Okay, thanks for that. The next question I have is the heads-up display Can it be used for other indications like aircraft, NASA, non-underwater or gaming? Is there any other opportunities for your heads-up technology to expand beyond underwater visibility?

That's a great, great question, actually, and something, of course, we are, you know, working on actively at the moment. I think the biggest switch point for us definitely was in the dust hardening program where we created our new Gen 4 HUD. That is a game-changing enabler for, yes, not only perhaps the smaller full face masks, scuba mask type market of which there's much, much higher volume, as I've stated, than hard hat diving. but you're correct. All other adjacent markets above water, you know, between water and above water, you know, those are absolutely opportunity spaces that we're actively looking at at the moment. So, yes, we do see that as an opportunity. The one key thing I would say is in the fighter pilot kind of type market, yes, that could still be an opportunity space. However, we have focused on For our deliverables, it's always generally conditions of low visibility, noise in the water column. So this is generally not what I would call a daylight heads-up display. That doesn't mean we cannot enter that space. But our primary focus today has been in solving the much harder problem of dealing with vision in occluded or very disruptive and noisy environments. So, of course, all adjacent markets surrounding those same facets are absolutely opportunity for us to explore.

Okay. Well, you just hit my next two questions, so I'll just elaborate on one of them. Can you get into a little bit more detail about what hardening involves?

Sure. So let me start by saying, and this is going to worthwhile point. The data technology, the data tether technology encompasses a lot of features to address a lot of different mission profiles. So dust hardening was addressing multiple different aspects. So number one, we're now going between a diver who perhaps walks on the seafloor with a hard hat helmet who's tethered to a surface ship to now an agile swimmer that will be swimming in a rebreather, much lighter equipment. So we had to repackage the equipment, make that form-fit function with existing rebreather equipment. So really you can think of it as, you know, miniaturizing as much as possible, taking as much weight out of the system, and form-fitting around the other dive equipment that they also have to carry such that the David system, with all its benefits, doesn't carry a payload obligation for the diver. The second point, which is the David HUD, so the Gen 4 HUD, our current optics or our previous optics in the Gen 3, they could not fit into the smaller mass. They were too large, the waveguide optics that we previously used. So this complete ground-up development, which will eventually replace all of our HUDs, is an incredibly much smaller payload that allows us to fit in the smallest of dive masks, which perhaps EOD-type community, that's what they are very, very interested in.

Okay. Well, I've followed you guys for years now, and I'm very, very excited to see how you're, you know, entering this exponential phase of opportunity and potential profitability. So congratulations. Keep up the good work. I'm really impressed. Thank you.

Thank you, Richard. Thank you very much.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our next question, our third question, comes from Steve Emerson with Emerson Investment Group. Please proceed with your question.

I'm so happy to see your excellent progress in these very large markets. But now that we're facing poor short-term results, perhaps you could give us a better idea of the addressable markets. For instance, U.S. underwater warfare scuba divers, how big are some of these markets that you're addressing? Of course, give a range. And how big are these contracts that you've alluded to that are, let's say you're competing with, and I am certainly aware of the 5 million from U.S. for scuba, but if you could size some of these markets, it would help us.

You know, Steve, so, Blair, go ahead, yeah.

Yeah, I was just going to say, from the, yes, from the market of David, as we've always said, the dust, which is the untethered full face mask market, there is a considerable number more of those divers in different types of applications than the hardhat diver. However, getting the hardhat diver in with the Navy was the door opener for these other markets. I definitely feel we've achieved that, and that's what's bringing the promise of these new contacts. Just to give some form of size, I think, Steve, There's something like 2,200 seals, 120 EOD divers, 1225 of other divers just within the U.S. alone. The way that we view that is we're looking to convert roughly about 15% of those, which would give us a target of $40 million over five years just within the U.S.

sector.

Okay, excellent.

And can you give TAM, and why would 15% be an appropriate number for TAM?

Do you want to take that one, Anne-Marie, or I can take that one?

Well, I think when we started, first of all, sorry, I think I'm having some trouble here. Sorry. Okay. I can hear you fine. So when we started this, first of all, Blair, sorry, we have to understand how customers would adopt the technology because despite the fact that we say, okay, there are X number, let's say 4,000 divers in the U.S., we still need to understand how the customer would adapt adopt the technology? Is it a one-for-one adoption? And those are things that are unknown to date. So we've really just modeled and said that our target is 15% based on trends that we see in the adoption of the technology. Sorry, Blair, over to you.

Yes, I think that's correct, Anne-Marie. I think many of the new groups, if we take EOD as a good example, were in the early stage discussions with those groups. I think the promising fact is everyone has been able to see, witness, and dive the tethered system of David, and now, of course, the initial variant of the untethered system So we're in active discussion, and they themselves are trying to understand what other sensors can they bring into the David system. I think, as I said in my initial remark, we're trying to make the cell phone revolution underwater. that only works if you can incorporate other sense of data or other information. For example, that could be biomedical information, you know, the stress on divers, for example, or it could be other type of sensors like magnetometers, you know, ADP and all of those factors. Those are all critical because that creates the swell around the use of the technology and we become the linchpin in the center. And I think we definitely are feeling that we are becoming the linchpin there It's now about working together with those teams so that they don't display technology A, reintegrate with the previous generation of their technology, and then it's a seamless migration for them. I'll give one case in point. The majority of perhaps SEALs or EOD divers would swim with, let me just say, an iPad underwater. They have a display underwater. So clearly the next evolution of that is to have that in the heads-up display. However, it's not as quite simple to take all of that information and put that in the heads-up display, much like the automotive market takes on board. Augmented reality is a skill set in its own to display the right level of information at the right time for the diver, also based upon what they're doing. So there is a skill and an art there, and it isn't just a complete one-to-one. So we are looking at the overall market to try and bring the adoption curve up. clearly the focus for us is to be involved in the most, you know, high volume applications, which will then see is the biggest yield. So, but I think, you know, we felt the 15% conversion over our initial modeling over the, over the five years felt a very reasonable target for us to achieve.

Yeah. And I think we can't, you know, I mean, regardless how big the market is over time, the biggest priority for this business is to get the, untethered variant in the field, operational, and that will set the precedent for global adoption in the military community with foreign navy. So we have to do this well, and I think we've reached this pivotal point in the program where we're now reaching to the phase where there's acquisition of a small number of units in this year, and I think that that will be the stepping stone for increasing the adoption curve over time. I really think that's an important milestone for business.

Okay. Thank you.

I'm looking forward to receiving, perhaps in your presentation, some more detailed feedback addressable market by segment information. Second question, can you give us some metrics or better feel for this acquisition you said is in due diligence phase?

Well, at this stage, actually, Steve, we're really... give you a rough order of the size. Is that by revenue are you thinking about or are you thinking about what we're looking to spend?

Yeah, give us what you feel comfortable telling us.

Well, the most I can see given that we're going through due diligence at this point is that the target purchase price is at $12 million. Sorry, $40 million. Sorry, got that wrong.

Okay.

And can you give us revenue and EBITDA?

What kind of overlay? I prefer not to, at this stage, Steve, to talk any more about the target because we are under NDA at this moment and we're still just early days of the due diligence. So... I'd much prefer to wait until we progress more with a target.

Okay. And sub-segment or, again, you'd rather wait?

At this stage, I don't want to pre-announce something that is really at its nascent stage. So if you don't mind, I'd like to know pretty much more about this.

Certainly.

Thank you very much.

Thank you.

Our fourth question comes from John Dasher with Pinnacle. Please proceed with your question.

Good morning. Thanks for taking my question. Most of my questions have been answered, but I was curious on the Precision Acoustics purchase. When you say you're going to enhance business development, what exactly does that mean? More salespeople, more offices, what does increasing business development mean for that company?

More salespeople, sales and marketing. As I said, when we acquired them, they really weren't doing any sales and marketing because the sales just trot in. As I said, I think we can introduce business development via sales development personnel to grow the business, and that's one area we're looking to invest in.

Any idea of how many additional salespeople you'll be hiring?

Well, initially, it's a small business, so if we sort of put in two salespeople initially, I think that would be plenty in the first year.

Okay, that makes sense. And you mentioned that the business did, I think, what, $5 million last year and $24 million Gross margins were 52%. What were operating margins for 2024 for that business?

Jeff, do you have their operating margins?

It's not as simple a question to answer as it might seem, actually, because it was privately owned and it was run as a almost as a subsidiary of another company, and some of the charges to and from are a little bit oblique. So I'd prefer really not to be drawn on operating margin, except to say that I expect it to be positive.

Okay, will it be in line with the operating margins for the legacy Coda business, which were... I don't know, 15% or 16%? 17.2%.

No, I don't think so. Yeah, I would hope it was something like that, yes.

Okay, so all right, fine. And I think you said that you were going to increase the R&D and the SG&A this fiscal year. By what percentage might you think each of those might go up for R&D and SG&A?

Well, I think that let's take the SG&A first. We would probably put in a couple of people over the course of the year, as Anne-Marie said. I think they'll probably be in the, let's say, towards the latter half of the year. We're running at about 22 people at the moment, so it would be equivalent to about one head over the course of the financial year. In terms of R&D, there are a number of projects that we are running, which I think we would hope to get some results out of in terms of product.

Okay. So R&D last year was $2.3 million. What percentage increase do you think we should model for this year?

I think we would look towards perhaps four or five projects over the course of the year of varying sizes, but we're towards the start of the year at the moment, so it's difficult to be precise.

Yeah, and I do think in terms of internal R&D, just to answer that question, I don't see just collectively, I think our goal would be to keep an increase of 5% in terms of monetizing the capabilities of precision acoustics in the group.

Okay. Well, that's helpful. And SG&A was I think 8.3 million last year. How should we model that for this fiscal year?

It also will depend on the pace at which we take on these costs at the moment. really, in terms of our R&D effort, cross-group R&D effort, it's really time at this time, really thinking about what our priorities are in terms of near-term goals to, you know, monetize what they have in the broader group. So currently, this is internal resources. Later on, it will involve really just buying kit to... start working on so I think it's going to be incremental increase in our R&D for precision acoustics leveraging what they have in the group so it's a gradual increase in our costs over the year okay that's helpful and finally do you anticipate segmenting out precision acoustics or will you include that with either product or services That's a great question. So the broader, in terms of segment reporting, it will fall on the products. But just to be clear, that will be when we report products, there will be the marine technology business products, and then there will be PA business, because it's a different business unit within products.

Okay. But on the operating income line, will you break that out as well? Marine versus... I don't...

I don't know at this stage. I mean, we'll do what's required for reporting purposes, so I don't know. Gail, do you have a view on this?

I believe our current plan, Anne-Marie, thanks for the question, is to keep it under the products segment. Reporting is to keep it clean of that and not to break it out separately.

Okay, so you'll break out the sales, but not the operating margins. Yes. Okay, I'm good. I guess finally, is there a public disclosure of how, or will there be a public disclosure, maybe an 8K or something, in terms of how Precision did for the year?

No, I don't think there's a requirement. No, there is no requirement for an 8K, an 8K for Precision Acoustics. And we finish our first quarter, I think, two days from now. So we'll be filing our consolidated first quarter results 45 days after the end of January.

Okay, so no separate disclosure.

Okay, great.

Thanks so much, and good luck to you.

Thank you very much. Thank you for that.

Our next question is from William Bremer with Vanquish Capital Partners. Please proceed with your question.

Good morning, Anne-Marie.

Morning, Bill.

And Blair, welcome. And I thank you for the commentary and the articulation of so many of our future products as we go into commercialization. My first question, and really only question, is on the whole scanning. How are we going to sell this product or service? Is this going to be maybe a yearly service? like a multi-service agreement? Is this going to be by vessel? Is it going to be an equipment sale? If you could just enlighten us a little bit on your sales approach there.

Thank you, Bill. That's a great question, and I guess I should clarify also for everyone in terms of what we extensively mean by ship-pile scanning. Our initial customer, which is the U.S. Navy, specifically had in mind strip hull scanning for either parasites on a hull or for, you know, incident reporting of a hull. So to save on what I've called dry docking fees. So you can call that in some respects strip husbandry in some respects. The market opportunity is quite massive, however, and I would say over the last three to four years, actually, I've been trying to group many of the customers or potential markets that require the same solution but are trying to do different things. So if I give you just a case point, we have the group that want to avoid, say, maintenance and repair costs by doing that underwater. So we call that dry docking fees. You secondly have a battle damage assessment where perhaps, and I know we kind of commented on this a couple of years ago, there's several incidents where U.S. Navy vessels came in contact with either other vessels or other objects and they had battle damage. How can the ship hull scanning solution provide an instant view under the water before going into port? We then have what I would call the parasite kinetic community. So that is either EOD or what I would call naval vessels. But in the commercial sector, that is anyone coming into major ports, you know, and these things always get flagged up. to be able to scan those hulls for looking for unknown objects. And then, of course, you have the whole customs type route as well, which looks at other attachments to the hulls, such as false panels in the hull where they're packing narcotics and drugs. So this solution that we have is intended to address all of those markets, The second point I should make out is that although for our initial customer, we developed the hull sled, which is a solution for a diver to go in, create a real-time map underwater under the hull, and to do prosecution, the same solution platform could be deployed on perhaps a surface vessel or it could be deployed more commonly on an ROV. And in actual fact, our EOD customers are using the ROV approach instead of the diver approach. So really, I think as we stated in the filing, this is a global market opportunity and it's got multiple different sectors to it. Currently, what we're addressing is the Navy requirements, which is really the ship husbandry and EOD type aspects. And that's what we're looking at. But I do suspect this will be an investment. You know, this is probably not going to be a service thing, I would say. And As it currently runs at the moment, the Navy employs contractors to do either ship hull cleaning, the dry docking fees, and I would suggest that perhaps they would be involved in this process, and we're providing the solution for them to do that job quicker and faster.

I thank you for the color, Blair. I truly do. Given all those different end markets, I'm assuming there's going to be different SKUs or different models of this technology, right? over time?

Just to jump in there, the ship house canning solution we put forward, it's not going to be different from our model of selling the technology or renting the technology. So it's going to follow one of those bills. So we will not be providing a service that around the technology. We are selling the package and the customer will use this in their operations as we currently do with what we sell in the market today. So it will be either outright sale or a rental.

Okay, agreed. Blair, is it possible, and I guess I'm assuming that the vessel is in port at the time of the scanning, but is it possible over time that the next couple generations, this type of technology can be equipped that the vessel doesn't need to be imported?

Great question. And yes, I guess the two models I would say that are under evaluation, and this is where we think the next opportunity with our customers looking at. I do know, for example, the Coast Guard have jurisdiction out to a certain number of nautical miles away from the port, and then it becomes the port's authority at that point. There is two models. There's the ship at anchor, at steady state, out in the open water. That generally could easily be an augmentation of the current solution. And I don't think that would necessarily represent a significant challenge. It depends on the sea state, of course. You know, if the ship itself is dynamically moving, we'd need to be able to capture that information in addition to our own movements. So there's some math to go on to solve that problem. I think what is... was a desire of many people was i would call it the car wash type ship hull scanning solution where your sensors are placed on the seabed and as the ships pass over them then they would instantly be scanned i think you know that model i'm not saying it's been disproven but it's much harder than i think um you know either the customers and you know or the technology people thought that it may be simply because the ship is underway it's creating its own cavitation you know, different sizes of vessels, a ship can't slow down to the speed perhaps required for scanning. So there's many more complications. But certainly scanning offshore should be exactly the same as the ship necessarily being at dock. Also recall that An entire 3D model of the hull is generally required for people like ship husband, brave, battle damage assessment, for example. When we look at their narcotics type of thing, there's a certain region of the hull of which they're interested. So we've become much more localized. in terms of where we have to do the search and where we look at the information. And sometimes it could be real-time search. We don't have to create what I would call the high-resolution 3D map. And that's really where our technology comes into play. We can do the real-time inspection, and we can build the map.

You just answered my final question. I thank you for your time.

Thank you, Bill. I really appreciate it. Thank you very much.

Our next question comes from Walter Ramsley with Walrus Partners. Please proceed with your question.

Thank you. I've got a couple of more financially oriented questions. The company did $5.5 million in revenue to Asia. You say China is your biggest offshore market and that the export controls could prevent you from selling to China anymore. Can you quantify that, how much you're going to? you know, be at risk for if those export controls are retained?

Just to be clear, Walter, thank you for your question. Most of the composition of Asia is Japan, actually. So we've been impacted in terms of sales to China for many years now. So it's getting less and less a problem for us because uh since i think 2022 um you know we have had reduced ability to sell to china so um most of the composition is japan okay all right good enough and uh as far as the precision acquisition uh precision um we got the acoustics acquisition um you know it's

in the 10k that uh amortization pro forma was uh 477 000 uh is that going to be the number going forward for the amortization amortization i can take that and marie and that's the number for four years yeah so for the first four years that's the number and then okay slightly when it reduces slightly when our um

our non-competes stop after four years. So then it will go down slightly, and it lasts for a total of seven years is what we've modeled.

Okay.

No, I see.

Well, I'll worry about those years when we get there, but for the time being, that's good. Okay. And the earn-out target is a pre-tax number of $1.05 million. Is that before the amortization or after? before oh okay so they have to make 105 and then you would you know for your financial reporting subtract from there but to calculate the earn out that's really all I have to get okay I think that sounds good appreciate it thank you Walter thank you at this time this concludes our question and answer session I'd now like to turn the call back over to Ann Marie Gale

for closing comments.

Thank you, Operita. Thank you for your participation today. Have a great day. Thank you, everyone.

Thank you for joining us today for Coda Octopus's conference call. You may now disconnect.