Full Year 2024 Coda Octopus Group Inc Earnings Call
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Joining us on today's call from Coda Octopus are its Chair and CEO Annmarie Gayle, its interim CFO Gayle Jardine, and its President of Technology Blair Cunningham.
Following their remarks, we will open the call for questions.
Speaker Change: Before we begin, Geoff Turner from our investor relations team will make a brief introductory statement.
Geoff, please go ahead.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business.
Speaker Change: 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.
Speaker Change: and Forms 10-Q for the 1st, 2nd and 3rd 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.
Speaker Change: 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.
Speaker Change: Now, I will turn the call over to the Company's Chair and CEO, Annmarie Gayle. Annmarie?
Annmarie Gayle: Thanks, Geoff, and good morning, everyone. Thank you for joining us for our Fiscal Year 2024 Earnings Call.
Annmarie Gayle: 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
Annmarie Gayle: I would now like to provide some of the key highlights relating to our financial results for fiscal year 2024.
Annmarie Gayle: We also added through acquisition a third business unit, Precision Acoustics Ltd., a company established under the laws of England.
Annmarie Gayle: However, it is important to note that our income statement activity for fiscal year 2024 discussed here
Annmarie Gayle: This newly-acquired business unit had no material income statement activity for those two days
Annmarie Gayle: This business sells its products and solutions globally, with Asia, Europe, and U.S. being important geographies for our products.
Annmarie Gayle: We saw an increase in equipment sales in the key strategic geography of Asia.
Annmarie Gayle: Equipment sales from Asia rose by 19% and were $5.47 million compared to
Annmarie Gayle: We also saw a significant reduction in revenue from the U.S. on defense programs.
Annmarie Gayle: Many defense programs were funded through the continuing resolutions mechanism, which resulted in reduced allocation of funding.
$2.83 million in fiscal year 2024 compared to
Annmarie Gayle: 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%.
Annmarie Gayle: 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.
Annmarie Gayle: The engineering business units are primarily subcontractors, the prime defense contractors, and therefore are dependent on receiving funding on the defense programs.
Annmarie Gayle: In fiscal year 2024, revenue generated by the engineering business increased by 3.8% along with its gross profit margin.
Annmarie Gayle: 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.
Annmarie Gayle: Furthermore, since the results of the U.S. election, many defense programs are on hold until the new administration's budget and policies are in place.
Annmarie Gayle: 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.
Annmarie Gayle: And therefore, many offshore projects are currently on hold, and this is likely to adversely affect our first quarter 2025 results.
Annmarie Gayle: 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 continue to make progress around our growth pillars, Etuscope and David.
Annmarie Gayle: 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 session if you have any.
Speaker Change: I will now turn the call over to Blair Cunningham, where he will give a short overview of our core technologies around which we are postulating our growth agenda.
Speaker Change: These technologies form a powerful complementary ecosystem that revolutionizes underwater operations.
Speaker Change: Additionally, underwater data is collected today with analysis and decision-making tomorrow. We're disrupting this model.
We're turning to these technologies.
Speaker Change: Where are we with the adoption curve for David Heather's system?
Speaker Change: Developed under a three-year future naval capabilities contract with ONR and NACI, this fully developed augmented reality system is commercially available.
Speaker Change: 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.
Speaker Change: We are aware that several of these commands have submitted budget requests through their respective process.
Speaker Change: 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.
Speaker Change: We are therefore seeing year-on-year budgeting by the U.S. Navy for acquisition of the David technology.
Speaker Change: Following recent participation in international maritime warfare exercises in Norway, UK, and the U.S.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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,
Speaker Change: 200% increase in resolution and an expanded visual field of view. These enhancements significantly improve compatibility with specialized dive helmets and masks, unlocking new possibilities for previously underutilized markets.
Speaker Change: This accomplishment represents a major milestone in the success of the dust hardening program.
Speaker Change: We still believe the DUST system represents the largest addressable market for data technology. For example,
The U.S. Navy, with approximately 4,000 active divers.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We're also spinning off technologies from the David system and introduced a new digital audio communication system, Voice Hub 4, which offers a competitive, superior quality system for diver-to-diver and diver-to-supervisor communication.
Speaker Change: This all-digital communication technology incorporates AI-driven features, including background noise removal, diver inhalation noise isolation, and active helium voice correction.
Speaker Change: 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 data technology.
Speaker Change: The new David Gen 4 HUD delivered under the DUST program cements the technology now as mature and leverageable.
Speaker Change: Our achievements with the development of this technology is stunning and will pay off in time for our shareholders.
Speaker Change: Turning to the ectoscope technology, another of our growth pillars, the ectoscope is the world's first and highest resolution real-time volumetric 3D sonar.
Speaker Change: 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.
Speaker Change: The Octopus are well established in the commercial offshore sector and our Ectoscope solutions have revolutionized subsea operations and inspections for decades.
Speaker Change: Delivering significant time savings, cost reduction and enhanced operational efficiency in the most challenging conditions.
Speaker Change: 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.
Speaker Change: The Brayton water market is a good example where we have moved the market from placing only four blocks per day up to 260 blocks.
Speaker Change: The acquisition and utilization profile of the commercial sector differs significantly from that of the established defense programs.
Speaker Change: While we do have commercial customers who purchase multiple Xscope systems in a single order, this is relatively uncommon.
Speaker Change: The commercial market typically favours minimal capital investment over operational project costs.
Speaker Change: We see further evidence of this trend with customer preference for Equiscope rentals over direct purchase.
Speaker Change: The new undersea vehicles, whether remotely controlled and operated, or fully autonomous,
Speaker Change: 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.
Speaker Change: By embedding Exascope 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.
Speaker Change: We view this as a significant growth opportunity, enabling a seamless fusion of episcopes capabilities with advanced undersea operations.
Speaker Change: The result is a smarter, more capable vehicle that not only improves mission efficiency, but also amplifies overall effectiveness.
They are currently undergoing tests and evaluation.
Speaker Change: Whilst these represent longer term opportunities, they provide a valuable platform for expanding our technology footprint within these defence programme initiatives.
Speaker Change: Direct short-term opportunities exist with the active undersea vehicle programs of record, such as the Video Ray Defender ROV program for the EOD.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: As we reported previously, we developed and delivered, under a multi-year defence-funded Navy programme, a comprehensive ship hull scanning solution, embedding the ECOSCOPE and DAVID technologies.
Speaker Change: Under this application, customers are performing critical target identification, such as parasites on a hull, which can compromise security.
Speaker Change: 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.
Speaker Change: This is still being evaluated by our customer, but initial results have been overwhelmingly positive and we believe this program will move forward.
Speaker Change: Finally, I want to cover the recent acquisition of Precision Acoustics, a recognized leader in the ultrasound and acoustic measurement field.
Speaker Change: 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 NDT.
Speaker Change: 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.
Speaker Change: This acquisition brings valuable and recognized acoustic expertise to the group, expanding our knowledge base in a domain that has previously been under-leveraged in the underwater acoustic space in which we operate.
Speaker Change: We believe this acquisition opens up significant opportunities to integrate precision acoustics capabilities with our existing technology platform, particularly advancing our ECOSCOPE technology.
Speaker Change: This will also enable us to penetrate new market sectors such as passive acoustics and ultrasound imaging, critical areas for defence applications.
Speaker Change: Other more, the combined strengths of our group position us to qualify for larger defence-related programmes, as well as explore exciting research and development opportunities that were previously beyond reach.
Speaker Change: Annmarie will cover any questions on the commercial aspects of this transaction.
Thank you, Claire.
Speaker Change: 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.
Speaker Change: Furthermore, this addition expands the group's collective capabilities and positions it to qualify to compete for larger defense contracts.
Speaker Change: They also sell a wide range of products and generate revenue of approximately $5 million with margins of 52%.
Speaker Change: Let me now turn the call over to our Interim CFO, Gayle Jardine, to take you through our financials for the fiscal year 2024, before I provide my closing remarks. Gayle?
Gayle Jardine: Thank you Annmarie and good morning everyone. Let me take you through our full year 2024 financial results.
which are all reported in U.S. dollars.
Gayle Jardine: As Annmarie 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.
Gayle Jardine: 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%.
Gayle Jardine: The product segment generated revenue of $12.8 million compared to $12.1 million, a 5.7% increase from the prior fiscal year 2023.
Gayle Jardine: As reported earlier by Annmarie, 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.
Gayle Jardine: In the services segment our UK arm was key to the 3.8% improvement in revenue in this segment compared to fiscal year 2023.
Gayle Jardine: However, like the products business, U.S. Engineering Business Unit was also affected by the reduced funding allocations under defense programs.
Moving on to Gross Profit and Margin.
Gayle Jardine: 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.
Gayle Jardine: 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.
Gayle Jardine: with increased revenue from rentals, which generate a higher margin, combined with lower commission costs in the period.
Gayle Jardine: 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.
Gayle Jardine: Total operating expenses for 2024 rose 2.9% to $10.6 million, compared to $10.3 million in fiscal year 2023.
Gayle Jardine: 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.
Speaker Change: Our Selling General and Administrative, or SG&A, costs in FY2024 totalled £8.3 million, an increase of 1.8% over the FY2023 expense of £7.9 million.
Speaker Change: As a percentage of revenue, our SG&E costs for the fiscal year 2024 improved, reducing to 41.1% of total revenue, compared to 42.3% in the fiscal year 2023.
Marketing also increased in accordance with our strategy.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Net income before taxes in the fiscal year 2024 was $4.6 million, compared to $3.4 million in the fiscal year 2023.
Speaker Change: Net income after taxes Fiscal Year 2024 was $3.6 million or $0.32 per diluted share compared to $3.1 million or $0.28 per diluted share in Fiscal Year 2023.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Moving now to our balance sheet. Please note the published balance sheet figures do include Precision Acoustics Ltd. and are post-acquisition combined figures.
Speaker Change: This represents a decrease of $2 million over fiscal year 2023, where the reported figure was $24.5 million.
Speaker Change: The cost of acquisition of Precision Acoustics, net of cash acquired, was $4.6 million.
Annmarie Gayle: That completes my financial summary, so let me turn the call back over to Annmarie for her closing remarks.
Annmarie Gayle: 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.
Annmarie Gayle: 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 the goal of securing recurring sales of multiple units.
on to these programs.
We are also seeing the vindication of this strategy.
To summarize,
Annmarie Gayle: The DAVID user base is also adopting the Ecoscope technology as part of the DAVID solution.
Annmarie Gayle: The David technology has now matured and the 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.
Annmarie Gayle: This has opened up many new opportunities for the technology and we expect the award of three new programs around this technology.
Annmarie Gayle: Our ECOSCOPE SIVS technology, a short-range, high-resolution sonar used for close-up visualization and mapping, has been demonstrated to several defense customers.
Annmarie Gayle: and is a contender for several opportunities for ship hull applications and close range target inspection.
Annmarie Gayle: Financial year 2025, subject to the satisfactory completion of due diligence, we anticipate completing another acquisition in the group.
Annmarie Gayle: To conclude, we would like to thank our shareholders for their continued support. We are now happy to answer any questions. Operator?
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Our first question comes from Brian Kingslinger with Alliance Global Partners. Please proceed with your question.
So.
Hi Brian, good morning.
Good morning.
Are you thinking about Q4 itself?
Speaker Change: Yeah, I mean full year doesn't matter. It's a long time ago. So I'm just kind of thinking about the fourth quarter Yes, if I look at the gross margin in marine it was about 76% which is you know kind of below where it was the last two quarters and then if I look at
Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle,
Speaker Change: 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, if equipment seized will carry
Speaker Change: Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle, Unknown Attendee,
Speaker Change: but generally it's driven by simply the mix of sales that we have in the revenues.
Speaker Change: 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...
Speaker Change: Can you tell us how much revenue the DAVID program generated in fiscal 2024 and with the funding challenges in the U.S.?
Speaker Change: 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
Speaker Change: 2024, we saw really a significant reduction in funding from US programs. And that's really typical, first of all, that's typical in an election year.
Speaker Change: 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...
Annmarie Gayle: Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle, Unknown
Speaker Change: 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
Unknown Attendee
because of reduced funding. Now...
Speaker Change: Most of the things that we anticipated, they've not gone away, they've just moved from last year and hopefully into this year. So I think that we expect, for example, Q1 to be challenging for the business because programs continue to be funded by continuing resolutions.
Speaker Change: but we expect to see that changing in our second quarter onwards.
[inaudible]
Speaker Change: Overall, I think all the DAVID programs that we have in the pipeline, and when we think about the DAVID, we should think about...
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Speaker Change: That's being used by nine commands currently and year on year we're seeing acquisitions and budgeting for that product line. The untethered variant is
Speaker Change: Still going on the program of development, but I think we've reached this pivotal point.
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sitting in those types of masks that we've delivered.
Again.
Speaker Change: 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 have 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
Speaker Change: Well can you, 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.
Speaker Change: So on the tethered system on the Navy side this year in terms of purchasing systems we would expect two million dollars of purchases of equipment for
Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle,
Speaker Change: That is really, and what we have visibility and what we're talking about here, just to be clear, it's only the opportunity with the U.S. we're talking about here. We have not began 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.
Speaker Change: They also will be in lockstep with the U.S. in terms of acquisitions. We simply don't have their budget at this stage.
Speaker Change: 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 dabbing technology.
Okay.
and then
Switching gears,
You commented on foreign customers
[inaudible]
Speaker Change: and the broader implication is that, you know, it could contract demand or reduce demand because simply it becomes much more difficult to export items. So I think generally, as I said, what we're seeing is a general...
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or the environment being very cautious.
Speaker Change: And, you know, the infrastructure budget, it's a big budget in the U.S., 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.
Speaker Change: Until we can gauge the new shift in policies, what they mean, it is still a lot of unknowns.
Speaker Change: So, that's pretty much what I'm hearing from our customer being just cautious and just a lot of unknowns until the policies are in place.
Great. One on precision acoustics.
Speaker Change: Jess, I'm going to ask you to take questions on precision acoustics, please.
Speaker Change: Okay, hello Brian. You asked two questions there. First of all, Precision Acoustics is actually quite well equipped.
Thank you. Have a good night.
Speaker Change: 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 plough in a load of capital.
Speaker Change: 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.
Unknown Attendee
Okay.
Last question I have, Annmarie.
Speaker Change: 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
Speaker Change: Thank you. Last questions are first, is there any seasonality in 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?
Unknown Attendee
Geoffrey Turner: Geoffrey Turner, Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie
The budget is appropriate for the university academic year.
Great
Unknown Attendee Hi.
Speaker Change: and in terms of the acquisition that we're currently looking at, it's larger than Precision Acoustics.
Thank you so much, guys.
Thank you, Brian. Thank you for your questions.
Speaker Change: Our second question comes from Richard Deutsch with Sutter Securities. Please proceed with your question.
Unknown Speaker Unknown Speaker Unknown Speaker
Blair
Speaker Change: Yes, thank you, Richard, for a 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,
Speaker Change: A vehicle is either trying to create a map of the scene floor, 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.
Speaker Change: 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.
Speaker Change: 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.
Annmarie Gayle: Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle, Jackie Keshner,
Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle,
Annmarie Gayle: What's my duration I can run on the available batteries I can carry? And then what mission profiles I can perform.
Annmarie Gayle: I'm trying to understand why this wouldn't be the expected way.
Winner of these competitions.
I think with a lot of the... Yeah, sorry, Annmarie.
Speaker Change: I was going to say, and I guess go ahead Blair, but what I wanted to say, that question Richard is to say, it's...
Speaker Change: 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
Speaker Change: 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 cost and you're reducing your payload and power requirements, as Blair said. So, I just wanted to chip in and say that, you know,
Speaker Change: 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.
Blair Cunningham: 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,
Blair Cunningham: It's clear that not only the commercial industry but the defence 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, as I say, the specific task.
Speaker Change: 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.
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Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Okay, thanks for that. The next question I have is the...
Speaker Change: Heads Up Display, can it be used for other indications like aircraft, NASA, non-underwater or gaming? Was there any other opportunities for your Heads Up technology to expand beyond underwater visibility?
Speaker Change: The one key thing I would say is, in the fighter pilot kind of type market, yes, that could still be an opportunity space, but however, we have focused on...
for our deliverables, it's always generally.
Speaker Change: 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?
Speaker Change: So let me start by saying, and this is a worthwhile point, the data technology, the data tether technology encompasses a lot of features to address a lot of different mission profiles.
So we had to repackage the equipment.
Speaker Change: make that form fit function with existing rebreather equipment. So really you can think of it as, miniaturizing as much as possible, taking as much weight out of the system, and form fitting around the other diver 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.
Unknown Speaker 0.0.0.0. Thank you.
Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee.
Speaker Change: 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.
Speaker Change: So, keep up the good work. I'm really impressed. Thank you.
Thank you, Richard. Thank you very much.
Speaker Change: As a remind if you'd like to ask a question please press star 1 on your telephone keypad. One moment please while we follow for questions.
and Michael Jackson.
Speaker Change: Our next question, our third question, comes from Steve Emerson with Emerson Investment Group.
Please proceed with your question.
But now that we're facing poor, short-term results.
perhaps
U.S. underwater warfare scuba divers. How big?
Speaker Change: Are some of these markets that you're addressing, of course, give a range?
Speaker Change: And how big are these contracts that are, that you've alluded to?
It would help us.
EAT!
Speaker Change: You know, um, Steve, Blair, go ahead. Yeah, yeah, I was just going to say from the
Speaker Change: Yes, from the from the market of David as we've always said the dust which is the untethered full face mask market
Speaker Change: There is a considerable number more of those divers in different types of applications than the hard hat diver. However, getting the hard hat 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 contracts. Just to give some form of size, I think, Steve,
Speaker Change: There's something like 2,200 SEALs, 120 EOD divers, 12, 25 of other divers just within the U.S. alone.
Speaker Change: The way that we view that is, you know, we're looking to convert, you know, roughly about 15% of those which would give us a target of, you know, $40 million over five years just within the U.S. sector.
Okay, excellent. And can you give...
and John Price. Thank you. Thank you.
I can hear you fine.
Blair Cunningham: 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, OK, there are X number, let's say 4,000 divers in the U.S., we still need to understand how the customer
Blair Cunningham: would adopt the technology. Is it a one for one adoption? And those are things that are unknown to date.
Speaker Change: So we've really just modelled and said that our target is 15% based on trends that we see in the adoption of the technology. Sorry Blair, over to you.
Blair Cunningham: Yes, I think that's correct, Annmarie. 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
Everyone has been able to see.
Speaker Change: witness and die the tethered system of David and now of course the the initial variant of the untethered system
Speaker Change: 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.
Speaker Change: 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 could be other other type of sensors, like magnetometers, you know, 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
Speaker Change: 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.
Speaker Change: 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...
Speaker Change: 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, you know, and it isn't just a complete one-to-one. So we are, you know, 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 we'll then see is the biggest yield. So, but I think, you know, we felt the...
and Annmarie Gayle. Thank you very much.
Speaker Change: 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.
Okay.
Speaker Change: Thank you. I'm looking forward to receiving, perhaps in your presentation,
Some more detailed...
Addressable market by segment information.
Speaker Change: Second question, can you give us some metrics or better feel for this acquisition you said is in due diligence phase?
The End
Speaker Change: Well, at this stage, actually, Steve, we're really, I 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? Well, revenue is, yeah, give us what you can.
Sorry, $40 million. Sorry, got that wrong.
Okay.
and can you give us...
Speaker Change: Revenue and EBITDA? I prefer not to at this stage need 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.
Speaker Change: At this stage I don't want to pre-announce something that is really at it's nascent stage, so if you don't mind, I'd like to know pretty much more about this.
Unknown AttendeeCertainly.
Thank you. Thank you for coming.
Speaker Change: Our fourth question comes from John Dasher with Pinnacle. Please proceed with your question.
Speaker Change: 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,
Speaker Change: Unknown Speaker You know, you're going to enhance business development. What exactly does that mean? We're salespeople, more offices, what does
and Annmarie Gayle.
Speaker Change: 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 dropped in. As I said, I think we can introduce business development via sales personnel to grow the business and that's one area we're looking to invest in.
Speaker Change: Okay, that makes sense. And you mentioned that the business did, I think, what, $5 million?
Speaker Change: Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle, Unknown
Speaker Change: It's not as simple a question to answer as it might seem, actually.
Speaker Change: almost in a subsidiary of another company and some of the charges to and from are a little bit oblique.
Speaker Change: So I prefer really not to be drawn on operating margins.
except to say that I expect it to be positive.
Speaker Change: Okay, will it be in line with the operating margins for the legacy COTA business, which were...
I don't know, 15 or 16 percent.
Unknown Attendee 17.2, so it's no, I don't think so.
I would hope it was something like that, yes.
So, all right.
Speaker Change: 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, I think that...
Speaker Change: Let's take the SG&A first. We would we would probably put in a couple of people over the course of the year as Annmarie said. I think they'll probably be in the
and
Speaker Change: 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.
Speaker Change: Okay, so R&D last year was 2.3 million. What percentage increase do you think we should model for this year?
Speaker Change: 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.
Speaker Change: And I don't 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.
Speaker Change: Okay, well that's helpful. And SG&A was, I think, $8.3 million last year. How should we model that for the fiscal year?
[inaudible]
As I said, I think that's it.
She involves really just buying cake to engage in conversation.
Speaker Change: to start working on. So I think it's going to be an 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.
Speaker Change: Okay, that's helpful. And finally, do you anticipate segmenting out precision acoustics, or will you include that with either product or services?
Speaker Change: 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.
Speaker Change: Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle, Unknown
Speaker Change: I believe our current plan, Annmarie, thank you 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.
Speaker Change: Okay, so you'll break out the sales, but not the operating margins. Yes.
And I guess finally.
Speaker Change: Is there a public disclosure of how, or will it be a public disclosure, maybe an AK or something in terms of how Precision did for the year?
Speaker Change: and 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.
Speaker Change: Okay, so no separate disclosures. Okay, great. Thanks much and good luck to you. Thank you very much. Thank you for that.
Speaker Change: Our next question is from William Bremmer with Vanquish Capital Partners. Please proceed with your question.
Good morning, Annmarie.
Speaker Change: and Blair are 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
Speaker Change: product or service? Is this going to be maybe a yearly?
Speaker Change: 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.
Speaker Change: 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 hull scanning. Our initial customer, which is the U.S. Navy, specifically had in mind ship hull scanning for either parasites on a hull
on what I call dry docking sheets.
Speaker Change: So you can call that, in some respects, strip husbandry, in some respects.
Speaker Change: 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 are
Speaker Change: require the same solution but are trying to do different things.
Speaker Change: 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.
Speaker Change: 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 US Navy vessels came in contact with either other vessels or other objects and they had battle damage.
Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle,
Speaker Change: We then have what I would call the parasite kinotype community, so that is either EOD for what I would call natal 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, you know, unknown objects.
Annmarie Gayle: Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle, Unknown Attendee,
Annmarie Gayle: So really, I think, as we stated in the in the filing.
Annmarie Gayle: This is a global market opportunity and it's got multiple different sectors to it.
Annmarie Gayle: Part of 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.
Annmarie Gayle: As it currently runs at the moment, the Navy employs contractors to do either ship all 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.
Speaker Change: I thank you for the color, Blair, I truly do. Given all those different end markets,
Speaker Change: I'm assuming it's going to be different SKUs or different models of this technology.
over time.
Speaker Change: Just to jump in there, the ship house scanning 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, Bill. So we will not be providing a service around the technology. We are selling the package and the customer will use this in their operations as we currently do.
Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle,
Okay, agreed.
Speaker Change: Blair, is it possible, and I guess I'm assuming that the vessel is in port at the time of this scanning, but is it possible over time that
Speaker Change: The next couple generations, this type of technology can be equipped that the vessel doesn't need to be imported.
Speaker Change: Great question and yes I guess the two models I would say that are under evaluation and this is where we think you know the next you know 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 you know two models
Speaker Change: Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle, Unknown
Speaker Change: Unknown Attendee, Annmarie Gayle, Jackie Keshner, Unknown Attendee, Annmarie Gayle, Unknown Attendee,
Speaker Change: comes into play. We can do the real-time inspection and we can build the map.
Speaker Change: You just answered my final question. I thank you for your time.
Speaker Change: Thank you Bill, I really appreciate it, thank you very much.
Speaker Change: Our next question comes from Walter Ramsley with Walrus Partners. Please proceed with your question.
Walter Ramsley: 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
Speaker Change: Unknown Speaker You know, be at risk for if those export controls are retained.
Speaker Change: 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 since, I think, 2022, you know, we have had
Speaker Change: Reduce Ability to South China, so most of the composition is Japan. Okay, all right, good enough. And as far as the precision acquisition, precision...
Speaker Change: We got the acoustics acquisition. You know, it's in the 10K that amortization pro forma was $477,000. Is that going to be the number going forward?
for the amortization.
Annmarie Gayle: I can take that Annmarie and that's a number for four years.
Yes, so for the first four years, that's the number.
Unknown Compete.
Annmarie Gayle: Okay Worry about those years when we get there, but for the time being that's good and okay, and the earnouts Target
Annmarie Gayle: is a pre-tax number of 1.05 million. Is that before the amortization or after? Before.
Oh, okay.
Annmarie Gayle: So they have to make $105,000, and then you would, you know, for your financial reporting, subtract that 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.
Annmarie Gayle: At this time, this concludes our question and answer session. I'd now like to turn the call back over to Annmarie Gayle for closing comments.
Speaker Change: Thank you Operator. Thank you for your participation today. Have a great day. Thank you everyone.
Speaker Change: Thank you for joining us today for Coda Octopus's conference call. You may now disconnect.