Coda Octopus Group, Inc. ($CODA)

Good morning, and welcome to Coda Octopus Group's First Quarter Fiscal 2026 Earnings Conference Call. My name is Melissa, and I will be your operator today. Before this call, Coda Octopus issued its financial results for its first quarter ended January 31, 2026, 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, Annmarie Gayle; its Interim CFO, Gayle Jardine; its President of Technology, Blair Cunningham; and Dillon King from their Investor Relations team. Following their remarks, we will open the call for questions. Before we begin, Dillon King from the company's internal Investor Relations team will make a brief introductory statement. Dillon, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Coda Octopus' First Quarter Fiscal 2026 Earnings Conference Call. Before management begins their formal remarks, we'd 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 or 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 the year ended October 31, 2025, and Form 10-Q for the first quarter of our fiscal year 2026. You may get Coda 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 Coda Octopus' website. Finally, as a reminder, this is our first quarter fiscal 2026 reporting and all comparisons, unless explicitly stated otherwise, are with our first quarter fiscal 2025. Now I will turn the call over to the company's Chair and CEO, Annmarie Gayle. Annmarie?

Thanks, Dillon, and good morning, everyone. Thank you for joining us for our first quarter fiscal year 2026 earnings call. Despite the challenging global policy environment, our revenue in the first quarter 2026 increased by 28.8%, and I believe that we have delivered a solid set of results. For those who are new to the Coda Octopus story, our business is made up of 3 discrete business operations: the Marine Technology business, the Defense Engineering Services Business and our Acoustic Sensors and Materials business unit. Within our group, our core business is the Marine Technology business. This business generates most of our revenue. And in the first quarter 2026, it generated 50% of our consolidated net revenue. It is around this business that we're building our growth strategy. The Marine Technology business operates in the subsea market and is home to key disruptive underwater technologies. These technologies are bringing the smartphone revolution underwater by providing a comprehensive real-time information platform, which provides vision underwater and allows our customers to make real-time decisions. This technology is a key enabler for the AI-enabled autonomous capability required by the subsea market as it provides real-time 3D perception, enabling these autonomous systems to perceive, navigate and make decisions independently underwater. This technology reduces the cost of these operations and increases safety. The specific addressable markets that we operate in are the imaging sonar market and diving market. It is these market segments that our growth strategy is built around. Turning to our imaging sonar, the Echoscope. The Echoscope is a real-time 3-dimensional volumetric imaging sonar that can generate real-time 3-dimensional images underwater in zero visibility water conditions. This is widely used in the commercial offshore marine market for a range of underwater applications. A significant part of our annual revenue is derived from the commercial offshore marine market. To achieve the growth that shareholders want to see from our company, we have to increase our market share for underwater imaging sensors in the defense space. There are many ongoing defense programs globally where new classes of underwater vehicles are being adopted. Significant budgets are appropriated for this. The Echoscope's uniqueness of being a single sensor for multiple on the-sea activities presents a significant advantage over other technologies. It allows the consolidation of multiple sensors into a single power-efficient unit without compromising the various missions to be executed. We recently launched our next generation of ultrasmall form factor, 3-dimensional sonars, the NANO Gen Series, which expands the [ size ] of the imaging sonar market we can address large and small payloads. Our second key technology is for DAVD, the Diver Augmented Vision Display system. The DAVD provides a real-time information platform for diving operations, increasing safety and efficiency. The addressable market for the DAVD technology includes both the defense and commercial diving sectors. The untethered DAVD variant addresses the special forces type of divers, and we believe constitutes the largest addressable market for the technology. This variant is now going through approved Navy use assessment, and we are hopeful that this will be concluded in our second quarter 2026. Once approved, this paves the way for broader adoption of the DAVD technology by the military sizing market. Now turning to first quarter 2026 highlights relating to our core business, the Marine Technology business. This business sells its products and solutions worldwide and increased revenue in the first quarter 2026 by 47.4%. Key highlights include hardware sales increased by 31% and were $2.3 million compared to $1.7 million in the first quarter 2025 with a strong focus on Echoscope sales from the Asia region. Rental assets utilization improved, increasing rental revenue by 232.8% to approximately $0.7 million compared to approximately $0.2 million in the previous quarter and was a factor in the increase in gross profit margin for this business unit. Now turning to highlights relating to the Defense Engineering Services Business. In the first quarter 2026, our Defense Engineering Services Business revenue increased by 9.2%. This business has long-standing relationships with prime defense contractors and has served the defense market for over 48 years. It is reliant on receiving funding on the defense programs. Many defense programs are currently being funded through the use of continuing resolutions. In practical terms, this reduces the funding available for many programs and as such, this business has experienced delays in receiving contract awards. Although a federal budget is in place, line items appropriations are still pending and this continues to impact our Defense Engineering Services Business. Now turning to highlights relating to our Acoustics, Sensors and Materials business. This business sells its products and solutions worldwide and increased revenue in the first quarter 2026 by 20.7%. Gross profit margin was higher at 66.8% compared to 61.7%. We continue to be very pleased with the performance of this unit. Blair Cunningham, our President of Technology, who is the market maker for our technologies, will be updating you on progress and various milestones around our core technologies. Blair will also be available to answer any questions you have about our technologies. I will now turn the call over to Blair Cunningham.

Thank you, Annmarie, and good morning, everyone. Our core business focus is expanding market share for our disruptive underwater technologies, specifically our real-time 3D sonar systems and our DAVD technology. Today, I will keep my remarks brief and concentrate on the key milestones that will help us achieve this objective. As we have noted on previous earnings calls, the DAVD untethered variant represents the largest market opportunity for this technology. In the U.S. alone, there are approximately 14,000 divers across the government and defense community who are potential users of this DAVD untethered system. We successfully completed the hardening program for the DAVD untethered variant in fiscal year 2025. Based on this, we delivered the first batch of the new generation of DAVD untethered system to our Navy customer. This delivery has now placed the U.S. Navy in a position to commence the safety qualification for the product. We are, therefore, currently awaiting the authorization for Navy Use or ANU assessment to be completed. We are hopeful that this will be in place in our second quarter. ANU approval is an important milestone as it is a prerequisite for the broader adoption within the military untethered diving community. We are on schedule to perform DAVD site acceptance test training with a key European Navy in the second quarter, which we expect will serve as a precursor to broader technology adoption discussions. This naval diving group represents an influential European defense customer, and we are encouraged that they have already made an initial investment in DAVD Tethered Systems and are evaluating the DAVD technology platforms for wider fleet adoption. We continue to work on several defense programs, which are seeking to leverage DAVD as a critical life support and visualization component and which we believe are strong indicators that DAVD is now considered a mature technology. We continue to see strong global momentum around our NANO Gen Series, and we believe that in the third quarter, we will begin to see initial adoption of NANO through several defense-funded product improvement programs. The initial quantities will be a small batch for continued fleet assessment. NANO represents an important step forward for our business. Its ultracompact form factor built on the proven Echoscope technology lineage is capable of supporting multiple mission profiles with a single system. This positions it well for a market increasingly seeking to consolidate imaging sonar capabilities whilst also addressing the growing demand from foreign navies for multi-utility sensors capable of performing multiple independent tasks rather than relying on the traditional one sensor per task approach. The NANO technology further advances our business through its inherent AI readiness and ability to deliver deployable 3D data for AI workflows. This aligns well with the new generation of subsea AI platforms, which are smaller, lower powered and often operating in swarms to cover large areas quickly and efficiently. NANO's AI readiness goes beyond simply providing 3D perception data. It generates multiple real-time 3D data sets and imaging that can be tailored to specific AI tasks, enabling more efficient and accurate analysis and real-time decision-making. For example, an autonomous platform inspecting a seabed pipeline may need to detect structural damage, identify unsupported spans or burial and locate leaks. NANO can provide 3 separate AI-ready real-time data sets and 3D images optimized for each task without additional sensors or processing rather than relying on a single image that must first be processed and segmented to extract the required information. At the same time, NANO continues to provide a standard real-time imaging and 3D forward-looking obstacle avoidance. Another strong area of customer engagement for us is the protection of undersea cables and subsea infrastructure, which are increasingly at risk and are paramount for national connectivity and security. The Echoscope technology is uniquely positioned to support continuous monitoring of these critical assets through real-time 3D visualization while also enabling rapid damage assessment, repair support and protection, further reinforcing the multi-mission capability of our technology. By way of example, Japan relies on subsea cables for approximately 99% of the international communications, underscoring both the importance of these assets and the challenge of monitoring, protecting and rapidly repairing them. [ Savage ] increased heavy shipping traffic and natural disasters all present growing risks to this critical infrastructure. For fiscal year 2026, our goal is to achieve key milestones with our disruptive technologies, including expanded DAVD adoption in the global commercial market and by foreign navies and the deployment of our Echoscope technology, including NANO on next-generation autonomous AI-enabled platforms as a primary perception center for navigation, obstacle avoidance and target guidance. I will turn the call over to Annmarie, and I will be available to take your questions during the Q&A session of this call.

Thank you, Blair. Let me now turn the call over to our Interim CFO, Gayle Jardine, to take you through our financials for our first quarter 2026 before I provide my closing remarks. Gayle?

Thank you, Annmarie, and good morning, everyone. Let me take you through our first quarter 2026 financial results. Starting with revenue. In the first quarter 2026, we recorded total revenue of $6.7 million compared to $5.2 million in first quarter 2025, an increase of 28.8%. Our core business, the Marine Technology Business generated revenue of $3.4 million compared to $2.3 million, representing a 47.4% increase over first quarter 2025. Our Acoustic Sensors and Materials business recorded revenue of $1.6 million this period compared to $1.3 million in first quarter 2025, an increase of 20.7%. Our Defense Engineering Services Business generated revenue of $1.8 million compared to $1.6 million, representing a 9.2% increase over first quarter 2025. Moving on to gross profit and margin. In the first quarter 2026, we generated gross profit of $4.4 million compared to $3.4 million in the first quarter 2025. Consolidated gross margin was 65.1% versus 65.8% in the first quarter of 2025. This reduction reflects the composition of revenue derived from the Defense Engineering Services Business. In our Marine Technology Business, gross margin increased to 75.3% in first quarter 2026 compared to 73.1% in the prior period, largely reflecting the increase in rental sales, which grew by 232.8% over the first quarter of 2025. The Acoustic Sensors and Materials business increased gross margin to 66.8% in first quarter 2026 compared to 61.7% in first quarter 2025, reflecting the mix of type of sales. In our Defense Engineering Services Business, gross margin decreased to 44.1% in the first quarter 2026 versus 58.9% in the prior period, reflecting the change in the mix of engineering projects during first quarter of 2026. Now looking at our operating expenses. Total operating expenses for the first quarter 2026 increased by 21.3% to $3.4 million compared to $2.8 million in the first quarter of 2025. The main factor for the increase in total operating expenses was the weakening of the U.S. dollar against both the British pound and Danish kroner. This impacted on our costs when translated into dollars from the base currencies for reporting purposes. Our selling, general and administrative costs in the first quarter of 2026 totaled $2.8 million, an increase of 23.7% from $2.2 million in first quarter of 2025. This is reflecting a swing of $0.5 million from an exchange rate gain in the first quarter 2025 to an exchange rate expense in first quarter 2026. SG&A as a percentage of consolidated net revenue in first quarter 2026 was 41.0% compared to 42.7% in first quarter 2025. Operating income in first quarter this year was $1.0 million compared to $0.6 million in first quarter 2025, an increase of 52.6%. Operating margin was 15.1% compared to 12.7% in first quarter 2025, reflecting the increase in our consolidated net revenue in the first quarter. Pretax income in first quarter 2026 was $1.2 million compared to $0.9 million in first quarter 2025. Net income after taxes this period was $0.93 million or $0.08 per diluted share compared to $0.91 million, also $0.08 per diluted share in first quarter 2025. In this period, we provided for a tax expense of $0.3 million compared to $0.05 million in first quarter 2025. Moving now to our balance sheet. As of January 31, 2026, we had $30.5 million in cash and cash equivalents on hand and no debt. This represents an increase of $1.8 million from October 31, 2025, with the comparable figure was $28.7 million. Total assets increased by $1.1 million to $55.6 million in the first quarter of 2026. Now let me turn the call back over to Annmarie for her closing remarks.

Thank you, Gayle. I am very pleased with the increase in revenue in the first quarter 2026 and our overall financial results. I'm also pleased with the progress we're making against our key milestones for growing our business, both around our DAVD and Echoscope technologies. We believe real progress is being made in getting broader adoption of these technologies in the defense space. In terms of cash deployment, we will also continue to prosecute our M&A strategy in fiscal year 2026 and are continuing to build our M&A pipeline of opportunities. We are very keen to close another acquisition in fiscal year 2026. Through our strategy, we aim to pivot the revenue model of the Marine Technology Business towards a multiyear program-based adoption, supporting a multiple sale model over the life of major programs as we have started to see with our DAVD product line. We continue to work to create stable long-term shareholder value and execute against our strategy to grow the business, which is our single biggest priority as a group. To conclude, we would like to thank our shareholders for their continued support. We are now happy to answer any questions. Operator?

[Operator Instructions]. Our first question comes from the line of Brian Kinstlinger with Alliance Global Partners.

You've highlighted there are 14,000 divers in the United States. So with that said, can you size the total addressable market in dollar terms in the U.S. for the DAVD?

Brian, thank you very much for that question. Look, that's a difficult question actually, Brian, because then that is predicated on our seed price, what the Navy accepts as the purchase price for the item. So this is still being negotiated. So it's very difficult for us to provide a number at this stage. Although in the past, for the military diving system, we have been providing this at a price at USD 50,000 per unit. But as I said, we're always looking at how to sharpen our pencil on that, and it really depends on the customer accepting that price.

Got it. And then you highlighted and you've been for a bit, the unmanned underwater vehicle market is going through some exciting changes. What is the timing as to when this could be an opportunity for Coda from a revenue perspective? Are there any design wins to speak of for Coda? And when do you see production for UUVs possibly beginning?

Well, as Blair has reported to the market in first -- in our last earnings call and today, really for the NANO Gen Series, we're seeing some very near-term opportunities on the product improvement program, the so-called PIPs. So we would expect in third and fourth quarter to see small batches of NANO being acquired under some of these programs.

So those are replacements under existing vehicles? Is that what you're saying?

I wouldn't say replacement, but they're certainly going on some of these existing vehicles that are looking for more capabilities. And they are to expand on that a little bit more.

I would completely echo that point actually. So there's going to be a combination of new platforms that are coming online that are looking for 3D perception, which is where we really fulfill a significant gap in the market as well as, as Annmarie said, there's existing platforms through this PIP program where they're looking to enhance the fleet they have. And when they're adding new vehicles to that same fleet, then they're going to be adding this with this new capability. And that's what we are seeing, as Annmarie noted in the kind of third and fourth quarter, that's what we see starting to come in.

But Blair, maybe you could help us understand, do you need to be part of a design win for the new generation of vehicles? Are those conversations ongoing? And when is the targeted date for some of these vehicles? Are we a year out? Are we 2 years out?

It's an interesting question. I think, obviously, as people are designing new vehicles and platforms, generally, we'll be in the discussion realm in terms of what sensors they need upfront, and we're seeing that increasing and increasing at the moment. So that's encouraging that people are looking were not being added to the vehicle after all the decisions are made as an afterthought, we're now being built into the out front of the vehicles. And I think there's probably 2 or 3 platforms I can think of right now that are in design phase where that is going to be a consideration. In terms of the time line, I think the defense community, especially in Europe, is pivoting from a long duration design phase where perhaps they go through a cycle of 2, 3 years, and they're looking to try and say, well, let's buy smaller quantities and then we can develop those on in further years. So I believe that's going to benefit us from having some initial sales in the shorter period. So certainly, I expect to see that picking up beyond the fourth quarter.

Yes. And I guess just as a footnote, Brian, just to say the programs we are most excited about currently are those under the so-called PIP because they are more nearer-term opportunities. When there's a program at the design phase that can be multiyear program, right? So we're particularly excited about the PIP opportunities because they are already established programs looking to improve their capability.

Great. How does rising oil prices impact demand for your products? And are you seeing any changes this quickly on demand right now?

Well, not really because then it is really just think about development cycle is not that responsive. It's saying we're going to start this new development in price of oil. So not really. It's not as fluid as that. So we're not seeing any increased demand because of what's happening today.

Great. And then kind of a more difficult question, sorry. If I look in fiscal 2021, Marine Technology peaked at almost $16 million. Here we are 5 years later, Echoscope scales haven't gotten back to that level and maybe have even got back to fiscal '22 contribution. We know the impact of COVID, but the technology seems so differentiated and so value add. I'm curious your thoughts, what's holding back the product from scaling today? And how do you think about the long-term growth potential of this product?

Yes. So as I've said over and over, Brian, so the bread and butter for the business currently is in the commercial marine market. And that we do very well, and we are well known in the commercial offshore marine market. But I've always said for the business to grow because if you really want multiple recurring sales, we need to get on to these programs. Now these programs can take a very long time to mature. And I think that this is mainly a reflection of the gestation period for a lot of these programs. So again, I come back and I say, well, yes, if I think of this quarter's sales within the mix, there is a very, very strong bias towards Echoscope sales. So [ heartened ] and I continue to see the progress we're making on some of these defense programs. Some of these are closer than others. But again, our focus then is on the near-term opportunity for the PIP where we can start seeing a little bit of volume. In addition to that, really where we see with like the DAVD product line, where we're seeing pull-through sales of Echoscope from the DAVD. So the long and short is that I feel that the overriding barrier has been the time that it takes for some of these programs to mature. And we still have lots of opportunities that we are pursuing for these newly designed programs, but they get -- they can be quite long-winded. But we also have now within the mix closer to term or nearer-term opportunities on the some of these PIP programs.

[Operator Instructions]. Ladies and gentlemen, at this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Annmarie Gayle.

Thank you, operator. Thank you, everyone, for your attendance. Have a great day. Thank you.

Thank you. This concludes today's call. You may now disconnect your lines. Thank you for your participation.