Coda Octopus Group, Inc. (CODA) Q2 FY2026 Earnings Call Transcript & Summary

Good morning, and welcome to Coda Octopus Group's Second Quarter Fiscal 2026 Earnings Conference Call. My name is Robert, and I'll be your operator today. Earlier this morning, Coda Octopus issued its financial results for the second quarter ended April 30, 2026, including a press release and a copy of which will be furnished in the 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 and Director; Blair Cunningham; and Dillon King from their Investor Relations team. Following the 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 proceed.

Thank you, operator. Good morning, everyone, and welcome to Coda Octopus's Second Quarter Fiscal 2026 Earnings Conference Call. Before management begins their formal remarks, we would like to remind everyone that some statements made today may be considered forward-looking statements under U.S. securities laws. These statements are subject to 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, 2025, and Form 10-Q for the first and second quarters of our fiscal year 2026. You may get Coda Octopus's Securities and Exchange Commission filings free by visiting the SEC website at www.sec.gov. I would also like to remind everyone that this call is being recorded and will be made available for replay through the Investor Relations section of Coda Octopus's website. Finally, as a reminder, this is our second quarter fiscal 2026 reporting and all comparisons, unless explicitly stated otherwise, are with our second quarter fiscal 2025. With that, I will now 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 second quarter fiscal year 2026 Earnings Call. I believe we have delivered a solid set of results with improvements in gross profit margins net income and earnings per share, even though our consolidated net revenue decreased slightly by 1.6%. The geopolitical situation in Iran and the resulting instability across the Middle East have softened demand from customers in the region and parts of Asia. Despite this, our performance highlights the resilience of our revenue base and the strength of our financial fundamentals. I am very pleased with how the business has continued to perform in a challenging environment. Our business is made up of 3 discrete business operations: the Marine Technology Business, the Defense Engineering Services Businesses and our Acoustics Sensors and Materials Business units. Our Marine Technology business remains the core of our company, generating the majority of our revenue and accounting for 41.1% of our consolidated net revenue in the second quarter 2026, and it remains the strategic center piece of our long-term growth ambitions. The specific addressable markets that we operate in are the imaging sonar market and diving markets where the opportunity for technological disruption is significant. With our disruptive underwater technologies, we are positioning ourselves to be at the forefront. At the heart of this business are technologies that are redefining what is possible on the water we are effectively bringing the real-time data-rich experience of the smartphone era on the water, delivering instant visibility, intelligence and real-time decision-making capability to our users. Our Echoscope, DAVD and our digital audio communication system are not just products. They are building blocks of a new underwater operating paradigm. For example, the DAVD enables divers operators and mission-critical teams to work with unprecedented clarity, safety and efficiency. As these technologies evolve, they are opening new markets, expanding our addressable opportunities and setting the stage for the next chapter of our growth for our company. Growth is a process, not an event, and we are executing the strategies that position our company to deliver it consistently over time. Our Echoscope technology 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 markets. To deliver the level of growth that shareholders expect, we must continue expanding our market share in underwater imaging sensors within the defense sector, and we are directing efforts and resources toward that objective. Around the world, multiple defense programs have allocated budgets for the new classes of underwater vehicles, creating a significant long-term opportunity. Our Echoscope is well positioned for adoption in these programs. As a single sensor capable of supporting multiple undersea activities, it offers a clear advantage over traditional technologies by providing a multi application sensor in 1 power-efficient units without compromising mission performance. We recently introduced the NANO GEN series, our next generation of ultra miniaturized 3D sonar which expands the family of imaging sonar within our portfolio. NANO provides a purpose-built solution for highly compact platforms, opening new opportunities in the emerging light and autonomous systems. We mentioned in our first quarter earnings call that we anticipated a small number of NANO GEN solar to be included in a new vehicle program. We're very excited to report that during the quarter, we received an initial order for a small number of NANO GEN [ solar ] for integration into an established vehicle program. These systems provide a significant upgrade to this vehicle program, which will undergo extensive evaluation. If successful, we believe this opportunity could scale rapidly. For additional detail on our underwater technologies that at the center of our growth strategy, I would refer you to our previous earnings calls where we provided a comprehensive overview of these technologies and our approach to expanding market share. Now turning to second quarter 2026 highlights relating to our core business, the Marine Technology Business. This business sells its products and solutions globally with the Middle East and Asia, representing strategically important markets for our technology. The ongoing conflict in Iran and the resulting instability across the Middle East have reduced customer activity in the region and Asia. In addition, the effective closure of the Strait of Hormuz moves through which a significant share of global maritime shipping passes has disrupted commercial operations, further softening demand for our goods and services. This is the main factor which has resulted in this business segment reported revenue decreasing by 26.8% in our second quarter. Notable features of our core business revenue structure in second quarter '26 include hardware sales decreased by 46.9% and were $1.8 million in the second quarter 2026 compared to $3.3 million in the 2025 period. Rental assets utilization in the second quarter 2026 improved, increase in rental revenue by 351.1% to approximately $0.7 million compared to approximately $0.2 million in the previous quarter. This is a factor in the increase in gross profit margin in the second quarter for this business unit. Now turning to highlights relating to the Defense Engineering Services Business. In the second quarter 2026, our Defense Engineering Services Business revenue increased by 37.9%. This business has long-standing relationships with prime defense contractors and has served the defense market for over 48 years. Its performance is closely tied to funding on the defense programs. The U.K. arm of this business saw an increase in opportunities and delivered higher revenue during the quarter. In the United States, however, many defense programs continue to be funded on the continuing resolutions, which has delayed contract awards and consequently, the timing of revenue. Now turning to highlights related to our Acoustics Sensors and Materials Business. This business sells its products and solutions worldwide and increased revenue in the second quarter 2026 by 17.5%. 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. [ There ] 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 focus as a business is to increase our market share for our disruptive technologies. Our real-time 3D sonar and our DAVD technology. I will be brief today and focus on our key milestones to achieve these goals. For those who would like more information on our underwater technologies, I would refer you to our previous earnings call where we provided a comprehensive overview of these technologies and our approach to expanding market share. DAVD progress. A key milestone for the broader adoption of the DAVD in the military diving sector is the completion of the Approved Navy Use assessment. I'm pleased to confirm that the DAVD uncovered system has been approved for Navy use. This is a meaningful inflection point since the product is now available for acquisition by any command and supporting full fleet deployment of the 20 systems previously issued. The approval validates the system's operational suitability and paves the way for wider adoption across the naval diving community. Another important milestone has been the expansion of DAVD adoption beyond the United States. In support of this objective, we have successfully delivered training to our European Navy that recently acquired an initial number of systems with training now complete, we continue to engage closely with this influential naval customer and are encouraged by the positive feedback received to date. We remain optimistic about the opportunities to further expand the deployment and operational use of the DAVD within this Navy, establishing a strong foundation for future growth in the international military diving market. The DAVD program continues to expand, and we continue to work on several awards for 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 are still awaiting final U.S. Navy DAVD procurement budget approval, while the approval and associated procurement activity has been delayed beyond this quarter, we currently anticipate receiving the corresponding orders during the third quarter. We also received an initial order for a small number of NANO GEN Series sonar, our ultra miniaturized 3D sonar for an established vehicle program delivery. These initial systems offer a significant upgrade to the vehicle with full 3D perception visualization and vehicle control, 3D obstacle avoidance and will be used for extensive evaluation. If successful, we believe the opportunity for NANO on this vehicle program could grow quite quickly. We're pleased to see continued interest in our latest NANO GEN [ CV ] sonar with a growing number of credible vehicle integration opportunities emerging across both the U.S. and European defense market. These opportunities reflect increasing recognition of the unique capabilities offered by NANO, including its ultra compact form factor, real-time 3D perception and advanced autonomous navigation support. We remain encouraged by the level of engagement with prospective customers and partners and believe these opportunities have the potential to drive meaningful growth in the defense sector. For our fiscal year 2026, our main goal is to reach new milestones with our disruptive technologies, such as broader adoption of DAVD by foreign Navy and the Echoscope technology being adopted on some of the new autonomous AI-enabled platforms as a core perception sensor 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 second quarter 2026 before I provide my closing remarks. Gayle?

Thank you, Annmarie, and good morning, everyone. Let me take you through our second quarter 2026 financial results. Starting with revenue, in the second quarter 2026, we recorded total revenue of $6.9 million compared to $7.0 million in second quarter of 2025, a slight decrease of 1.6%. Our core business, the Marine Technology Business, generated revenue of $2.8 million compared to $3.9 million, representing a 26.8% decrease over second quarter 2025. Our Acoustic Sensors and Materials Business recorded revenue of $1.5 million in second quarter 2026 compared to $1.3 million in second quarter 2025, an increase of 17.5%. Our Defense Engineering Services Business generated revenue of $2.5 million compared to $1.8 million, representing a 37.9% increase over second quarter 2025. Moving on to gross profit and margin. In the second quarter of 2026, we generated gross profit of $4.6 million compared to $4.5 million in the second quarter of 2025. Consolidated gross margin was 66.3%, [indiscernible] 64.1% in the same quarter last year. This increase reflects the composition of our revenue. Notable factors include the increase in our rental revenue and reduction in net commission costs. In our Marine Technology Business, gross margin increased to 77.0% in second quarter 2026, compared to 67.7% in second quarter 2025, largely reflecting the increase in rental sales, which grew by 351.1% over the second quarter 2025. Concurrent with the reduction in commission expenses by 68.7% or $0.3 million due to less equipment sales via agents in Asia. Acoustics Sensors and Materials Business gross margin decreased to 53.7% in second quarter fiscal 2026 compared to 65.4% in the second quarter 2025, reflecting the mix of type of sales with an increase in our [ acoustic test ] environment product sales compared to second quarter 2025. Our Defense Engineering Services business gross margin increased to 62.0% in the second quarter 2026 versus 55.5% in the second quarter of 2025, reflecting a mix of engineering projects in the period presented. Now looking at our operating expenses. Total operating expenses for the second quarter 2026 increased by 18.3% to $2.8 million compared to $2.4 million in the second quarter 2025. The primary driver of this reduction was the movement of the U.S. dollar against the British pound and Danish krone, which lowered reported costs when translated into U.S. dollars for financial reporting. Selling, general and administrative expenses totaled $2.1 million, a 21.4% decrease from $2.7 million in the prior quarter. This improvement reflects a favorable $0.4 million swing from an exchange rate expense in the second quarter 2025 to exchange rate gain in second quarter 2026, as well as lower employee-related costs due to reduced headcount. SG&A represented 30.9% of consolidated net revenue in the second quarter of 2026 compared to 38.8% in second quarter 2025. Operating income in second quarter 2026 was $1.8 million compared to $1.1 million in second quarter 2025, an increase of 64.8%. Operating margin was 26.0% compared to 15.5% in second quarter 2025, reflecting the decrease in our SG&A and operating expenses in the second quarter. Pretax income in second quarter 2026 was $2.1 million compared to $1.3 million in second quarter 2025. Net income after taxes in second quarter 2026 was $1.7 million or $0.15 per diluted share compared to $0.9 million or $0.08 per diluted share in second quarter 2025. In second quarter 2026, we provided for a tax expense of $0.44 million compared to $0.36 million in second quarter of 2025. Moving now to our balance sheet. As of April 30, 2026, with $30.6 million in cash and cash equivalents on hand and no debt. This represents an increase of $1.9 million from October 31, 2025, with a comparable figure was $28.7 million. Total assets increased by $2.8 million to $67.3 million in the second quarter of 2026. That completes my financial summary. So let me turn the call back over to Annmarie for her closing remarks. Thank you.

Thank you, Gayle. Despite the challenge in geopolitical environment, which has affected parts of our customer base, particularly in the Middle East and Asia, I am very pleased with our second quarter financial performance and importantly, the resilience and diversification reflected in our revenue structure. I'm also encouraged by the progress we're making against our key milestones for expanding the business, especially around our DAVD and Echoscope technologies. Most notably, the Navy's approval of the DAVD [ on tape ] system as an Approved for Navy Use item marks a pivotal milestone for the DAVD, one 1 of our core technology offerings that anchor our long-term growth ambition. The recent orders for our NANO GEN sonars, which will upgrade an existing vehicle programs are another positive indicator of our technology traction. If post-purchase integration and evaluations proceed as expected, this opportunity has the potential to scale quickly. We believe meaningful progress is being made towards broader adoption of these technologies within the defense sector. On capital deployment, we will continue to advance our M&A strategy in fiscal year 2026 and are actively building and progressing a pipeline of opportunities. We remain keen to close a transaction this fiscal year while maintaining a disciplined approach to due diligence and strategic fit. Through this strategy, we aim to pipe the revenue model of the marine technology business toward multiyear program-based adoption, supporting a recurring multisale model over the life of major programs as we are beginning to see with the DAVD product line. We remain focused on creating stable long-term shareholder value and executing against our growth strategy, which continues to be our highest priority as a group. To conclude, we thank our shareholders for their continued support. We are now ready to take your questions. Operator?

[Operator Instructions] First question comes from Brian Kinstlinger with Alliance Global Partners.

I have a bunch. The first one with the authorization for Navy Use. How do you see demand for the [indiscernible] DAVD ramping in the second half of the year and fiscal '27 maybe some kind of range of units or revenue? And is there a contract in place like a BPA or an IDIQ, where the Navy can purchase? And if not, what is needed for the procurement process, now that the authorizations in place.

Look, the approval of the [indiscernible] system for use as a Navy Use item is really a meaningful inflection point for the DAVID technology because, as you know, without this approval in place, procurement could not go ahead for the [indiscernible] variant. It's difficult to predict the exact timing, but we do know that David funding is included in this fiscal year's budget, and we expect to see some orders in our third quarter. What we don't know yet is the mix of configurations where the commands will procure [indiscernible] or on [indiscernible] variance. Importantly, also, the 20 on [indiscernible] systems previously purchased can now be allocated and fielded following Navy Use approval, which is a very important step. Once divers begin using the system operationally, we expect the real-world deployment will help to drive further demand for the DAVD on [indiscernible] system in this very, very important market sector for our technology. We do not have an IDIQ in place at the moment, and we do not anticipate on for the DAVD on [indiscernible] system, these orders were placed directly with our company, and we believe it will be the same going forward.

That's helpful. Now you described slower demand due to the Iran conflict in certain regions, has that pressure continued into the current quarter? And once a resolution is in place, maybe we have one today, maybe we don't, how quickly do you expect demand in these regions might recover?

First of all, it's difficult for anyone to predict the duration of the geopolitical instability in the region. What we can see is that we're staying very, very close to our customers. And one thing is clear about this, Brian, it's not structural. It's a timing issue. What we see the fundamentals are there for the projects. It's just timing and security. For example, in the UAE, a lot of offshore projects are on hold because of the safety aspect. So we believe as soon as the pressure is alleviated, these projects are live projects and we would hope that they would resume swiftly.

Great. And you highlighted the initial orders for the NANO GEN, Echoscope, which sounds like a retrofit to a current underwater [indiscernible] vehicle type. How long do you think that a valuation process might be? And then once the evaluation is complete, are there other steps necessary for full integration or full retrofit? How many underwater vehicles of these are sold a year also?

How -- sorry, what was your last question? I'm curious.

What -- how many vehicles are in production already right now? And how many maybe are sold annually?

So in terms of the NANO GEN sonars that we see it's really too early to say the annual volume because the customer is still defining the final configuration of the platform, what we can see is that if the valuation is successful and the system is written into the vehicle specification. For us, it becomes a recurring production opportunity aligned with the platform's development cycle. And more importantly, for us, why we're excited. It [indiscernible] with our broader strategy to grow the number of underwater vehicle programs which include our real-time 3D volumetric imaging sonar. Now why this program is exciting, it is because it's already an established program. And what this is an upgrade of the existing technology on the platform.

Right. But can you tell us how many of these actual underwater vehicles are potential to be retrofit and/or how many are sold annually new?

Well, at this stage, I really -- cannot say really. I really cannot say. But needless to say that we would think this would be meaningful for us on a year-on-year basis. This is a long-term opportunity of fitting out these vehicles and we believe year-on-year, it would be meaningful for us if we pass the valuation phase.

Okay. And then can you talk about progress in other next-generation underwater [ core ] vehicles? We've talked about this for a while. Maybe how many OEMs you're in discussions with. It sounds like Blair said you hope to get something announced by the end of the year. What stages are you in, in discussions with these OEMs?

Well, Blair can talk a little bit more about the evaluation process. But as you know, as soon as there is an active ongoing conflict that affects the world, so spending priorities and pace always shift when those dynamics are ongoing. What was yesterday's priority is not today's priority. So really, what we've seen is a slowing of pace somewhat because the current priorities would be to deal with the ongoing conflicts, and we see less pace on procurement. But as soon as we believe that as soon as the issue is resolved with the conflict then we could see some more pace ongoing. Blair, can you talk about a little bit about some of the programs and the process involved please?

Yes, sure. Yes, sure. Absolutely. Thanks again, Brian, for the question. So I think they really fall into 2 camps, really is one -- one is generally customer instigated such as the one we just announced the sale of the initial orders for where the customer who we've been working with for some time as really wanted to embed the Echoscope technology into their vehicles. So these are new vehicles that are being procured for an existing program, as Annmarie stated. And this is really at the start, this is why it's exciting for us. This is really at the start, we're providing basic perception, obstacle avoidance and navigation control, but they're already knowing the capabilities of the Echoscope as they been involved with us for some years now, understand where they can take the capabilities of their vehicle. So that's one example. The other -- I would say there's another 3 or 4 examples where the NANO technology is providing different capabilities to each vehicle. And I think that's one of the unique things is we're not just do mapping. We don't just do forward-looking obstacle or [indiscernible] we can perform all of these tasks. So there's another 3 vehicle companies who are looking to integrate our sensor. And they are at various stages of maturity. But as Annmarie noted, we can plan the best. We're generally quite aggressive when we get involved with these types of opportunities. We want to try and see these move quickly and try and support the end customer as much as we can. However, again, they have their own priorities as well. So sometimes, things could take a little while to be able to, a, get in the water and have the necessary technical trials that are required to be able to understand how well the technology fits between the 2. But I would say -- 2 or 3 of those are fairly advanced stages, which is positive. And then I think the second camp for underwater vehicles are ones where we have had a collaborative discussion with a manufacturer not because they're necessarily involved in direct programs, but where we can see and they can see the benefit of joining the 2 technologies together. So that's almost like an internally funded opportunity for us to take those forward and to be able to provide our capability on their platform to some extent. So some are customer-driven and some are technology manufacturer driven.

That was really helpful, Blair. And are you going to generate the revenue this current quarter from those NANO GEN series deliveries? I think there are a couple of hundred thousand dollars a pop. Is that a this quarter event?

So can I just answer so for the initial order that we received, these are clearly not material in terms of our revenue contribution in this quarter. The significance here isn't the initial volume. It's the opportunity ahead if the post-integration and evaluation proceed as planned. So in the quarter, we did deliver the initial systems to the customer. So that revenue is included in our quarter's revenue.

I see. Two more quick ones. You highlighted SG&A, it's the lowest it's been since April '24. Can you break down maybe compared to the first quarter? How much was lower employee cost that you mentioned? How much was foreign exchange? And did you say there was a onetime gain as well?

Gayle did you want to take that question? Gayle?

We'll come back to that one in a second, maybe she's muted we'll get that.

My last question is on M&A, which you spoke pretty clearly about. My one question would be -- are there a couple of companies you're evaluating in these discussions? Do you have identified a target? I just want to kind of understand where you are in this process?

Right. Yes. We do have 2 active opportunities that we're going through [indiscernible] at the moment -- sorry, sorry. So we do have 2 active opportunities that we are going through due diligence at the moment, Brian. So yes, we're quite close in terms of our process, but it's still ongoing.

Can you hear me now?

I can.

Sorry. [indiscernible], apologies for that slight delay. Yes, I can deal with the question for you, Brian, do you want us to understand the SG&A reduction? Correct?

That's right.

So there's 3 main elements in SG&A. We have an exchange rate swing of about $400,000 between Q2 last year and Q2 this year which is basically due to the exchange rate markets. We have less spend on our stock-based compensation, and we have lower spend on wages and salaries because we've a slightly lower head count of in the region of, I think, it's about 100,000, something like that. So other than that, everything else is fairly similar that's the main drivers. You also asked about the gain that's through other income. We had a sale of a vessel that we made a significant gain on in the quarter as well, but that's through the other income line, not through the SG&A line.

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 for your participation today, and have a great day. Thank you.

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