Good morning, and welcome to Coda Octopus Group's Second Quarter Fiscal Year 2023 Earnings Conference Call. My name is Christine, and I'll be your operator for today. Before this call, Coda Octopus issued its financial results for the fiscal second quarter ended April 30, 2023 including a press release, 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; and its CFO, Gayle Jardine. Following their remarks, we will open the call for questions. Before we begin, Jackie Keshner, from the Gateway Group will make a brief introductory statement. Ms. Keshner, please proceed.

Thank you. Good morning, everyone, and welcome to Coda Octopus' second quarter fiscal year 2023 earnings conference call. Before management begins their formal remarks, we would like to remind everyone that some statements we are making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures and our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances including, but not limited to risks and uncertainties identified in our Form 10-K and Form 10-Q for the second quarter. 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 link in the Investor Relations section of Coda Octopus' website. Now I will turn the call over to the company's Chair and CEO, Annmarie Gayle. Annmarie?

Thanks, Jackie, and good morning, everyone. Thank you for joining us for our second quarter 2023 earnings call. As a management, we have established over many years a good track record of running a profitable and sound business. We have also spent the last four years on the development of our new generation of underwater products and solutions, including our Echoscope PIPE and our Diver Augmented Vision Display system, DAVD, which underpin our growth strategy. Management's core focus is now on organically growing the business. Our current business target is growing the Marine Technology business this year by 22.2% to reach $18 million and growing the Services business by 6.7% to reach $8 million. We have a strong balance sheet and do not envisage the requirements for new capital to fund our growth. Although, at the end of this quarter, we are behind on our full year 2023 business plan financial goals, we continue to be laser focused on our growth strategy and executing against this. From Echoscope rental, and sales projects we're working on have unpredictably (ph) slowed, mainly in Asia, and therefore, in the second quarter, we did not achieve our revenue target for Echoscope solution. I'd now like to summarize our second quarter highlights. Within our current business strategy, the two pillars of growth for our company are our Echoscope real-time 3D imaging sonar, the new generation of Echoscope PIPE and our recently launched Diver Augmented Vision Display system, DAVD system, which is in adoption by the U.S. Navy. I will therefore focus my remarks on these two pillars. Turning firstly to the Echoscope. The underwater imaging sonar market is growing largely due to the new generation of underwater vehicles focused on bringing new capabilities to the subsea and underwater market. One of the key requirements for…

Thank you, Annmarie, and good morning, everyone. Let me take you through our fiscal second quarter financial results. Let's begin with revenue. In the second quarter of 2023, we recorded total revenue of $5.3 million compared to $5 million in the second quarter last year, an increase of 6.4%. The Marine Technology business generated revenue of $3.6 million, compared to $3.5 million last year second quarter, a 2.6% increase. We're excited about the mix of sales and as previously mentioned by Annmarie, in the second quarter, we sold $1 million of DAVD units, which is 50% of our DAVD revenue target for this financial year. Looking now at gross profit margin. In the second quarter of 2023, we generated gross profit of $3.6 million, compared to $3 million in the second quarter of fiscal 2022. Gross margin in the second quarter of 2023 was 68.3%, especially 60.8% in the same year ago period. In our Marine Technology business or product business, gross margin fell slightly to 75.3% in the second quarter of 2023 compared to 76.6% in the prior year second quarter, reflecting changes in the mix of sales. In the second quarter this year, we had more units of hardware in the mix of sales with less units of rentals and services. Our Marine Engineering business gross margin was 53.9% versus 23.9% in the prior year second quarter. In the prior period, there was a high concentration of revenues from a particular low margin project. Now moving to our operating expenses. Total operating expenses for the second quarter of 2023 increased 8.5% to $2.8 million, compared to $2.6 million in the second quarter of 2022, driven by a 10.3% increase in selling, general and administrative expenses, due to net increase and professional fees for services such as tax and…

Thank you, Gayle. As stated previously, although, in the second quarter, we are behind in our business plan, we are focused on executing our existing plan and growth strategy. We have significant momentum around our gross pillars and again our focus is converting these into tangible near term opportunities for the business. Management will continue its efforts to explore the rental and lease model for the DAVD with the objective of galvanizing market adoption. We also have a near term growth catalyst from the Digital Audio Communications Module. If we're successful with this module, it will provide the company with diversification of revenue which counterbalances the longer sales cycle of both the Echoscope and the DAVD and potentially as a good stream of additional revenues for the company. We have a demonstrated track record of consistent profitability, and we have a solid on leverage balance sheet with cash on hand and no debt, which gives us confidence in our outlook for CODA. Furthermore, with our solid balance sheet, we do not envisage needing growth capital for the growth targets we have set out for the next two years. We're now happy to take your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

Great. Thanks so much, and thank you for all the very detailed information on your markets in your end, and the exciting things going on. I wanted to start with your financial targets for fiscal '23, especially the $18 million for marine projects. This would mark a substantial increase in demand for the second half of the year, especially with only a modest contribution, if I heard you right, which is about $1 million more for the DAVD. So first, have you seen an improvement in the Asian market? And then, whether you have or have not. what does give you the confidence in the second half of the year? You're going to see much stronger results compared to the first half.

Brian, hi. It's Annmarie. Thank you very much for the question. Yes. We're really off plan, as I said and really, by this time, we really should have done around $9 million and that largely what we've seen really good level of inquiries, good level of proposal writings and good quality of opportunities that we are pursuing. However, what we've really seen is the slower pace of conversion from the Asian market, but nothing leads us to believe that the opportunities have gone away. We still think that they're valid opportunities for 2023. So whilst I believe that we are definitely off plan and we've got a lot of more to do to achieve that $18 million, I really think from what I am seeing for our business is that we still could be very close to the projections, the internal projections. Look, we haven't reforecasted because then, we have no reason to do so. As we said, what we're seeing is slower pace of conversion, but nothing indicating that the opportunities that we are pursuing have gone away. They've just slowed. And that's, not unusual, I mean, our sales cycle and quarterly fees are not necessarily linear, although within our projections, they are just for modeling purposes, linear. But, really, our focus is full year revenues and believe on a full year basis, we have no reason at this stage to reforecast that.

Okay. And then as it relates to your two underwater vehicles in trials with the Echoscope PIPE. Is CODA's technology the only one selected for those trial phases? And how long do you expect a trial phase might last?

Well, we don't know what’s on the defense vehicles that are being, what other senses are there. We only know that our sensor is part of that solution. And I think that the two programs that we worked on this quarter, I think that they are at their advanced stage and from information we have, if this program or trials are successful, they're likely to do a small batch in the beginning of Q1 next year, but it's subject of course to their trials being successful and they continue to execute at the pace that we're currently executing.

Great. In the last quarter, you talked about having four of these underwater vehicles in the U.S. and one outside the U.S. Maybe share any details you commented on two. Are the other three, have they gone away? Are they still in the pipeline? There's just no update on them. Just trying to understand how that pipeline may or may not have changed.

No. The pipeline is the same. One program is in Japan and four programs in the U.S. In fact, one program is a commercial opportunity. They have launched their new program. And I think that we are selling into that program. So I think they've done successful trials with their underwater vehicle. And I think that they are in the process of -- I think this will be for them, a rental model to -- I think that program is alive. Our technology is part of their solution and the other programs are ongoing. But in this quarter, I think what I tried or the business is trying to emphasize is that the programs that we supported are advancing and moving from just their development fees into customer trials phase and we're excited about that because it's a significant move forward under the program.

Got it. Thank you. And then my last question for now is, in the past, you've communicated -- recent past, you've communicated your plan to invest more in sales and marketing. I see SG&A moved up a little bit, but not a material amount, at least in my opinion. Can you talk about where you are with that piece of the plan and what you have left, if you have something to invest in sales and marketing?

Yeah. So we've been doing a lot of legwork in the territories that are important to us. So Europe is really, really important. Asia is really important and the U.S. market. So let's start with Asia. Really, what we are doing in Asia is expanding our network of agents and really what the business needs to do is to put boots on the ground to support agents and support our customers there. So the investment we're making for marketing is supporting our agents in the field with support staff in country. And that's the model that we think will be very effective for our customers there because what our customers want to know, especially for these programs that we're working on, especially for the DAVD, that there's a code of that can provide support in country. So we're in the process of moving support engineers into Japan to start with and China and South Korea. So that's the first leg. And of course, as I've mentioned, expanding our agents' network, which means that appointing more agents and we have done that in the last since this year. We have appointed a number of new agents and provided training. In fact, in June, we have quite a big team going out to China to do not just demonstrations, but extensive training and our senior hydrographic severe will be there for several weeks providing support and training to our agents. So we think that the best way for the countries where we don't speak the language, the best way to support our customers like expanding our agent network, ensure that our agents are free and (ph) in country support for the opportunities that are ongoing and also when a customer has a problem on the ground, that, who the people are at hand to see this is what you need to do or the system needs to go back to base. But we feel that this is the best model for us. So that's that in the U.S., we continue to attend a lot of significant events and we are although our marketing costs were down, I think that on a full year basis, it's just timing we will see marketing being much higher than last year because then we've got quite a lot of activities planned for the back end of the year. And in the U.S., we're still looking to recruit focused business development stuff, and that's ongoing. And similarly in Europe, we are looking for people, but they've got to be the right people with the right background. But I'm pleased to see that we're expanding our agents' network at the same time and providing quite a lot of support and training for ongoing opportunities.

Right. I would ask about the DAVD, but you provided so much good detail that I don't really have any questions about it. So thanks for all your time.

Thank you very much, Brian. Thank you.

[Operator Instructions] Our next question comes from the line of Walter Ramsley with R-Squared. Please proceed with your question.

Thank you. Hello, Annmarie. Thanks for all the information. I had a request, I guess, if you could elaborate a little further on the slow performance in Asia. You said the customers are dragging their feet a little bit. Is that because their own business is slowing down or what's provoking that?

Well, we don't have a lot of visibility as to the reason for the slow pace of conversion, either we're told that projects is just moved a little bit to the right it's not gone away. So, we don't have any reason to be concerned, wherein good line of communications with our agent network, with the opportunities that we're pursuing. And what we're told is that they've just moved to the right. So I can't give you more color as to the reason, but what I can say is that at this point, I am not alarmed because I believe it's just a question that the project is pushed out a little bit from the scheduled Q2 to later on in the year.

Okay. And as far as the Echoscopes and the military, I mean, my understanding is that the military around the world is really accelerating development of these underwater drones, essentially, is that the case or are they, kind of not moving as quickly as you would like either?

Well, it's -- look, the programs that we are really targeting for getting our vehicles embedded in, there's a lot of front end work, because then if you think of a vehicle being manufactured to the end user requirement, that will take a couple of years. The work that Coda Octopus needs to do is to be part of that front end. It's a little bit like Tesla. If Tesla is to bring out a new model or vehicle, all the specification for that model is locked down. And when that vehicle is then produced and supplied to the market, it's the same specification for that model, that's what we are doing. So the program might take a couple of years, but, really, that is simply what happens when you've got new generation of anything. There's a prototype phase, then there's trial phase, then there is production phase. We are doing a lot of prototype or front end work to ensure we are part of that solution. And this is what gives us the confidence that in the future, that we are going to capture more market share because we're certainly in a number of programs and it doesn't stop with the five programs that we talked about last year. Every year, this is our laser focus what are the new programs that Coda Octopus technology can get into and we're having lots of discussions. In fact, one of the things that we had in the U.S. last year and that now is now been launched to the market. And as I said, we have sold a handful of system last year that same program has come back to us for a different program that they're now developing for a different sonar within our series of sonar. So we're getting good repeat opportunities from -- first of all, during that front end work, we're a part of that solution, that solution works for them. They come back to CODA with a good and excellent track record and then we get on to another program. So I feel we're doing a lot of the right things and really, the impact of those right things, which are the front end work that we're doing to be part of that story where we'll start yielding the results, Walter, of next year and onwards. So that's really what we need to do. So [Multiple Speakers] and at the same time.

That sounds correct. Okay. And then just one last question, these new military programs in particular, when they do a bake off on a new program, what's your success rate? Do you win them all?

When we do a bake off, what do you mean? I'm not sure I understand what you mean?

Well, they put out a request for bid or whatever it is to get an underwater vision system for their new secret drone. And so you put in your proposal and do other companies put in proposals and do you have a competition and what's your success rate?

Well, I don't know if because the way it works, it's like a handful of I mean, most of these companies that are doing or producing underwater vehicle for defense market will be your prime defense contractors in the U.S., in Japan, in South Korea. And really, they really have a requirement already that says, and where we win is because they're looking for real-time 3D imaging sonar technology and the one program knows of the CODA solution and we're contacted. And also, where we were at the military continuum in Panama City. There was a huge swell around not just the DAVD system but the CODA Echoscope. So there's a lot of word-of-mouth that this is the only imaging sonar that will meet that brief for imaging in real-time 3D in zero visibility, water conditions. In fact, yesterday, I saw a paper that was -- or the Coda Octopus technology around and that paper was unequivocal that this is the most advanced sonar technology in the market and the most capable and we just saw that yesterday. And, so there is -- no it's not controversial that our technology is the most advanced. And I think that the small number of prime defense contractors that are operating in the space, we're kind of well known. So it's not usually a competition for the sensor that they're integrating in their vehicles. It usually starts with a dialogue that they're trying to do this within what the details they can provide. And then we answer a series of questions and then we provide them with data sheets and it goes on until they reach the point where they say, okay. We would like to buy a system for our fees, first fees. So we see very [Technical Difficulty] that we have good connections with the primes and that's not just in the U.S., in Japan, in South Korea, where for example, on a number of programs in South Korea already, and that we've started supplying via sonar into their new vessels. So it's a small community of users for real-time 3D imaging. And, unfortunately, I mean, unfortunately, rather, CODA is the show in town.

Yeah. Sounds great. Thanks for answering all those questions. Congratulations.

Thank you very much, Walter.

Our next question comes from the line of David Wright with Henry Investment Trust. Please proceed with your question.

Hey, Annmarie. Good morning. Thanks for having the call.

Good morning.

Question, can you tell us the status of the search for a permanent CFO and whether or not you have a particular geography in mind for that CFO would be stationed.

Thank you very much, David for your questions. Yes, that's ongoing. We've had a number of use (ph). Well, the position is opened, both in Edinburgh and in Orlando. And so we're having some good quality conversations at the moment, and we're hoping to make an appointment, in the next more number of months. So that's where we are. But we we're getting some good quality conversations and we're hoping, as I said before to make an appointment in a small number of months. But of course, we want to emphasize, we want to make sure the right candidate for Coda Octopus.

Okay. And just to go back into the script, I wanted to make sure I didn't -- I didn't misunderstand you. When you were speaking right after describing the DAVD adoption curve and going through, you got to untethered and talked about what was going on with untethered. And then I thought I heard you refer to something called the saturation diving community. Did I understand the word saturation correctly?

Yes, you did. Exactly. Those are new communities that coming out of the SWOD that we -- the SWOD event we attended in Papendrecht in the Netherlands and also at the Military Continuum in the U.S. We started conversations with different teams, including the deep diving saturation team. So these are new conversations that we've started and for around the DAVD.

Okay. If you have another minute, could you just kind of briefly describe what is saturation diving?

Well, I probably, it's just deeper diving where you dive in like a chamber environment. So it just means right at the moment, we're doing more on surface diving and we sometimes dive a little deeper at the dive belt, but the saturation diving is much deeper diving and that's where you would have things like the diving suits, and that's really where the technology would be embedded in the diving suits.

Okay. Well, thanks for the elaboration.

Simply deeper diving.

Right. I wasn't sure if it meant, lots and lots of divers saturating an area.

No.

So thanks for explaining. Very good. Well, continue the good luck going forward.

Thank you very much. Thank you, David. Thank you.

Thank you. We have reached the end of the question-and-answer session. Ms. Gayle, I would now like to turn the floor back over to you. Ms. Gayle, I would now like to turn the floor back over to you

Thank you for joining our call today and for your interest in our company. Have a great rest of your day.

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

Thank you.