Good morning, and welcome to Coda Octopus Group Third Quarter Fiscal Year 2023 Earnings Conference Call. My name is Sherry, and I will be your operator today. Before this call, Coda Octopus issued its financial results for the fiscal third quarter ended July 31, 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, it's Acting CFO, Gayle Jardine. And following remarks, we will open the call for questions. Before we begin, Jackie Keshner will -- from Gateway Group will make a brief introductory statement. Ms. Keshner, please proceed.

Thank you. Good morning, everyone, and welcome to Coda Octopus' third quarter fiscal year 2023 earnings conference call. Before management begins their formal remarks, we would like to remind everyone that some statements we're making today may be considered forward-looking statements under securities law, and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as 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 Forms 10-Q for the first, second and third quarters this fiscal year. 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. 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 third quarter 2023 earnings call. As a management, we have established over many years a good track record of running a profitable and sound business. In addition to remaining profitable in the third quarter, we have been profitable for 45 of the last 50 quarters and every year for the last 12 years. 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 underpins our growth strategy. We believe that the company has almost unrivaled potential with a unique product set at a time when the market will expand. Against these impressive metrics, management's core focus continues to be on organically growing the company. Despite disappointing results due to low order take in the third quarter, we remain optimistic about our business and the pipeline of opportunities we're pursuing and the strong momentum we're having in our core target market, the defense space. In addition, we have maintained a strong balance sheet and do not envisage the requirement for new capital to fund our growth plan. Our Marine Technology Business has two business models. These are outright sale of our technology and rental and associated services. The main reasons we have not met our third quarter financial goals are: firstly, although our Marine Technology Business continues to increase its quality of pipeline of opportunities, order conversions have slowed, principally outright sales from Asia and, in Europe, for rentals and associated services due to a fall in the number of offshore wind projects; secondly, our UK services business has also experienced significant delays in receiving orders because the priorities of its defense customers temporarily shifted…

Thank you, Annmarie, and good morning, everyone. Let me take you through our fiscal third quarter financial results. Starting with revenue. In the third quarter of 2023, we recorded total revenue of $4.9 million compared to $6.3 million in the third quarter last year, a reduction of 22%. The Marine Technology Business generated revenue of $2.9 million compared to $4 million, a 28.5% decrease from the prior-year quarter. As reported earlier by Annmarie, this decline in our consolidated revenue was a result of weak demand from strategic markets and geographies, such as Asia for outright sale and Europe for rentals, particularly in the offshore renewable sector. Our UK services arm was also affected by delays in receiving key orders due to its customers' focus being on land-based defense applications to support the Ukraine efforts and not the naval-based applications that apply to our business. Moving on to gross profit and margin. In the third quarter of 2023, we generated gross profit of $3.4 million compared to $4.6 million in the third quarter of fiscal 2022. Gross margin in the third quarter of 2023 was 68.8% versus 72.8% in the 2022 third quarter. In our Marine Technology Business, or Products Business, gross margin fell to 82.1% in the third quarter of 2023 compared to 86.7% in 2022 third quarter period, reflecting changes in the mix of sales and higher commission costs in the period. Our Marine Engineering Business gross margin increased to 50% this quarter versus 48.2% in the 2022 third quarter. Now moving to our operating expenses. Total operating expenses for the third quarter of 2023 fell slightly to $2.50 million compared to $2.54 million in the third quarter of 2022, driven by a slight reduction in both selling, general and administrative expenses and research and development expenses. SG&A remains…

Thank you, Gayle. As stated previously, although in the third quarter we are behind in our business plan, we continue to be profitable and are focused on executing our existing plan and growth strategy. We have significant momentum around our growth 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 system with the objective of galvanizing market adoption. We also have a near-term growth catalyst from the digital audio communication module, which has progressed in this quarter. If we're successful with this module, it will provide the company with diversification of revenue, which counterbalances the longest sales cycles of both the Echoscope and the DAVD and potentially adds a good stream of additional revenues for the company. We have a demonstrated track record of consistent profitability and we have a solid unleveraged 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 additional capital for the growth targets we have set out for the next two years. To conclude, our management remains committed to executing the company's growth strategy and delivering value for our shareholders. We're now happy to take your questions. Operator?

Thank you. [Operator Instructions] Our first question is from Brian Kinstlinger with Alliance Global Partners. Please proceed.

Hi, Annmarie. Thanks for taking my questions. First, looking at the 10-Q, you've been clear the revenue from Asia has been pressured for two consecutive quarters, and you highlighted the slower conversion of proposals to orders. Do you expect these trends to continue given the challenging economy in Asia or are there signs that this slower conversion is temporary?

Well, we've got a really strong customer base in those geographies. Well, everything that we see, these are delays, and the opportunities for the business have not gone away. So, we remain confident and we still see at the beginning of our Q4 revalidation requests coming in. So, I certainly believe that, in Q4, we'll get some of those orders and certainly, in Q1, we would expect some of these orders to also come through. So, overall, I think these are more delayed than they've gone away, Brian.

Great. And then, on the DAVD, the tethered side, sounds like you've got a lot of training. Is that ramped in command centers? And then, you highlighted at the end the interest in Japan and Europe. And then, you mentioned an inflection point in fiscal '24. First, is that beginning of the year? Do you think that's more towards the end of the year? And help us understand what that means in terms of a revenue range? Is it going to be much more significant, do you think? I'm just trying to understand what that inflection point really means.

Well, look, I mean, this year we set out to do something like $2 million of DAVD revenues. And I think that we have met that actually, and we've exceeded that a little bit. What I see, as you've rightly said, the tethered version is now fielded. This is now an item that's open for purchase by any command in the U.S. So that's very good news for the business. In addition to that, what we're seeing is that, as I mentioned, is that we've got one European -- major European offshore service provider having conducted rigorous trials, have confirmed that this could be game-changing for their organization and their intention to adopt the DAVD. We also have pre-adoption discussions in Japan. And later this month, we will be running training with a major Japanese customer that we think will adopt the DAVD in this calendar year. So, I think we have a swirl of -- or swell of good activities around the DAVD and we do expect that, that will be a significant part of our revenues in 2024. On the untethered version, I would expect that to be more the backend of 2024, because, as I pointed out earlier, I think that program has moved forward. I'm very, very excited about that because for the first time, Brian, we have a foreign Navy jointly funding the program and having their own requirements in the U.S. work package. And we've always said that one of the paths to adoption will be the U.S. Navy itself working with foreign navies on adoption, and we're seeing that coming through. So, I am really, really excited about the progress. I mean, in this quarter, we were funded to the tune of $750,000 of $1.8 million contract, and part of that is for eight evaluation systems, and the other part is for some customization work for the Navy. So, I'm really excited about the DAVD, the prospects for the business for the DAVD. And I think we're making really, really good progress because a number of things happened in this quarter. As I said, we've got a European -- a major European offshore service provider being happy about the trials. We also are doing pre-trial training in Japan. Also at the same time, demonstrating the capability to a wide breadth of Japanese customers. So, I feel really, really excited about where we are with the DAVD. And I do believe that the biggest opportunity we have with the DAVD, as I've always said, is going to be the untethered version. And therefore, what we are seeing now with that variant is that it's moving into its second evaluation phase, which is that they've bought evaluation systems and we're doing some customization work for them.

And quickly a follow up on that. How long do you think evaluating those eight units takes? Is that a couple of months? Is that a couple of quarters? How do you think about that?

This is why I said that I really think that we will really start seeing the impact of revenue impact, because we've started acquiring systems. I feel that's going to be more in the backend of 2024.

Got it. Okay. And then in terms of your revenue goals, you highlighted, obviously, this year you're behind plan. Your first year, I'm curious, do you think you're one year behind plan given all these catalysts? Are you a little bit more than that given the market conditions? And then, secondly, your full year outlook suggests the fourth quarter is much stronger than the third quarter. Is that because of these orders starting to convert? Or is it more what you highlighted the digital audio module is going to offset the weakness that you're seeing right now?

No, it's really, Brian, some of the delays. We expect orders from Asia to start coming in in the fourth quarter. As I said, we're seeing some activities on revalidation of our proposals. So that's all looking robust for the fourth quarter. Look, I do believe that in the fourth quarter our results overall in 2023 will be more in line with our 2022 results. And whilst we might not have grown in the way that we set out to grow, our growth strategy is still intact. I think that despite challenging market conditions, the business still demonstrates that it can be not only profitable, but I think that earnings will still be quite strong for the business. And I think that looking at the pipeline of opportunities that we see for the business, I have -- still feel excited about the opportunities, particularly for really where we are going to make a difference in terms of our growth strategy. Brian, let me be clear. It's the number of -- on the Echoscope side, it's the number of underwater vehicles that the technology is embedded into, and that's the defense side. So, to some extent, the budget there is a different budget from the commercial market where that's susceptible to the broader macroeconomic conditions. So, really, our goal is to grow the opportunities in the defense market where we can see repeat revenues. And we are certainly seeing a swell around our technology in the defense space. Absolutely, there is quite a lot of traction and momentum. We've got good quality business development activities around the Echoscope. And a lot of these activities, Brian, just to say, are closed-door events or invitations that we have received to come and demonstrate the technology on these new platforms. So, the technology is becoming well known in the defense space, and we are having success there. So, I think that's what's going to make a difference to our revenue in 2024. And therefore, this is really why I am still quite confident about our growth strategy and our plans to grow the business. And that's really our focus. Of course, I don't -- can't predict precisely what the market conditions will be. But what I'm telling you right now is that I'm excited about the business, the quality of activities that we're engaged in. They're very, very promising. The results we're having, very, very promising. So, I'm excited about next year.

Thanks. Just one point of clarification, and then that's all I've got. I just want to make sure I understand. We're halfway through the October quarter. Are you saying the conversions have started to already happen? Or you expect they're going to happen in the next six to seven weeks?

No, look, as I said, just to be clear, so what we did in year-to-date as a business, we've done something like $15 million. For the rest of the year, I think that we are going to be doing something like $5.5 million. So, more in line. Overall, our results look more to be in line with $21 million for 2023. So that's what we can see today for our last quarter.

Okay. Thank you.

[Operator Instructions] Our next question is from Walter Ramsley with Walrus Partners. Please proceed.

Oh, thank you. Got a couple of questions. Is the company investigating any strategic alternatives?

Strategic alternatives? Hi, Walter, what do you mean by strategic alternatives?

Well, I guess not. Okay. The fourth quarter is coming up, do you have any intention or have you begun to consider any way establishing reserves or doing any write-offs? The inventories are up to like $11 million now. So, anything that could happen there?

No, not at all. I mean, as you know, I mean, a lot of our inventory, the makeup of our inventory, Walter, has to do with our Echoscope technology, our DAVD technology. So, we don't see the use. And also our particular design for those systems, I don't see the use case for writing off inventory at all. None of the inventory we carry as such is obsolete inventory. So, we don't have any plans to make any reserve at all, because we think our inventory is current.

Okay. And just one last thing. If you could possibly elaborate, if you know the answer anyhow. It just seems preposterous to somebody on the outside that the U.S. Navy would allow its R&D operation to be hijacked by the Army to work on land-based systems. Can you explain what's going on there?

Well, no. I think that it's just where they are. I mean things where the fighting force I think is right now, I mean they're looking for aircraft, land-based defense, not naval defense in Ukraine. So, I think really that's pretty much what the situation is. They are not doing removing mines at this stage as you would have read in the news. They are pretty much now fighting using land-based defense systems. And this is the problem for our business that priorities -- they've not gone away, they've just shifted for the time being.

Well, okay, I'll accept that I guess, but it still sounds a little crazy. And I guess one more. Excluding the military, you did obviously point out offshore wind is a big problem and everybody knows that. But as far as a lot of the other vertical markets the company used to focus on at any rate, I mean, are they all under pressure as well? Or is this due to the interest rates you think? Or is it just the offshore wind?

Well, it's not really just the offshore wind, but if you look at the breakdown of our results, what I can say to you, year-to-date, I can say equipment sales have gone up by 3.9%. For example, reinforcement of the growth pillars that we have, that's all DAVD and the [indiscernible] solution where we have steam pressure or softening rentals which are down by 36.9%, software sale, which goes with our hardware, up by 13.4%, and again, services which are part of our rental package and some customization work, is down by 36.9%. So, really the softening that we are seeing or weakening in the market is around offshore wind. And I think a large part of the problem, Walter, is about some of the big European offshore developers. They've been delayed in entering the U.S. market and they're the ones with the expertise. And I think at some point these delays...

No, I understand all of that. I mean the wind is -- I mean I live in Cape Cod, so I know all about the offshore wind situation. But I was thinking more about the oil and gas mapping, salvage, dredging, bridge inspection, port security, all that stuff, is that down also?

Well, as I said, what we see in the numbers, which really is really about services softening, I'm not seeing -- equipment sale, year-to-date, have gone up. So, I think for applications such as construction in Japan might slow a little bit, but I think these are more projects being postponed than going away. Oil and gas, I mean, this year, we were up. I mean, we did -- in the previous year, 1.3% of our Marine Technology Business was in oil and gas. This year, it's 4.5%. So, it's a mixed picture. But I think the overriding weakening has been around offshore renewables and some sort of strategic geographies like Asia, we've experienced a slow rate of conversion. But what I can say, I don't necessarily see our inquiries level tapering off. We're quoting a good level in those markets. They're just slow in converting into firm orders.

Okay. That's very helpful, Annmarie. Thanks for answering the questions.

No problem, Walter.

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

Good morning, Annmarie.

Good morning, Bill.

So, my question tails with Walters. Would you mind providing us your initiative on the U.S. commercial market? Given the infrastructure bill, which targets bridge work, including oil and gas offshore, now that the commodities are approaching $90 a barrel domestically here, surely I would assume that your products there are needed.

Well, they might be needed, Walter -- sorry, Bill. But, as I said, we're responding to good level of inquiries globally, in the U.S. also. But it just takes time to convert some of these. I feel optimistic about the technology in the spaces that you have highlighted. And we have business development activities globally, but it does take time to convert opportunities into orders, especially when you are talking about a piece of equipment being $250,000, it's not the sale we make overnight. So that's really -- yes, so...

I think the question I was asking was, on the corporate level, do you have specific targeted sales personnel going after the U.S. market, which, at this time, is far advancing especially in the capital initiatives on the oil and gas and offshore markets here versus Europe?

We're always looking for good people, Bill, to join our team. We continue to build our team. Sales and marketing is a big, big part of our effort, but we have to find the right team to put in place. I mean, recently, we've just expanded our management team. We've just formed a new digitalization team that we've hired three people into the digitalization team for Coda Octopus. And we continue to look for the right business development people to join our business, but it has to be the right people. So, we do have sales people, and we are looking to expand the team, but we do have to find the right people to bring on board, and that's been through this year.

Well, I thank you for that, and I'm looking forward to seeing some growth. Thank you.

Thank you, Bill. Thank you.

Thank you. This will conclude the question-and-answer session. I would like to turn the call back over to Annmarie for some closing remarks.

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

Thank you so much. Thank you, everybody, for joining us today for Coda Octopus' conference call. You may now disconnect.