Good morning. Welcome to Coda Octopus Group's 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 fiscal year 2023 ended October 31, 2023, 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, and its CFO, John Price. Following their remarks, we will open the call for questions. Before we begin, I would like to hand it over to Jackie Keshner from Gateway Group, who'll make a brief introductory statement. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Coda Octopus' 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 of 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 fiscal 2023 earnings call. Our results in fiscal 2023 continue to reflect the impact of various macroeconomic and marine industry headwinds. These have negatively impacted our revenue, and therefore, overall financial performance in the fiscal 2023. Notwithstanding, I believe in fiscal 2023, we continued to make progress in our overall goals of investing in our growth acceleration strategy. A quick rundown of factors affecting the marine industry and thus our business. Fiscal 2023 saw the cancellation and shelving of several major offshore renewable projects that many of our industry peers and we ourselves had anticipated. These projects are reported to be unviable due to inflation, higher interest rates and supply chain problems. It is reported that some of these contracts oblige the developers to sell electricity at $108 per megawatt hour, but developers require this price to be $178 per megawatt hour for the development to be viable. Many of these projects were therefore either canceled or postponed while the contract majors negotiate price resets. Some of the contract majors include Ørsted, Vattenfall, Siemens and bp-Equinor. This means that many offshore developments did not go forward in fiscal year 2023, resulting in low demand for our Echoscope solution. This has impacted our rental revenues. Rentals are an important sector of our business, and revenues in this sector fell by 31.4% contrary to our business plan goals. In addition, the unleashing of the pent-up demand following the removal of COVID restrictions in China, which we and many industry peers had anticipated, did not occur in the fiscal year 2023. This has impacted on our sales from Asia, a strategic market for us. Sales from Asia fell by 19.5% as our customers in that region were also affected by…

Thank you, Annmarie, and good morning, everyone. Before I take you through the fiscal year 2023 results, I just wanted to say that I'm very pleased to have joined the company and excited to be on board to work with you and the company to drive our management goals and prospects forward to the next level of performance. Let me take you through our full year 2023 financial results. Starting with revenue, in fiscal year 2023, we recorded total revenue of $19.4 million compared to $22.2 million in the fiscal year 2022, a reduction of 12.9%. The Marine Technology Business generated revenue of $12.1 million compared to $14.7 million, a 17.7% decrease from the prior fiscal year 2022. 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 service arm was also affected by delays in receiving key orders due to our 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 fiscal year 2023, we generated gross profit of $13.0 million compared to $15.2 million in fiscal year 2022. Gross margin was 67.3% versus 68.3% in the fiscal year 2022. In our Marine Technology Business, or Products Business, gross margin fell to 76.7% in fiscal year 2023 compared to 80% in 2022, reflecting changes in the mix of sales and higher commission costs in the period. Our Marine Engineering Business gross margin increased to 51.6% in fiscal year 2023 versus 45.4% in 2022, again reflecting the mix in sales. Now, moving on to operating expenses. Total operating expenses for…

Thank you, John. In closing, I would like to reiterate that we have a demonstrated track record over many years of running a solid profitable business with a strong balance sheet. We continue to believe in our growth strategy, and although our results were disappointing for the factors discussed, we are confident that we are making progress to accelerate growth through increased adoption of our technology in pivotal markets. We're pleased with the progress we're making in increasing the number of underwater vehicle programs, which are including: the Echoscope PIPE, the progress in making a comprehensive solution for ship hull's scanning and mapping, a sizable global market opportunity if our solution is effective for the problem to be solved; the progress in achieving adoption of the DAVD tethered system outside of the U.S. Navy and we believe we will have adopted in fiscal year 2024; the progress in advancing at the various stages of the DAVD untethered system customization program, the biggest market opportunity for the DAVD solution; the progress in adding a new exciting growth pillar, our digital audio communication system. We continue to build our growth strategy around our Echoscope PIPE imaging sonar series, our DAVD and derivative of our DAVD technology. In addition, in fiscal year 2024, we will expand our growth strategy to include M&A activities with the goal of acquiring complementary value-accretive technologies into our portfolio. In relation to our growth pillars, the markets that are pivotal for the Marine Technology Business growth acceleration program are underwater imaging sensor market, defense underwater vehicles market, offshore renewables, underwater construction, ship hull scanning and mapping, diving solutions market, including the diving sensor market. We will focus our efforts on business development in these areas in fiscal year 2024. To conclude, we would like to thank our shareholders for their continued support and reassure them that management understands that its business imperatives are the acceleration of growth and we remain steadfast on achieving this 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.

Great, thanks. Hi, Annmarie. So, interest rates, inflation and supply chain have been challenges for a good long time to all markets. Revenue for marine products during the fourth quarter, your core business, was abnormally low compared to the last several quarters. So, I guess I'm curious what you think was different about this quarter than the previous several quarters that caused such a shortfall.

Thank you, Brian. Well, it's all the things that we've said really. Our revenues are predicated on certain projects going forward. So, underwater construction, really key markets for us. Offshore renewables, key markets for us. What we saw is either projects being really postponed or being shelved in key markets. So, overall, order take was down in the fourth quarter, and that continued throughout the year. Either we were having significant delays because the projects are still under discussion, Brian, but then eventually get postponed, and it's all because of these factors. I mean, if you look at the key numbers coming out of offshore renewables, when the contract price is negotiated, the contractors were offering $108 for the electricity. Now, for that to be viable, they need $178. And this is all because of inflation and higher interest rates. So, those factors are likely to impact on the business and have impacted on our business in the period.

A quick follow-up on that. Is it getting worse? Because if you look at the trend, your peak was the January quarter, then it went down a little bit in the April quarter, then it went down precipitously in the July and even much more so in October. So, is it that you had projects at the beginning of the year and, when they complete, you don't have a replacement, or is it actually getting worse, the order intake?

Well, as I said, in the fourth quarter what we saw a lot of projects stalling, literally stalling, and didn't go forward for the reasons we have discussed. So, I think this year was exceptional and I really think that offshore renewables and energy market generally were impacted by four factors we discussed earlier. So, order take was much lower for the Marine Technology Business.

So, based on the conversations you're having with your customers, how are renegotiations of economics going? And do you see a rebound in demand in sight, or is there too much uncertainty in the near term?

Well, what we're seeing in the first quarter, we're seeing sort of increased inquiries for rentals and contracting for rentals. We have a number of rental projects that are ongoing, several projects in the Middle East around on the sea cables and breakwater. Also, in Taiwan, where we're involved in offshore renewables in three different projects there. And again, in Europe, involved in a number of projects, rental projects, around cable repair and offshore cable placement in the Baltic Sea. So, we're certainly seeing much more inquiries, for example, and also getting some orders around rentals, which is crucial for our business. So, there are positive signs. But I think, for example, offshore renewable sector, they're still renegotiating price resets, and I have no visibility on when those contracts will be completed, but those are critical projects for our business.

Right. Lastly, you highlighted your M&A strategy. Where are you in the evaluation of targets? Is it the very early stages? With your -- you just hired, obviously, your new CFO, congratulations. Are you in advanced stages? Just maybe take us through where you are in this journey.

No, we're really just at the really outset of our strategy. Of course, we always have targets in mind, but we have no ongoing discussions with targets.

Okay. Thank you very much.

Thank you, Brian. Thank you.

Our next question is from Walter Ramsley with Walrus Partners. Please proceed.

Thank you. Excuse me. This question is for John. In the October quarter, the equity on the books declined by $1.4 million. Was that due to some write-offs or some adjustment [Technical Difficulty].

John?

Annmarie, can you hear me? Sorry.

I can hear you.

Walter, I didn't hear your question. Could you repeat that?

Sure. The shareholder equity declined by $1.4 million in the October quarter. Was that caused at least in part by some write-offs or adjustments to the reserve accounts?

No, that's not, no. It's primarily going to be related to the impact from the P&L. We also have stock-based compensation that rolls through our equity statement on a quarter-to-quarter basis.

Okay. Thank you. And then just one other question. The R&D, I think you indicated that that amount of money of spending is going to decline. So, I get that part. Is the R&D tax credit, is that going to be affected in the upcoming year? I'm not sure what the situation is with the federal tax code there.

Walter, just on the R&D, just to be careful about decline, I think that what we're saying, we're keeping a lid on R&D expenses, so they'll probably be in-line with our previous year, meaning we're not investing more over and above our run rate on R&D. R&D is a permanent feature of our business because we are a solutions business. So, in order to maintain our lead, also support our customers using our technology in the field, it's an ongoing. So, we think R&D will be in-line with previous years. And that's the biggest statement we're making about R&D, not that we expect it to fall. I just want to clarify that.

Okay. And the R&D credit that is part of the U.S. tax code, is that going to change or is that going to be the same?

The R&D credits that we have are in relation to our foreign entity, our Scottish business, and not our U.S. businesses actually.

Oh, I see. Okay. Well, thanks again. Appreciate your answering the questions.

Thank you, Walter. Thank you very much.

[Operator Instructions] Our next question is from Fernando Canto, Private Investor. Please proceed.

Good morning, everybody. I think in relation to the previous question, the reduction in the stockholder equity, I think it was due to the loss that the company had in the fourth quarter, right?

The other element to think about here is the FX rate. And so, we've seen that the FX actually positive over the course of -- excuse me, '23. There's really no write-offs of inventory or accounts receivable that run through equity. That's just going to be a component of overall net income.

Right. But for operation, did you lose money on the fourth quarter?

No. And there were no material write-offs over the course of the year.

Okay. Now, I noticed you have about $24 million worth of cash, and the stock is getting very close to the book value. Are you considering buying some shares in the market now that it's getting so close to the book value?

Can I take that, Fernando? So, I mean, as you know, we do have the stock liquidity problem. So, buying back shares in the market will be very, very problematic for our liquidity profile. We are always discussing different options for returning value to shareholders. And that's one of the things we discuss on an ongoing basis with our Board. But I do believe that there's a fundamental problem with a share buyback program, because it takes out further stock out of the market, which is already thinly traded because of the unavailability of stock in the market.

All right. Now you almost complete the first quarter. How does the first quarter looks like?

Well, I think -- Fernando, thanks for that question again. As I said, one of the areas where we were hit last year, we saw weak demand in key strategic markets, such as offshore renewables. What I have just said that, in the first quarter, we saw increased contracting, that means order take, also the number of projects, rental projects that are ongoing, we've seen an increase in those. So, they're very, very positive signs, and I hope we can sustain those signs throughout the year. So, I think I see rentals in the core market, and let me repeat what they are, offshore renewables and underwater construction, we're really seeing good traction there at the moment. Also, other things that are not contracted but really which I think is exciting for business, for example, we have one major offshore service provider who is developing an island in the Middle East. On that project alone, we're quoting six Echoscopes outright sale with ongoing support. That is a first, because in the commercial market, the profile of sale is typically a maximum of two systems. So, we haven't got the order yet, but I'm saying I think we have some good exciting conversations. We see underwater construction coming back. We see some rentals ongoing. Also, one of the things I am personally excited about, and I know it's taken longer than we all wanted, but having adoption of the DAVD outside of the U.S. Navy, and I have a high level of confidence, in 2024, we will see this. Last year, what we did, we had significant business development activities, lots of one-to-one trials. All of those trials were successful. It's now a process for these customers to think about how they're going to adopt the DAVD, getting their own infrastructure…

All right. But in other words, we can expect the first quarter to be more or less similar to the first quarter of last year, right? And then going forward, we will see some light at the end of the tunnel, right?

Well, I'd like to correct what I said, that I saw really good signs of rentals rebounding in the first quarter. And we've got ongoing projects on rentals. So, I don't know where we will be in relation to the previous first quarter. So, I've not commented on that.

All right. Thank you very much, Annmarie.

You're welcome.

Our next question is from Richard Deutsch with Sutter Securities. Please proceed.

Yes, thank you for taking my call. You've got such a deep, long-term development program. There's a lot to look at. But my first question would be, what is left to do to commercialize the untethered system? And if the untethered system is commercialized, is there any reason for anybody to still use the tethered system? I'd like to differentiate between the two. Thank you.

Thanks for that question. Well, the way to think about the customization work that is ongoing, it's more a workflow process than anything else. So, the workflow for a diver who is, let's call it, a special force diver who is doing something a stealth operation, the modus operandi or the workflow for that diving setup is completely different from the surface diving, which is the tethered system, where you've got a topside involved in the equation. So, the untethered system, it's really about for a different workflow, then we have to get the product certified for that particular application, which is ongoing. So it's not -- I wouldn't think about it as commercialization. The product is taking our base product and then customizing that for their particular application. Really, that's what the program. And then also what they call hardening. So, when they dive the system, they've got eight systems and they're diving these in anger. And when they dive, then they might come back to us and say, "We don't think the IR lights were effective here. Can you look at a different IR light, because we couldn't see there." So, these are the things that we are -- they're diving, coming back with feedback and then we are making changes based on their experience. So, the expectation is that once they come to the end of that evaluation process, because we're working hand in hand with them, we would expect by that time all of the things they want to see are done and then they can move on to production system. So, that's that process. And as I said, the tethered system is all about a different type of diving where you have a topside involved.

Okay. So, is the untethered system then basically completed in terms of its capabilities, and you're just going through, as you said, the hardening and the certifications? Or is there still more technical work to be done before it is ready for commercialization?

It's largely done, but for the 3D data side, which is also new for that market, then there are certain hardware developments for -- it's a processing box more than anything else to do with the data communication and transfer. There is a part of that development, but we are well along the way with that. I would say that in terms of the products, it's almost fully formed, but we still have about 5% to 6% development work, and as I said, a feedback program. So, we would expect in this year to complete all of the requirements for that market.

And finally on that sector, what is the range of the untethered system?

Well, the depth reaching for the system is 330 feet, 100 meters for the tethered system.

So, the untethered is 100 meters?

100 meters or 330 feet.

Okay. Thank you. Thank you very much.

You're welcome.

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

Good morning, Annmarie, and welcome, John.

Good morning, Bill.

Thank you. Appreciate it. Good morning.

Annmarie, you spoke a lot about the technologies, international activity. What is currently happening here in the North American market?

Well, if you look at our growth pillars really, the biggest, and if you look at our revenues also, you will see actually revenues from North America for equipment sale was higher than Europe actually. So, what's happening in North America, it's mainly the defense underwater vehicle programs that we have there. So, it's a lot of the applications that we have in North America, it's around underwater vehicles, and of course the DAVD solution.

Any activity within the infrastructure market of North America?

Yes, we're seeing -- I mean, in terms of infrastructure, as you call, laying cables on the seabed, et cetera, we have quite a lot of ongoing business activities. Look, make no mistake, when the offshore renewable markets, I mean, the U.S. has the biggest budget for energy transition and some of that is going to get spent. When that all happens, the Echoscope is at the center of that, because the Europeans are coming to the U.S. with -- they're the ones with the experience, and they all have used the Echoscope on their projects in Europe without exception. So, we feel a high level of confidence in the -- that the offshore renewable markets in North America is significant for the business and also planned within our growth strategy. We also have in fact one U.S. operator who is on the contract, and I cannot name that operator, in the last quarter they bought solutions for that market from us, and they're Americans. They're already aware that our solution is key for offshore renewables, and they are investing in the technology. So, I feel very much that's a very big market for us. We do need to see the contractual hurdles that the Europeans have removed and I think they're negotiating these. And we know that there are ongoing discussions on price resets. But I feel definitely excited about once those barriers are removed, the Echoscope is really at the heart of those operations' infrastructure. So, anything underwater, make no mistake, anything underwater that involves placing something under the seabed, removing something from the seabed, navigating from point A to point B, that is the Echoscope. That is the Echoscope and it's the Echoscope wheelhouse. So, I feel very much that we have quite a lot of opportunities. They just need to -- as I say, some of the macro factors need to be removed or normalized for us to move forward.

Okay, I understand. I hope that with the increase of SG&A, that some competent sales personnel will be hired for these markets given our infrastructure bill, given the amount of bridges that are needed, your technology will be welcome here. I just don't see any tangibility on that front as of yet. My final question is on the Navy. And you have articulated much of the technology. When are we going to start to see a deployment of your technologies within a contract that portfolio managers like myself can get our hands on and start to really understand the magnitude of these contracts with the Navy and its allies?

I'm not sure I follow that question when you say when are we going to see. Could you be a little bit clearer? Sorry, Bill, I...

Yeah. I mean, we -- I'm expecting -- I think many of us have been for years have been expecting a deployment of your underlying technologies onto the U.S. Navy platforms. I'm just wondering when we'll be able to understand which platforms they're on and more importantly the longevity of those programs.

Well as soon as we are awarded one of the programs we're talking about -- look Bill, if I take about -- if I talk about, for example, our ship hulls scanning comprehensive solution, that's a multi-year program that we started four years ago. Four years ago from the feasibility, to the prototype concept, to finally developing the platform for ship hull scanning, we've delivered that. Now, that's a sizable opportunity for the business and that runs over a number of years. So, look, evaluation under these programs can take up to four or five years, and some of the programs we're on are more mature than others. But I think we're making good progress. For example, this year, although we still haven't received an order, this year, for example, a Japanese program that we've been working on for four years now, that Japanese program was launched and the Echoscope PIPE C500 is a part of that program. So that now I understand that that vehicle is now being assessed and at sea with the end customer. So that's how it all evolves. But I know it takes time, but it's an area that we cannot afford and not to invest in heavily, because this is the opportunity for multiple recurring sales for our business. So, I think we're doing the right things on doing the front end work to go out and get on these programs to ensure at least that we're contenders. That's the first thing. Know about the program, become contenders, support the programs, and we're doing a lot of that, but that takes time, Bill. It is a -- and that's really where we will see the reward to grow. The commercial market, the profile of sale there, Bill, it's one sale in a project. I just talked about an island being built. If we get that order for five systems, then that's exceptional in the commercial market because when there's a project in terms of buying systems, the maximum system will be two systems and that can be a sizable, that would be around $700,000. But still, the point is that the opportunity to get multiples of sales and recurring sales comes from these programs, ship hull scanning programs, swimmer detection vehicles, mine countermeasure, critical asset management, these are all the programs that we are on. And also don't forget, Bill, over the years, over 30 ports in the U.S. carry our underwater inspection system, including New York, including California, New Orleans. All of these, at one time or another, invested in our underwater inspection system for -- if the President is coming in, it's the Echoscope that's used to sweep the port. So, I think we're making good progress in the areas where for our growth strategy -- it takes time, but I feel some of the programs are maturing.

I understand. And I appreciate the granularity. Unfortunately, many of us don't know any of these programs. I mean, it would be helpful if yourself, the Board considers when you are on these programs to let us know about them, so we can track them, to get a sense of them. Sometimes there are one-time events like the President coming in that you mentioned, but other times, they're not one-time events. They have annuities and multi-years, and we understand that. But we're in the dark here and it's very difficult to track this company and its initiatives.

And of course...

So, I thank you. I thank you for your time today. But I do hope that the Board considers being a little more flexible, a little more friendly to allow communication to its shareholders to the capital markets, because as of right now the stock is down 15% today. Year-to-date, it's been underperforming. For the last two years, it's been underperforming. Things have to change Annmarie. They really do. You have a stellar balance sheet. Now you got a real CFO. I welcome John. I can't wait to meet him and speak with him. But things and the communication to the capital markets need to change and the Board needs to get a little more active for a lot of reasons. And I would love -- as another investor echoed, love to see some insider purchases, Form 4s, just like the rest of us have used after-tax dollars to invest in your company through the years. I thank you for your time.

Thank you, Bill. Thank you.

This will conclude our question-and-answer session. I would like to turn the call back over to Annmarie Gayle for closing comments.

Thank you for joining Coda today, and thank you for your interest.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.