Good morning, and welcome to Coda Octopus Group's Second Quarter Fiscal 2025 Earnings Conference Call. My name is Melissa, and I will be your operator today. Before this call, Coda Octopus Group issued its financial results for the second quarter ended April 30, 2025, including a press release, a copy of which will be furnished, and a report filed with the SEC and will be available on the investor relations section of the company's website. Joining us today on the call from Coda Octopus Group are its Chair and CEO, Annmarie Gayle, its Interim CFO, Gayle Jardine, and its President of Technology, Blair Cunningham. Following their remarks, we will open the call for questions. Before we begin, Geoff Turner from our investor relations team will make a brief introductory statement. Geoff, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Coda Octopus Group's Second Quarter Fiscal 2025 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 events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as may be required by law. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including but not limited to risks and uncertainties identified in our Form 10-K for the year ended October 31, 2024, and Forms 10-Q for the first and second quarters of our 2025 fiscal year. You may get Coda Octopus Group'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 via a link in the Investor Relations section of Coda Octopus Group's website. Finally, as a reminder, this is our second quarter fiscal 2025 reporting, and all comparisons are with our second quarter fiscal 2024. Now I will turn the call over to the company's Chair and CEO, Annmarie Gayle. Annmarie,

Thanks, Geoff, and good morning, everyone. Thank you for joining us for our second quarter fiscal year 2025 earnings call. Despite the challenging global policy environment, our revenue in the second quarter of 2025 increased by 31.8%. Operating income decreased due to lower gross profit margins from our core business, the marine technology business, due to more units of hardware sales from Asia, which incurred a higher than usual commission cost in conjunction with increased operating costs resulting from the weakening of the U.S. Dollar against the British pound and Danish kroner. In the second quarter, I am very pleased to see revenue increasing by 31.8%. I would like now to provide some of the key highlights relating to our results of operations in the second quarter. For those who are new to the Coda Octopus Group story, our business is made up of three discrete business operations: the marine technology business, the marine engineering businesses, and our recently added acoustics, sensors, and materials business unit. Within our group, our core business is the marine technology business. This business generates most of our revenue, and in the second quarter, it generated 55.3% of our total consolidated revenue. It is around this business that we are building our growth strategy. The marine technology business operates in the subsea market and is home to key disruptive underwater technologies. These technologies are bringing the smartphone revolution underwater by providing a comprehensive real-time information platform, which allows our customers to make real-time decisions and also significantly reduces the cost of these operations while increasing safety. The specific addressable markets that we operate in are the imaging sonar market and diving market. It is these market segments that our growth strategy is built around. Saying a little bit more about our imaging sonar, the Echoscope.…

Annmarie, and good morning, everyone. Today, I want to focus on the addressable markets for our technology and to expand on what we are doing to grow the business as shareholders want us to do. I hope this will be helpful to our shareholders. The Echoscope. The biggest market opportunities for scalable growth for our company around the Echoscope lie in the defense space, which is undergoing a major transformation through the deployment of new classes of underwater vehicles, including manned, unmanned surface, and fully autonomous platforms. These platforms vary dramatically in size, from large vehicles exceeding 85 feet in length and weighing over 85 tons, to compact one-person deployable systems. Despite this diversity, a common requirement across all platforms is the need for reliable underwater vision. This capability is essential for safe and accurate navigation, situational awareness, environmental understanding, data collection, and mission execution. The Echoscope directly addresses these needs by providing high-resolution, real-time 3D imaging in complex underwater environments. The defense sector deploys these underwater vehicles for a range of mission-critical applications, most notably mine countermeasures (MCM), anti-submarine warfare (ASW), surveillance and reconnaissance, and infrastructure protection. Currently, Echoscope is being evaluated for integration into active future defense programs supporting three of these core mission areas, positioning it as a vital enabler in next-generation underwater operations. All next-generation defense vehicle programs share a common objective: integrating advanced technologies and enhanced capabilities. Central to this evolution is the development of smarter vehicles equipped with tools like the Echoscope, technology that delivers real-time, three-dimensional data for informed decision-making. Its versatility across a wide range of defense mission applications supports the consolidation of sensor suite requirements on these platforms. A key advantage lies in addressing SWaP, which is size, weight, and power constraints. By reducing the number of sensors required, the Echoscope…

Thank you, Blair. Let me now turn the call over to our interim CFO, Gayle Jardine, to take you through our financials for the second quarter of 2025 before I provide my closing remarks. Gayle,

Thank you, Annmarie, and good morning, everyone. Let me take you through our second quarter fiscal 2025 financial results. For reference, all income statement comparisons are with the second quarter fiscal 2024, and all figures are in U.S. Dollars. Starting with revenue. In the second quarter of 2025, we recorded total revenue of $7 million compared to $5.3 million in the second quarter of 2024, an increase of 31.8%. Our core business, the Marine Technology business, generated revenue of $3.9 million compared to $3.5 million, a 10% increase for the second quarter of 2024. Our Acoustic Sensors and Materials business, which was added to our group in October 2024, recorded revenue of $1.3 million. Our marine engineering services business generated revenue of $1.84 million compared to $1.8 million, representing a 2.3% increase over the second quarter of 2024. Our total consolidated net revenue increased by 31.8%. The newly added business, Precision Acoustics, added 18.5% to our consolidated revenue in the second quarter. Moving on to gross profit and margin. In the second quarter of 2025, we generated gross profit of $4.5 million compared to $3.7 million in the second quarter of 2024. Consolidated gross margin was 64.1%, versus 70.2% in the second quarter of last year. In our marine technology business, gross margin decreased to 67.7% in the second quarter of 2025, compared to 80.2% in 2024, reflecting higher commission costs attributed to increased sales in Asia for hardware, in conjunction with a lower utilization of our rental assets, therefore reducing rental income and associated services. The Acoustic Sensors and Materials business realized a gross margin of 65.4%. We expect, on an annualized basis, this to be between 59-63%, depending on the mix of sales. Our Marine Engineering business gross margin increased to 55.5% in the second quarter of 2025…

Thank you, Gayle. I am very pleased with the increase in the second quarter of 2025. Although the gross profit margins of our core business decreased, I consider this exceptional for the reasons explained earlier. The weakening of the US dollar also resulted in higher operating costs being translated into US dollars by our foreign subsidiaries. These two factors resulted in lower income and earnings per share. We continue to work to create stable long-term shareholder value and execute against our strategy to grow the business, which is our single biggest priority as a group. We are also very pleased with the broader progress that we are making on the DAVD program. The DAVD is the subject of various ongoing trials and limited use on live missions. As part of this, recent trials were conducted by a major body responsible for assessing the readiness of the technology deployment. This trial concluded that the DAVD technology is significant and unique. It also concluded that combining DAVD with our three-dimensional sonar Echoscope makes it unique for diving operations. As part of this recognition, we see the galvanization of different development programs we are under contract for five developments currently where other sensors that this community uses are now being integrated into the DAVD ecosystem. These are strong indicators that this is the technology of choice for future diving operations in the defense space. A key milestone which we are focused on achieving is the adoption of the DAVD by foreign navies, and this is progressing well. We will also continue to prosecute our M&A strategy in fiscal year 2025, although we have put on hold the acquisition which we were working on until the global policy environment has stabilized. I want to emphasize that we have not abandoned our M&A strategy. We are simply focusing on navigating the policy environment and ensuring that our decisions are sound for our shareholders. Through our strategy, we aim to pivot the revenue model of the marine technology business to a multi-year multi-sales model as we have started to see with the DAVD product line. To conclude, we would like to thank our shareholders for their continued support. We are now happy to answer any questions. Operator?

Thank you. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

During the last earnings call, Annmarie, you said given the uncertainty in global trade, there was a standstill by customers as it relates to your marine products business. And so you thought revenue would be back-end loaded this fiscal year. First, what changed that led to the stronger than expected second quarter demand from Marine Products? Did orders pull forward quicker than expected? Or is it something more broadly, sorry, that's changed from a demand perspective?

Hi, Brian. Good morning. Thank you very much for your question. Look. What we are seeing in the marine core business, the marine technology business, is really, really strong inquiries around our Echoscope technology, particularly on the outright purchase side. So I think we saw a really strong level of inquiries from Asia in particular, and that continues on the hardware side. Also, we also saw a strong pickup around the DAVD program, and we had in the quarter $1.2 million worth of DAVD sales. The one thing that we saw, which was the real sort of downturn in inquiries from European developers in the second quarter, but we are now seeing that moving forward and more rentals going ahead in the third quarter. So overall, I think what we are seeing is a strong level of inquiries right across the piece that the marine technology business and our engineering businesses.

Great. And then did you share the expected timing of the new NanoEchoscope release? I think you talked about back-end trials. And then can you discuss how this new release addressed its customer feedback and could lead to increased adoption in use cases?

Well, first of all, we are really on the cusp of releasing Nano. Blair Cunningham, our President of Technology, has significant trials with Nano, I think, at the end of this month for a critical defense program. So after those trials are concluded, we would expect to really make an announcement to our customer base. We would like to see how those trials go. But Blair will talk more about this, but what Nano addresses is really the smaller classes of underwater vehicles. So the introduction of this new into the mix allows our business to address the full expanse of the requirements that we see in the market from very large underwater vehicles to very, very small. So I think this positions the company nicely for, you know, addressing the full market. And in addition to that, we have, for example, the diver taking down currently the Echoscope, which is, you know, it's a bit sizable. So this now removes that, and Nano allows because it's a shade bigger than the iPhone, he can easily wear the Echoscope today and also robotic. Really, where you have got these small robotics platforms, again, a new application for our technology given the form factor. So we are pretty excited about this. And as I said, the launch date will be after trials in June, where Blair will be leading our team with the trials with our US Navy customer base.

Great. And then as it relates to your five development programs, can you help range or provide a range of sizes for the different opportunities of what these might address and help us with the timeline for these development programs that might be evaluated and turned into a next phase?

Blair, can you just talk a little bit, please, about the development programs that we are working on just in terms of the broad sense of requirements? Yeah.

Yeah. Sure. Thank you. Thank you, Brian, again for the question. Yes. The five programs are really taking the DAVD system either to support existing equipment, so integrating that existing equipment in, or in one particular case, it's for a completely new application, which is a kind of saturation, deep saturation dive suit. So all the biggest market opportunity still remains the untethered space. And, really, I would say probably three or four of those programs all relate to integration with untethered additional dive equipment. So it's all for the benefit of that really. The US Navy in particular, along with all the foreign navies, they all use different, what we call, UBAs or underwater breathing apparatus equipment. So we have to bang one of the key parts of DAVD is providing a hands-free, you know, information on critical lifeline information that they would have from this breathing apparatus. So how do we integrate that, bring that into DAVD, provide the alerts and the real-time information in a hands-free environment? So a lot of the programs around they've seen the interest in DAVD. They now want that to work with the existing equipment they have. And that really largely that's, you know, that actually, that's three or four of the programs that we are actively working on at the moment. So think about it as a product, you know, adoption, necessity as it were to get the equipment in the hands of those divers. That's correct.

So the one thing to just add on, Brian, there is to remember that all of the sensors that they are using for diving currently is relevant, but what they have to do if they are going to adopt DAVD is to bring that within the DAVD world. So I think that for us, this is very, very positive because what it's really saying is that DAVD is our choice. So we now need to bring all our sensors within that ecosystem. So and we are really seeing a galvanization around that to ensure that all of the sensors that are being used by all the different community of users are now being brought into the DAVD world, and we are extremely excited about this. Okay. And then you talked about the next generation underwater vehicles. And the progress Coda is making in securing, sorry. Can you talk about the progress Coda is making in securing design wins and maybe lay out any milestones or timing we should watch out for? I think we've been, you know, we've talked about this opportunity for a little bit. Maybe size, the range of opportunities in all the different vehicles, what it might look like if you did win a production order.

Well, it's very difficult for us to really give numbers. What we are seeing really to the market is that we've got various programs of different states of, if you like, maturity for these underwater vehicles. But really, the important thing, Brian, is it's making sure that we continue this journey of getting new programs. The ones that are ongoing and are being evaluated by from directly the US Navy or with prime defense contractors, the technology is already part of that broader program. And so that program is dependent on final evaluation. Where does this program go? So what we see is a proliferation of programs where the Echoscope is a contender because they are looking to integrate the Echoscope onto those platforms. So whilst I can't say categorically, I'm seeing there's a big market out there, and I think that the Echoscope is just that this final report, which was assessing the readiness of DAVD, talked about the uniqueness of the Echoscope technology for spatial awareness underwater and object detection that this is the most advanced technology for that purpose. So you know, these programs can be slow, but what we are seeing within, for example, the DAVD program, we are seeing pull-through Echoscope sales there. And for the other programs that we've been following for some years, we are seeing additional units being bought and the program's slowly moving forward. So until, like, budgets are appropriated and some of these evaluations are concluded, we are still waiting. But we know that some programs, you know, look very, very promising for the business. But we still have to wait for, first of all, award and still have to wait for the evaluation process to be completed, whether it be direct with the prime defense contractor program or the navy directly. But we have to make sure the key point, that we are not missing opportunities. And so the job of the team is to make sure that the Echoscope is part of the program that's being considered for adoption, and that's the work that we are doing.

Okay. Last question I have, a numbers question. Your business is lumpy for sure at times. But you'd previously expected to have a back-end loaded year, especially as it relates to marine products. Do you still expect the third and fourth quarter to be your two strongest quarters of the year? Or did some of that change given the upside in the second quarter?

Well, I think that overall, we expect the marine technology business to continue to improve in the way that we are seeing this. Look. I am very excited about the rental opportunities that we are seeing. We are seeing a good level of utilization of our rental pool, which is always very exciting for business. We also see lots of opportunities from Asia for hardware sales. So I see very much that the third quarter and our fourth quarter will be within the balance of what our Q2 numbers look like for the marine technology business. Great.

Thanks for all. Thanks for answering all my questions.

Thank you very much for the opportunity, Brian.

Thank you.

Our next question comes from the line of John Deysher with Pinnacle Value Fund. Please proceed with your question.

Morning. Thanks for taking my question. Was just curious on the gross margin percentage. It's still very attractive for the company as a whole, 64-65%. Should we model that percentage for the back half of the year? Or how should we think about the overall gross margin for the balance of the year? Is it staying the same, going up, going down, and for what reasons?

Well, thank you very much. The gross profit margins for our marine technology business are very low. It's very, very unusual. If I'm not mistaken, I think, Gayle, I mean, gross profit margins for that business, same time last year was about 76% compared to 65%. Is that right?

It was just over 70%, I mean. Yes. Yes. So that's 70% is typically what we would expect the margins to be. So we would expect for the rest of the year, margins to go up. I think this quarter was an exceptional quarter for the reason I explained, which was we had a concentration of sales from Asia. What that means, generally, is that you are selling via your agent's network, and then incurring commission costs. So that was one factor. But that was further compounded by the fact that we had a single sale that triggered a much higher percentage commission because of the multiples on that order. So we expect that to be an outlier. So we expect margins to be much stronger in the marine technology business.

And how about in the marine technology business?

Yes. But on well, Precision Acoustics, this, you know, the range is between 57 to 65%. It will be some it depends really there on the mix of sales and the marine engineering business, I think that they're again, we don't expect margins to really change dramatically because then it really depends on their mix of sales generally.

Okay. So those two are going to be steady. That's good to know. And on the SG&A side, is there any reason to think that that for the business as a whole, that percentage might come down? I think it's up a little bit from a year ago, the SG&A percentage.

Gayle, did you want to talk to that?

Yes. I can do. Yes, sir. SG&A percentage this quarter was impacted by a couple of different factors. One of it being the exchange rate variances that we are seeing in the business. And we are about 65% of our revenue and costs or 55% of our revenue, 65% of our costs comes from the entities that are not in the USA. So we have some impact of exchange rate variance in there. And we also have added in the Precision Acoustics business. And we also have some noncash noncash equivalent impact this quarter as well. If you look at the noncash element, that was quite a lot of the ex the sorry. Lost my train of thought there. Apologies.

The noncash So noncash sorry. The noncash charge has increased significantly.

Significantly.

It was the amortization in PAL. And the noncash charges for depreciation for stock-based compensation and exchange rate variances. So in the current quarter, the noncash items were a component of SG&A was 24.7% or about 670k compared to 0.3%, only a 6k gain in the previous quarter. So that swing had an impact in this quarter here.

As we we don't know what the exchange is going to do going forward,

we have to be expecting that the US dollar is going to continue to weaken against the pound and the kroner.

Okay. So it sounds like we should model SG&A as a percentage of sales about the same as the first half. Or the back half? Is that fair?

Or just slightly lower. Yes.

Slightly lower. Okay. Fine. That's good. And then I guess my final question is the announcement of in the third quarter, we expect to deliver 16 DAVD untethered systems, which is good. What kind of revenue might that generate?

Can we talk about that when we get there? I mean, the order, just so we know, last was $800,000. We're hoping Yeah. That we are going to be delivering all sixteen units in the third quarter. So if we do, it will be around $800,000. Okay. You have a contract for delivery of 16. It's

a question of timing?

Yes. We are on the contract, but we are keeping our production facility is getting the items ready for delivery in the third quarter. So we already have a firm contract for that. It's just a question of delivering those

And anything that's not delivered in the

Yes. Certainly. Certainly. But, of course, we are hoping to deliver all

Q3 would be delivered in Q4?

16 units in the third quarter.

Yep. I understand.

Okay. Good. Well, thank you very much. Good luck.

Thank you for your question.

Thank you. Thank you.

Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Miss Gayle for any final comments.

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

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.