CODA - NASDAQ

Good morning. Welcome to Coda Octopus Group's Group's Fiscal Year 2024 Earnings Conference Call. My name is Robert, and I will be your operator today. Before this call, Coda Octopus issued its financial results for the fiscal year ended October 31, 2024, 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, 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 fiscal 2024 earnings conference call. Before management begins their formal remarks, we would like to remind everyone 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 statement, 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 October 31, 2023, 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 our 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, Jeff, and good morning, everyone. Thank you for joining us for our fiscal year 2024 earnings call. Our revenue in fiscal year 2024 increased by 5% over the fiscal year 2023, and I believe that we have delivered a solid set of results, including increasing our gross profit margin, operating income, net income and earnings per share. I would now like to provide some of the key highlights relating to our financial results for fiscal year 2024. For those who are new to the Coda Octopus story, our business is made up of two discrete business operations, the marine technology business and our engineering businesses. We also added through acquisition a third business unit, Precision Acoustics Limited, a company established under the laws of England. However, it is important to note that our income statement activity for fiscal year 2024 discussed here does not include this new business unit since it was acquired two days prior to our fiscal year-end 2024.This newly acquired business unit had no material income statement activity for those two days, and therefore, are not included in our consolidated income statement for fiscal year 2024. Now turning to highlights relating to the Marine Technology business. This business sells its products and solutions globally with Asia, Europe and US. being important geographies for our products and in the fiscal year 2024, we saw an increase in the utilization of our rental assets resulting in an increase in our rental revenue by 84.1% and which was $2.32 million compared to $1.26 million in fiscal year 2023. We saw an increase in equipment sales in the key strategic geography of Asia. Equipment sales from Asia rose by 19% and were $5.47 million compared to $4.60 million in fiscal year 2023. We also saw a significant reduction in revenue from the US. on defense programs. Many defense programs were funded through the continuing resolutions mechanism, which resulted in reduced allocation of funding. This affected our business and resulted in the reduction of revenue generated by the US. Marine Technology operations by 33.4% and which was $2.83 million in fiscal year 2024 compared to $4.26 million in fiscal year 2023. Notwithstanding navigating these challenges on the US. defense programs, we were able to mitigate the impact of reduced funding onto these programs from other global sectors and the Marine Technology business revenue increased in fiscal year 2024 by 5.7%. I believe this demonstrates the resilience in our revenue generation structure. Now turning to highlights relating to the engineering business. There are two business units, which comprise our engineering business, one based in the US Salt Lake City and the other based in the UK. The engineering business units are primarily subcontractors, the prime defense contractors and therefore, are dependent on receiving funding on the defense programs. In fiscal year 2024, revenue generated by the engineering business increased by 3.8% along with its gross profit margin. However, the US. engineering business was also affected by the reduced funding available for defense programs, resulting in lower than anticipated order intake in fiscal year 2024. Furthermore, since the results of the US. election many defense programs are on hold until the new administrations budget and policies are in place. We're also seeing broader headwinds across the globe caused by the uncertainty around the policies of the new administration, including those relating to tariffs and offshore renewables and therefore, many offshore projects are currently on hold, and this is likely to adversely affect our first quarter 2025 results. Despite these broader headwinds, we continue to make it our priority to focus on sowing the seeds to grow our business and in the fiscal year 2024 we continue to make progress around our growth pillars, Echoscope and DAVD. Blair Cunningham, our President of Technology, who is the market maker for our technologies will today be providing a broad overview of some of our activities under these programs. Blair will also be available to answer any questions you may have on our technologies so please use the opportunity to raise such questions during the Q&A sessions, if you have any. I will now turn the call over to Blair Cunningham, where he will give a short overview of our core technologies around which we're postulating our growth agenda.

Thank you, Annmarie, and good morning, everyone. We continue to believe that our most promising opportunities for growing our business are around our defined growth pillars, the Echoscope Technology and the DAVD Technology. These technologies form a powerful complementary ecosystem that revolutionizes underwater operations. We're creating the smartphone revolution for the underwater world, providing a real time on demand information and data platform that enables operators to make critical decisions instantly. Additionally, underwater data is collected today with analysis and decision-making tomorrow. We're disrupting this model. Our underwater technologies empower operators to make real-time decisions, enabling quick informed actions, whether it's positioning an asset, navigating from point A to B or locating targets on the seabed. So, turning to these technologies. The data system is an advanced augmented reality display technology designed to enhance diver's performance, safety and situational awareness, especially in a low visibility and technically challenging environments. It seamlessly integrates real-time data, on-demand information and Echoscope 3D sonar imagery projecting these onto the diverse field of vision through the DAVD augmented reality head-up display. This hands-free solution enables divers to operate safely, accessing all essential information without the need to glance as external instruments or surfaces. Where are we with the adoption curve for DAVD Tethered system? The DAVD Tethered system is currently operational across nine naval commands within the US. Navy. Developed under a 3-year future Naval capabilities contract with ONR and NAVSEA, this fully developed augmented reality system is commercially available. It is classified as an authorization for Navy use item and carry CE marking certifying that the DAVD system meets the essential health, safety and environmental protection requirements set by the European Union and the UK. We are aware that several of these commands have submitted budget requests through their respective process. Many of these requests were not granted in the fiscal year 2024, but we have a high level of confidence that these awards will be made in fiscal year 2025. We are, therefore, seeing year-on-year budgeting by the US. Navy for acquisition of the DAVD Technology. Following recent participation in international maritime warfare exercises in Norway, U.K. and the US. We are also working closely with several foreign navies and armies that have shown strong interest in DAVD. Additionally, we are seeing strong interest from government bodies and commercial dive teams and continue to have sound engagements with these potential customers on the adoption of the technology. Following the commercialization of the DAVD tethered system, the Navy initiated to the DUS hardening program in September 2023 to adapt the DAVD technology for the untethered special operations diver market. This program funded by both the US. Navy and the foreign Navy as in the fiscal year 2024 seen substantial progress in the required modifications to meet customer specification. The DAVD untethered variant imported the same augmented reality display technology that is used by divers wearing dive masks, operating at shallower debt and not physically tethered covered to a surface mothership for air supply. These drivers are typically military diverse performing special forces operations. Despite the funding delays, we have made significant advancements in the hardening programs objectives, and we remain excited about the potential of this opportunity for the business. A key achievement under the program was the delivery of the Gen 4 head-up display in fiscal year 2024. This next-generation technology platform, both a more compact design, 200% increase in resolution and an expanded visual field of view. These enhancements significantly improved compatibility with specialized dive helmets and masks unlocking new possibilities for previously underutilized markets. This accomplishment represents a major milestone in the success of the DUS hardening program. We still believe the DUS system represents the largest addressable market for DAVD technology. For example, the US. Navy with approximately 4,000 active divers, 75% of these divers are using full face mask untethered systems, which aligns with the DUS solution. Similarly, the majority of public safety and law enforcement divers in the US., an estimated 10,000 divers use the same full phase mass dive systems. We're also experiencing pull-through sales of the Echoscope technology from DAVD users. The DAVD tethered and untethered systems seamlessly integrate with our Echoscope real-time 3D imaging sonar technology. Together, these technologies offer a comprehensive real-time navigation, situational awareness and mapping solution, enabling diver and supervisor to operate effectively in the most challenging zero visibility conditions. We're also spinning off technologies from the DAVD system and introduced a new digital audio communication system, Voice HUB-4 which offers a competitive superior quality system for diver to diver and divert to supervisor communication. This all-digital communication technology incorporates AI-driven features, including background noise removal, diver inhalation noise, isolation and active helium voice correction. The Voice HUB-4 system has already been purchased by NAVSEA and it addresses two key markets beyond defense, commercial diving and public safety. This is an exciting, accessible price point product, which diversifies our revenue spread and gets us in front of the same customer base for the main DAVD technology. I want to wrap up my briefing on the DAVD technology by stating that I am truly excited by this technology. The new DAVD Gen 4 Hub delivered under the DUS program cement technology now as mature and leverageable. We can also see the pathway for taking the DAVD technology to adjacent markets. Our achievements with the development of this technology is stunning and will pay off in time for our shareholders. Turning to the Echoscope technology, another of our growth pillars, the Echoscope is the world's first and highest resolution real-time volumetric 3D sonar. By generating a complete 3D image from each acoustic transmission, it is the only commercially available sonar technology capable of both imaging moving objects in 3D in real time and complex 3D marking. This unique combined capability enables real-time decision-making. Coda Octopus are well established in the commercial offshore sector, and our Echoscope solutions have revolutionized subsea operations and inspections for decades, delivering significant time savings, cost reduction and enhanced operational efficiency in the most challenging conditions, the Echoscope sonar is utilized globally across a wide range of applications in the commercial offshore and subsea markets and continues delivering game changing economies of scale to customers. The breakwater market is a good example, where we have moved the market from placing only four blocks per day up to 260 blocks. The acquisition and utilization profile of the commercial sector differs significantly from that of the established defense programs. While we do have commercial customers who purchase multiple Echoscope systems in a single order, this is relatively uncommon. The commercial market typically favors minimal capital investment over operational project costs. We see further evidence of this trend with customer preference for Echoscope rentals over direct purchase. Our growth strategy is therefore focused on opportunities in the defense sector, and specifically, the increase in new generation of undersea vehicles and associated robotic programs. The new undersea vehicles for the remotely controlled and operated or fully autonomous are currently designed for either mapping and information gathering such as creating a detailed sea bed map to identify targets of interest or performing specialized prosecution task such as neutralizing mines. By embedding exoscope technology into these vehicles, it allows a hybrid approach to engage targets in real time as they are detected, eliminating the need for separate follow-up missions. We view this as a significant growth opportunity, enabling a seamless fusion of Echoscope's capabilities with advanced undersea operations. The result is a smarter more capable vehicle that not only improves mission efficiency but also amplifies overall effectiveness. We have successfully integrated Echoscope systems into at least four new undersea vehicles in collaboration with prime defense contractors. These vehicles, whilst multiyear developments are in the early stages, but critically have the Echoscope design into the system from the outset. They are currently undergoing test and evaluation. But these represent longer-term opportunities, we provide a valuable platform for expanding our technology footprint within these defense program initiatives. Direct short-term opportunities exist with the active undersea vehicle programs of record, such as the Video Ray Defender ROV program for the Eod. We recently completed a successful 6-month test and evaluation period with a video rate vehicle with NUWIK. As a direct result of the success our latest Echoscope SIBS Sonar has demonstrated its capability and potential for high-resolution, target detection and ship all inspection operations. We are also actively pursuing several DoD contracts with both US. and foreign navies that wish to integrate both DAVD and Echoscope technologies for subsea vehicle control and divert teaming missions. As we reported previously, we developed and delivered under a multiyear defense funded Navy program, a comprehensive Ship Hull scanning solution embedding the Echoscope and DAVD technologies. Under this application, Customers are performing critical target identification, such as parasites on a hole, which can compromise security, being able to assess whether a hole is compromised is a matter of global concern for all incoming vessels in all ports located in the US. or elsewhere. This is currently a technology white space, and we believe we have developed and demonstrated a solution for this application. This is still being evaluated by our customer, but initial results have been overwhelmingly positive, and we believe this program will move forward. In summary, we continue to develop opportunities with our Echoscope technology within the defense programs, which have recurring long-tail revenues associated with them. We believe we are making progress, and this is a key part of our strategy to grow the business. Finally, I want to cover the recent acquisition of Precision Acoustics, a recognized leader in the ultrasound and acoustic measurement field. Specializing in acoustic hybrid design and innovative acoustic materials Precision Acoustics provides a comprehensive range of products and solutions with a primary focus on medical imaging and NDT. Their expertise extends to working closely with national and global standard setting bodies, contributing to the establishment of the primary measurement standards in the industry. This acquisition brings valuable and recognized acoustic expertise to the group, expanding our knowledge base in the domain that has previously been underleveraged in the underwater acoustic space in which we operate. We believe this acquisition opens up significant opportunities to integrate Precision Acoustic's capabilities with our existing technology platform, particularly advancing our Echoscope technology. This will also enable us to penetrate new market sectors such as passive acoustics and ultrasound imaging, critical areas for defense applications. Furthermore, the combined strengths of our group position us to qualify for larger defense-related programs as well as explore exciting research and development opportunities that were previously beyond reach. Annmarie will cover any questions on the commercial aspects of this transaction.

Thank you, Blair. Finally, as mentioned earlier, in fiscal year 2024, we started to implement our M&A strategy and completed the first of a number of acquisitions, which we are targeting subject to the satisfactory completion of due diligence. Precision Acoustics Limited was acquired in the group to gain access to their expertise in the field of atistics and medical imaging technologies which are potentially transferable to the subsea market in which the Marine Technology business operates. Furthermore, this addition expands the group's collective capabilities and positions it to qualify to compete for larger defense contract. They also sell a wide range of products and generate revenue of approximately $5 million with margins of 52%. Let me now turn the call over to our interim CFO, Gayle Jardine to take you through our financials for the fiscal year 2024 before I provide my closing remarks. Gayle.

Thank you, Annmarie, and good morning, everyone. Let me take you through our full year 2024 financial results, which are all reported in US. dollars. As Annmarie mentioned previously, due to the timing of our recent acquisition of Precision Acoustics, we had no material income statement activity and therefore, our income statement results discussed here today do not include Precision Acoustics. Starting with revenue. In fiscal year 2024, we recorded total revenue of $20.3 million compared to $19.4 million in the fiscal year 2023, an increase of 5%. The product segment generated revenue of $12.8 million compared to $12.1 million, a 5.7% increase from the prior fiscal year 2023. As reported earlier by Annmarie, this increase in our consolidated revenue was a result of improved demand from strategic markets and geographies, particularly for rentals and for equipment sales in Asia. In the Services segment, our U.K. arm was key to the 3.8% improvement in revenue in this segment compared to fiscal year 2023. However, like the products business, US. Engineering business unit was also affected by the reduced funding allocations under defense program. Moving on to gross profit and margin. In fiscal year 2024, we generated gross profit of $14.2 million compared to $13.0 million in fiscal year 2023. Gross margin was 69.8% versus 67.3% in the prior year. In our product segment, gross margin increased to 77.9% in fiscal year 2024, up from 76.7% in 2023, reflecting changes in the mix of sales. with increased revenue from rentals, which generate a higher margin, combined with lower commission costs in the period. Our Services segment gross margin also increased to 55.8% in fiscal year 2024 versus 51.6% in 2023, again, reflecting the mix of sales. Now moving on to our operating expenses. Total operating expenses for 2024 rose 2.9% to $10.6 million compared to $10.3 million in fiscal year 2023. This was caused by a 7% increase in research and development attributable to the investment we are making in our Thermi Octal range of mission computers. Our Selling, General and Administrative or SG&A costs in fiscal year 2024 totaled $8.3 million, an increase of 1.8% over the fiscal 2023 expense of $7.9 million. As a percentage of revenue, our SG&A costs for the fiscal year 2024 improved, reducing to 41.1% of total revenue compared to 42.3% in the fiscal year 2023. SG&A increased in real terms due to salary inflation, resulting in an increase in payroll expenses. Marketing also increased in accordance with our strategy. Looking forward to our cost structure. We expect the addition of Precision Acoustics will increase our R&D expenditure as we seek to leverage our expertise across the group. We also anticipate that SG&A will grow, reflecting increases in payroll, marketing and investor relations expenses. Operating income in fiscal year 2024 was $3.6 million compared to $2.7 million in fiscal year 2023, an increase of 30.8%. Operating margin was 17.6% compared to 14.2% in the fiscal year 2023, driven by the increase in revenues, as previously explained and the resulting impact the mix of sales type had on lowering our cost of revenues. Net income before taxes in the fiscal year 2024 was $4.6 million compared to $3.4 million in the fiscal year 2023. Net income after taxes, fiscal year 2024 was $3.6 million or $0.32 per diluted share compared to $3.1 million or $0.28 per diluted share in the fiscal year 2023. We have a notable increase in tax expense year-on-year. Current tax expense increased by 187% to $0.7 million in the fiscal year 2024. We expect that our tax expense will continue to increase in the future since we have no material net operating losses to offset this liability. Moving now to our balance sheet. Please note that published balance sheet figures do include Precision Acoustics Limited, and are post-acquisition combined figures. As of October 31, 2024, we had $22.5 million in cash and cash equivalents on hand and no debt. This represents a decrease of $2 million over fiscal year 2023, where the reported figure was $24.5 million. The cost of the acquisition of Precision Acoustics, net of cash acquired was $4.6 million. That completes my financial summary. So let me turn the call back over to Annmarie for her closing remarks.

Thank you, Gayle. I am very pleased with our fiscal year 2024 results, which saw an increase in revenue, gross profit and earnings per share. We continue to work to create stable, long-term shareholder value and execute against our strategy to increase the number of defense programs that our technologies are embedded in with a goal of securing recurring sales of multiple units under these programs. We are also seeing the vindication of this strategy. To summarize, that tepid system is now operational across nine naval commands within the US. Navy. We are seeing annual budgeting for this product line by the US. Navy and expect purchases in fiscal year 2025 for this variance of the DAVD. The DAVD user base is also adopting the Echoscope technology as part of the DAVID solution. We have reached a pivotal point in the DAVID on tethered system hardening program, and we anticipate the first sales of this variance in fiscal year 2025. The DAVID technology has now matured, and a key step forward was the delivery of the DAVID Gen 4 head-up display, which now is more compact display units and a much higher resolution. This has opened up many new opportunities for the technology, and we expect the award of three new programs around this technology. Our Echoscope SIFS technology, a short-range, high-resolution sonar used for close up visualization and mapping has been demonstrated to several defense customers and is a contender for several opportunities for ship hall applications and close range target inspection. We will also continue to prosecute our M&A strategy and in financial year 2025, subject to the satisfactory completion of due diligence, we anticipate completing another acquisition in the group. Through our strategy, we aim to pivot the revenue model of the marine technology business to a multiyear, multiple sale model as we have started to see with a 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?

[Operator Instructions] Our first question comes from Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

Hi. Great. Thanks for taking my questions. I've got about.I've got a handful. The first, as it relates to the fourth quarter results, can you talk about the mix of revenues that led to lower than usual gross margins in both segments?

Are you thinking about Q4 itself?

Yes. I mean full year doesn't matter us a long time ago. So I'm just kind of thinking about the fourth quarter. Yes, if I look at the gross margin -- in Marine, it was about 76%, which is kind of below where it was the last two quarters. And then if I look at the marine engineering, it was 52% and revenue didn't fall off there. So again, it was also a little bit lower than it was recently.

Well, I can't provide the details, but as we always report, margins are subject always in both parts of the business, the mix of sales. For example, if equipment sees carry less margins than rentals, for example. So it really depends on the types of sales that we have in the quarter. Unfortunately, I don't have the breakout of the Q4 mix. But generally, it's driven by simply the mix of sales that we have in the revenues.

Okay. I know it looks like rental then was lower in the fourth quarter compared to the last two. So that speaks to some of that.

It could be, yes.

Yes. And then moving on -- can you tell us how much revenue the DAVD programs generated in fiscal 2024 and with the funding challenges in the US., how do you think about the range of outcomes for this product in the current fiscal year, I know you mentioned you're confident in three new programs around the technology. Maybe you can size those.

Yes. So I mean, overall, in fiscal year 2024, we saw really a significant reduction in funding from US. programs, and that's really typical first of all, that's typical in an election year. Also, that also carries on a period of hiatus between the outcome of the elections and the new administration going into place. So I think overall, many programs were only partially funded. So the DAVD program, for example, we didn't get the funding we were expecting for, for example, on the hardening program and for purchases of the DAVID Gen three systems that we have. So overall, in fiscal year 2024, I think that we saw revenues from the US. decreased by 33.4% because of reduced funding. Now most of the things that we anticipated, they have not gone away. They've just moved from last year and hopefully into this year. So I think that we expect, for example, Q1 to be challenging for the business because programs continue to be funded by continuing resolutions, but we expect to see that changing in our second quarter onwards. So overall, I think, all the DAVID programs that we have in the pipeline. And when we think about the DAVID, we should think about the DAVD Tethered system, which is already in the field and as Blair explained, that's being used by 9 commands currently and year-on-year we're seeing acquisitions and budgeting for that product line. The untethered variance is still going on the program of development. But I think we've reached this pivotal point under the hardening program and the biggest milestone has been achieved, and that was the new head-up display for sitting in those types of mask that we have delivered. So again, under that program, we anticipate in fiscal year 2025 to see the first initial purchases of that system. So I'm really, really excited, and please remember, as we have already said, the untethered variant is the most promising and the biggest market for the business to see that we have delivered what the biggest barrier to the success of the program in fiscal year 2024 despite the funding challenges, very, very pleased with the team and what we've achieved.

Well, can you -- you're talking about three new programs. You're talking about your first initial orders. Can you size it at all? Are we talking very marginal size programs? Are we talking very large programs, somewhere in between. Any kind of any kind of numerical discussion would be helpful.

So on the tethered system on the Navy side this year in terms of purchasing systems, we would expect $2 million of purchases of equipment for purchases of the initial untethered system, we would expect that to be $1 million. And for the other development programs around the technology, we expect $2 million. So in all, we are tracking for DAVD $5 million in this fiscal year. But I think that the thing that we are focused on and what we feel to be pivotal for our business is the fact that the untethered variant is moving from its R&D phase into an acquisition phase that is really -- and what we have visibility and what we're talking about here, just to be clear, it's only the opportunity with the US. we're talking about here. We have not begun to talk about all of the other opportunities that we're tracking with foreign navies. And we should also remember that the untethered program was -- is a joint funded program between the US. and a significant foreign Navy, they also will be in lock step with the US. in terms of acquisitions, we simply don't have their budget at this stage. So I think what I am saying, I can see on the US. side, we expect $5 million worth of adapt revenues of different makeup this year, but that excludes opportunities that we think are close globally for the DAVD technology.

Okay. And then Switching gears, you commented on foreign customers being careful right now related to uncertainty around tariffs and the current administration. Can you talk about how you're thinking about tariffs potentially impacting your business?

In general, as you know, tariffs can in general styling the business environment because it impinges on the free through of goods and services. And the broader implication is that it could contract demand or reduce demand because simply it becomes much more difficult to export items. So I think generally, as I said, what we're seeing is a general caution in the environment or the environment being very cautious. And the infrastructure budget -- it's a big budget in the US., for example, and many, many European offshore service providers were in the queue for many big programs this year in the US. for some of the infrastructure projects like offshore renewables. So until we can gauge the new shift in policies, what they mean. It is still a lot of unknowns. So that's pretty much what I'm hearing from our customer base just cautious and just a lot of unknowns until the policies are in place.

Great. One on Precision Acoustics. It sounds like it can be much greater under the Coda umbrella, but it sounds like they've underinvested. Can you talk about any increased investments you have to make to achieve these potential revenue synergies? And then do you think this acquisition will be accretive to operating profit or diluted operating profit in the first 12 months?

Jeff, I'm going to ask you to take questions on Precision Acoustics, please.

Okay. Brian, you asked two questions there. First of all, Precision Acoustics is actually quite well equipped. We've bought very little equipment in the last three months since we've had ownership of the business. So I don't think we have a worry there about having to plow a lot of capital. The company has been profitable for the last however many years, if you look at the publicly available figures. And I see no reason why that would change. I think the business will continue to be profitable.

Last question I have.

Sorry, Brian, I just wanted to -- sorry, Brian, I just wanted to add there just the way -- what's exciting about Precision Acoustic is what I would call, it's a business that was just really operating almost without any business development because it's just whatever it does, it just has the market for those things. So we think that we can plow in business development in that area to grow the revenue. So that's the aspect that I'm particularly excited about. I'm also excited about the capabilities that it brings to the group and therefore, collectively, we can, if you like, compete for larger defense contracts. So those are the two headline things for the acquisition.

Last question. First, is there any seasonality in Precision? And then as you think about another acquisition this year, should we be thinking similar size of precision? Or might it be something larger.

Jeff, can you speak to the seasonality, and I'll talk to the other acquisitions.

Sure. There's no discernible seasonality really to the business. There's some dependence -- a lot of the customers are universities. So there are some dependence on the budgets appropriate for the university academic year. But there's no real appreciable seasonality now.

And in terms of the acquisition that we are currently looking at, it's a larger than Precision Acoustics.

Our second question comes from Richard Deutsch with Sutter Securities. Please proceed with your question.

Yes, thank you. Thank you for letting me ask my questions. I have several questions myself. In the underwater vehicle work that you're trying to get involved in with the drones and the other vehicles, what differentiates your technology from the competition.

Blair?

Yes. Thank you, Richard, and I welcome the question. I think really the key differential is, as we've always said, with the Echoscope technology it performs really essentially two things at one time. You can do the mapping, which is predominantly, as I think I said in my comments in the filing, a vehicle is either trying to create a map of the sea floor, which then gets processed later on and then perhaps something else goes out to take custody or prosecute that target in whatever manner that may be. What we are changing on its head is allowing the vehicle to not only make the map but also then be able to stay stationed on a target and then prosecute that target in whatever way they want. So for example would be in the vehicle space, there's a number of new vehicles, which I would call hybrids, autonomous vehicles or hybrid ROVs where they can perform the mapping mission which could be covering several kilometers of seablide, and then go back and identify the targets and then either do something with those targets. So they have manipulators or other tools on board the vehicle, which it transforms into once it's completed the mapping mission. Traditionally, that would require multiple different sensors to be able to complete that same mission profile. And what we are providing is a single sensor that can do those things together. Not only that, we're also then providing additional benefits to the vehicles such as 3-dimensional forward-looking obstacle avoidance, where traditionally, that's always 2-dimensional and ability to reduce the payload and the power requirements for these vehicles. I think those are two critical aspects of the vehicle markets I'm looking at. What's my duration I can run on their variable batteries I can carry and then what mission profiles I can perform.

Okay. So why would there be any competition? Is it price? I'm trying to understand why this wouldn't be the expected winner of these competitions.

I think with a lot of the. Sorry, Annmarie.

Yes, we're going to see -- and I go ahead, Blair. But what I wanted to say that question, Richard, is to say, it's Lots of these under water vehicles are still in their evaluation phase. So we haven't lost anything, but they still have to go through their evaluation on different technologies and what they offer. So you're right. I mean for us, it's a slam dunk. It is -- the Echoscope is more advanced because as Blair explained, it's a single sensor for multiple applications, whereas if you use all the sensors, you've got many different sensors for different missions. So by combining a single sensor for multiple applications, you're reducing cost and you're reducing your payload and power requirements, as Blair said. So I just wanted to chip in and say that we've got a number of programs that are ongoing, and we believe the Echoscope is a contender for many of these programs. So sorry, Blair. Over to you.

Yes. No, I think you answered most of what I was going to say. I think the only other thing I would say here is that, yes, of course, with all defense programs, a lot of these have been underway for many, many years. So yes, we are coming in as an incumbent. However, it's clear that not only the commercial industry, but the defense industry are looking at ways to do better teaming so that team could be a diver to a vehicle to be a vehicle to the prosecution of, as I say, the specific task. Yes, the old in way is to actually use the long more approach, you can go out and move the lawn and then we come back and see what we have and what do we need to do next? That's where everyone is now considering as being a realistic opportunity. So as Annmarie said, these opportunities have certainly not gone and a number of programs that are looking to embed us into the outset design of their vehicles with the Echoscope in mind. So I see that as really positive, highly beneficial for the product line moving forward.

I happen to agree with you. I'm just wondering why all of these projects don't choose you as their bolt-on for their system as opposed to some other sonar. That was really my question.

Sure. Yes.

You're assuming that though that we're not chosen, and I can't speak for what the customer is thinking. But what we are seeing from what we are doing we're seeing all of the programs that we are engaging in we see, first of all, something which is interesting, we will engage, for example, with prime contractor A. And initially, they would say to us, okay, we want you for this scope, then the next thing we see that they expand the scope and the next program they have, they include the Echoscope. So that's how we see that once we are in a program, the program is expanded for other uses of the Echoscope. So I can't say why everyone doesn't see what we see. But what I am saying in where we are, I feel we're making good progress in getting the Echoscope design in these programs at the front end. .

Okay, thanks for that The next question I have is the heads-up display. Can it be used for other indications like aircraft, NASA, non-underwater or gaming? Was there any other opportunities for your heads-up technology to expand beyond underwater visibility.

That's a great, great question, actually. And something, of course, we are working on actively at the moment. I think the biggest switch point for us definitely was in the DUS hardening program where we've created our new Gen 4 HUB that is a game-changing enabler for, yes, not only perhaps the smaller full-face mask, scuba mask type market, of which there's much, much higher volume, as I've stated than hard hat diving, but you're correct. All other adjacent markets above water between water and above water, those are absolutely opportunity spaces that we're actively looking at, at the moment. So yes, we do see that as an opportunity. The one key thing I would say is in the fighter pilot in a type market, yes, that could still be an opportunity space. But however, we are focused on or our deliverables, it's always generally conditions of low visibility, noise in the water comp. So this is there's generally not what I would call a daylight heads-up display. That doesn't mean we cannot enter that space. But our primary focus to date has been in solving the much harder problem of dealing with vision in occluded or very disruptive and noisy environments. That's really -- so of course, all adjacent markets surrounding those safe assets are absolutely opportunity for us to explore.

Okay. Well, you just hit my next two questions, so I'll just elaborate on one of them. Can you get into a little bit more detail about what hardening involves?

Sure. So let me start by saying -- and this is a worthwhile point the data technology that DAVD Tethered technology encompasses a lot of features to address a lot of different mission profiles. So DUS hardening was addressing multiple different aspects. So number one, we're now going between a diver and perhaps walks on the sea floor with a hard hat helmet who's tethered to a surface ship to now an agile swimmer that will be swimming in a rebreather; much lighter equipment, so we had to repackage the equipment, make that form fit function with existing rebreather equipment. So really, you can think of it as miniaturizing as much as possible, taking as much we type in the system and form fitting around the other dive equipment that they also have to carry such that the DAVD system with all its benefits doesn't carry a payload obligation for the diver. The second point, which was the DAVD HUD, so the Gen 4 HUB our current objects or our previous optics in the Gen 3, they could not fit into the smaller mass. They were too large, the waveguide optics that we previously used. So this complete ground-up development, which will eventually replace all of our heads is incredibly much smaller payload that allows us to fit in the smallest of dive masks, which perhaps EOD type community, that's what they are very, very interested in.

Okay. Well, I followed you guys for years now, and I'm very, very excited to see how you're entering this exponential phase of opportunity and potential profitability. So keep up the good work. I'm really impressed.

[Operator Instructions] Our next question, our third question comes from Steve Emerson with Emerson Investment Group. Please proceed with your question

I'm so happy to see your excellent progress in these very large markets. But now that we're facing poor short-term results. Perhaps you could give us a better idea of the addressable markets for instance US. underwater warfare scuba divers, how big are some of these markets that you're addressing, of course, give a range -- and how big are these contracts that are -- that you've alluded to that are, let's say, you're competing with, and I'm certainly aware of the $5 million from US. for scuba, but if you could size some of these markets, it would help us.

Steve, Blair go ahead, yes.

From the market of DAVD, as we've always said, the DUS, which is the untethered full face mask market there is a considerable number more of those divers in different types of applications than the hard hat diver. However, getting the heart hat diver in with the Navy was the door opener for these other markets. I definitely feel we've achieved that, and that's what's bringing the promise of these new contracts. Just to give some form of size, I think, Steve, there's something like 2,200 seals, 120 EOD divers, 1,225 of other divers just within the US. alone, the way that we view that is we're looking to convert roughly about 15% of those, which would give us a target of $40 million over 5 years just within the US. sector.

Okay. Excellent. And can you give TAM? And why would 15% be an appropriate number for TAM.

Do you want to take that one, Annmarie? Or I can take that one.

Well, I think when we started, first of all, Sorry, I can come having some trouble here, sorry. So when we started this, first of all, Blair, sorry, we have to understand how customers would adopt the technology because despite the fact that we say, okay, there are x number, let's say, 4,000 divers in the US. We still need to understand how the customer would adopt the technology? Is it a one-for-one adoption. And those are things that are unknown to date. So we have really just modeled and said that our target is 15% based on trends that we see in the adoption of the technology. Sorry, Blair. Over to you.

Yes. Yes. I think that's correct, Annmarie. I think many of the new groups, if we take EOD as a good example, we're in the early stage discussions with those groups. I think the promising fact is everyone has been able to see witness and dive the tethered system of DAVD. And now, of course, the initial variant of the untethered system, so we're in active discussion, and they themselves are trying to understand what other sensors can they bring into the DAVID system. I think as I said in my initial remarks, we're trying to make the cell phone revolution under water. That only works if you can incorporate other sensor data or other information, for example, that could be biomedical information, the stress on divers, for example, or could be other type of sensors magnetometers, ADT and all of those factors. Those are all critical because that creates the swell around the use of the technology, and we become the linchpin in the center. And I think we definitely are feeling that we are becoming the linchpin there. It's now about working together with those teams so that they don't display technology A, we integrate with the previous generation of their technology, and then it's a seamless migration for them. I'll give one case in point. The majority of perhaps seals or EOD drivers would swim with let me just say, an iPad underwater, they have a display underwater. So clearly, the next evolution of that is to have that in the heads-up display. However, it's not as quite simple to take all of that information and put that in the heads up display, much like the automotive market that it takes on board. Augmented reality is a skill set and its own to display the right level of information at the right time for the diver also based upon what they are doing. So there is still in an art there and it isn't just a complete one-to-one. So we are looking at the overall market to try and bring the adoption curve up. Clearly, the focus for us is to be involved in the most high-volume applications, which will then see as the biggest yield. So -- but I think we felt the 15% conversion over our initial modeling over the five years felt a very reasonable target for us to achieve.

Yes. And I think we can't -- I mean, regardless how big the market is over time, the biggest priority for this business is to get the untethered variant in the field operational and that will set the precedent for global adoption in the military community with foreign Navy. So we have to do this well. And I think we've reached this pivotal point with -- in the program where we're now reaching to the phase where acquisition of a small number of units in this year. And I think that, that will be the stepping stone for increasing the adoption curve over time. I really think that's an important milestone for our business.

Okay. I'm looking forward to receiving perhaps in your presentation, some more detailed addressable market by segment information. Second question, can you give us some metrics or better feel for this acquisition, you said is in due diligence phase.

Well, at this stage, actually, Steve, we're really give you a rough order of the size? Is that by revenue are you thinking about? Or are you thinking about what we're looking.

Yes, give us what you feel comfortable telling us.

Well, the most I can see given that we're going through due diligence at this point is that the target purchase price is $12 million. Sorry, $40 million, sorry, I got that wrong.

Okay. And can you give us revenue and EBITDA? What kind of overlay.

To talk any more about the target because we are under NDA at this moment, and we're still just early days of the due diligence. So I'd much prefer to wait until we progress more with the targets.

Okay. And subsegment or again, you'd rather wait.

At this stage, I don't want to preannounce something that it's really at its nascent state. So if you don't mind, I'd like to not so much more about this.

Fourth question comes from John Deysher with Pinnacle. Please proceed with your question.

Good morning. Thanks for taking my question. Most of my questions have been answered, but I was curious on the Precision Acoustics purchase. When you say you're going to enhance business development, what exactly does that mean? More salespeople, more offices? What does increasing business development mean for that company?

More sales people, sales and marketing. As I said, when we acquired them, they really weren't doing any fees in marketing because the sales fees just Rot in. As I said, I think we can introduce business development via sales personnel to grow the business, and that's one area we're looking to invest in.

Any idea of how many additional salespeople you'll be hiring.

Well, initially, it's a small business. So if we sort of put in two salespeople initially, I think that would be plenty in the first year.

Okay. That makes sense. And you mentioned that the business did, I think, about $5 million last year, 24 gross margins were 52%. What were operating margins for 2024 for that business?

Jeff, do you have their operating margins?

It's not a simple question to answer as it might seem, actually because largely privately owned and it was one of the almost in a subsidiary of another company. And some of the charges to and from are a little bit of leak. So I prefer really not to be drawn on operating margin, except to say that it's -- I expect it to be positive.

Okay. Will it be in line with the operating margins for the legacy Coda business, which were, I don't know, 15% or 16%.

17.2%. So no I don't think so.

Yes. I would hope it was something like that, yes.

Okay. All right, fine. And I think you said that you're going to increase the R&D and the SG&A this fiscal year, by what percentage might you think each of those might go up for R&D and SG&A?

Well, I think that -- let's take the SG&A first. We would probably put in a couple of people at the course of the year, as Annmarie said, I think they'll probably be in the let's say, towards the latter half of the year, we're running at about 22 people at the moment. So it would be equivalent of about one head over the course of the financial year. In terms of R&D, there are a number of projects that we are running, which I think we would hope to get some results out of in terms of product.

Okay. So R&D last year was $2.3 million. What percentage increase do you think we should model for this year?

I think we would look towards perhaps 4 or 5 projects over the course of the year of varying sizes, but we're towards the start of the year at the moment. So it's difficult to be precise.

And I don't think in terms of internal R&D, just to answer that question, I don't see just collectively, I think our goal would be to keep an increase of 5% on -- in terms of monetizing the capabilities of Precision Acoustics in the group.

Okay. Well, that's helpful -- and SG&A was, I think, $8.3 million last year? How should we model that for this fiscal year.

It also will depend on the pace at which we take on these costs at the moment really in terms of our R&D effort, cross-group R&D efforts, it's really time at this time really thinking about what our priorities are in terms of near-term goals to monetize what they have in the broader group. Currently, this is internal resources. Later on, it will involve really just buying kits to start working on. So I think it's going to be incremental increase in our R&D for Precision Acoustics, leveraging what they have in the group. So it's a gradual increase in our costs over the year.

Okay. That's helpful. And finally, do you anticipate segmenting out Precision Acoustics or will you include that with either product or services?

That's a great question. So the broader in terms of segment reporting, it will fall on the products. But just to be clear, that will be when we report products, there will be the marine technology business products, and then there will be PA business because it's a different business unit within products.

Okay. But on the operating income line, will you break that out as well? Marine versus…

I don't know what you speak. I mean we'll do what's required for reporting purposes. So I don't know, Gayle, do you have a view on this?

I believe our current plan on , thank you for the question is to keep on the products segment reporting is to keep it clean on that and not to break it out separately.

Okay. So you break out the sales, but not the operating margins.

Yes.

Okay. And I guess, finally, is there a public disclosure of how -- or will it be a public disclosure or maybe an 8-K or something in terms of how Precision did for the year?

No. I don't think there's -- no, there is no requirement for an 8-K -- 8-K for precision Logistics. And we finished our first quarter, I think two days from now, so we'll be filing our consolidated first quarter results 45 days after the end of January.

Okay. So no separate disclosure. Okay. Great. And good luck to you.

Thank you very much. Thank you for that.

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

Good morning, Ann Marie. Blair, welcome. And I thank you for the commentary and the articulation of so many of our future products as we go into commercialization. My first question and really only question, is on the whole scanning. How are we going to sell this product or service? Is this going to be maybe a yearly like a multi-service agreement? Is this going to be by vessel? Is it going to be an equipment sale, if you could just enlighten us a little bit on your sales approach there.

Thank you, Bill. That's a great question. And I guess I should clarify also for everyone in terms of what we extensively mean by ship pulse scanning. Our initial customer, which is the US Navy, specifically had in mind ship pulse scanning for either parasites on a hull or for, you know, incident reporting of a hull. So to save on what I'd call dry docking fees, so you can call that in some respects trip husbandry, in some respects The market opportunity is quite massive, however. And I would say, over the last three to four years, actually, I've been trying to group many of the customers or potential markets that are -- require the same solution, but are trying to do different things. So if I give you just a case point, we have the group that want to avoid, say, maintenance and repair costs by doing that under water. So we call that dry docking fees. You secondly have a battle damage assessment where perhaps, and I know we can commented on this a couple of years ago. It was several incidents where US. Navy vessels came in contact with either other vessels or other objects, and we had battle damage How can the ship hall stalling solution provides an instant view under the water before going into port. We then have what I call the parasite tinotype community, so that is either EOD for what I would call naval vessels. But in the commercial sector, that is anyone coming into major ports and these things always get flagged up to be able to stand those hulls for looking for unknown objects. And then, of course, you have the whole customs type route as well, which looks at other attachments to the hulls such as false panels in the hall where they're packing narcotics and drugs. So this solution that we have is intended to address all of those markets. The second point I should make out is that although for our initial customer, we developed the whole slag, which is a solution for a diver to go in, create a real-time map under water under the hall and to do prosecution, the same solution platform could be deployed on perhaps a surface vessel or it to be deployed more commonly on an ROV and an actual fact, our EUV customers are using the ROV approach instead of a diver approach. So really, I think as we stated in the filing, this is a global market opportunity and has got multiple different sectors to it. Currently, what we're addressing is the navy requirements, which is really the ship husbandry and EOD type aspects, and that's what we're looking at. But I do suspect this will be an investment, this is probably not going to be a service thing, I would say. And as it currently runs at the moment, the Navy employees contractors to do either ship all cleaning, the dry docking fees, and I would suggest that perhaps they would be involved in this process. And we're providing the solution for them to do to do that job quicker and faster.

It will -- given all those different end markets, I'm assuming it's going to be different SKUs or different models of this technology over time?

Sorry, just to jump in there. The ship health scanning solution we put forward it's not going to be different from our model of selling the technology or renting the technology. So it's going to follow one of those bills. So we will not be providing a service around the technology. We are selling the package and the customer will use the inter operations as we currently do with what we sell in the market today. So it will be either outright sale or a rental.

Okay. Agree. Blair. Is it possible -- and I guess I'm assuming that the vessel is in port at the time of the scanning, but is it possible over time that the next couple of generations, this type of technology can be equipped that the vessel doesn't need to be important?

Great question. And yes, I guess the two models, I would say that are under evaluation, and this is where we think the next opportunity with our customers looking at. I do know, for example, the Coast Guard up jurisdiction out to a certain number of nautical miles away from the port and then it becomes the ports authority at that point. There is two models. There's the ship at anchor at steady state out in the open water. That generally could easily be an augmentation of the current solution. And I don't think that would necessarily represent a significant challenge depends on the sea state, of course, if the ship itself is dynamically moving, we need to be able to capture that information in addition to our own movements. So there's some math to go on to solve that problem. I think what is was a desire of many people was, I would call it, the car wash type ship all standing solution where sensors are placed on the seabed and as the ships passed over them, then they would instantly be scanned. I think that model I'm not saying it's been disproven but it's much harder than I think either the customers or the technology people thought that it may be simply because the ship is underway. It's creating its own capitation, different sizes of vessels, a ship can slow down to the speed that required for scanning. So there's many more complications. But certainly scanning offshore should be exactly the same as the necessarily being at a dock. Also recall that an entire 3D model of the hull is generally required for people like ship husbandry battle damage assessment, for example, when we look at the narcotic to this type of thing, there's a certain region of the hall of which they are interested. So we've become much more localized in terms of where we have to do the search and where we look at the information. And sometimes, it could be real-time search. We don't have to create what I would call the high resolution 3D map. And that's really where our technology comes into play, we can do the real-time inspection and we can build the map.

You just answered my final question. I thank you for your time.

Thank you. We appreciate it. Thank you very much.

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

Thank you. I got a couple of more financially oriented questions. The company did $5.5 million in revenue to Asia. You say China is your biggest offshore market and that the export controls could prevent you from selling to China anymore. Can you quantify that? How much you're going to be at risk for if those export controls are retained.

Just to be clear, Walter, thank you for your question. Most of the composition of Asia is Japan actually. So we've been impacted in terms of sales to China for many years now. So it's getting less and less problem for us because since I think 2022, we have had reduced ability to sell to China. So most of the composition is Japan.

Okay. All right. Good enough. And as far as the Precision acquisition Precision -- we got the Acoustics acquisition. It's in the 10-K that amortization pro forma was $477,000. Is that going to be the number going forward? For the amortization.

I could take that Annmarie.

Yes, please.

And that's the number for four years. Yes. So for the first four years, that's the number. And then slightly when -- it reduces slightly when our noncompete stop after four years. So the down slightly and it lasts for a total of seven years is what we've modelled.

Okay. No, I see. Well worry about those years when we get there. But for the time being, that's good. And okay, and the earn-out target is a pretax number of $1.05 million. Is that before the amortization or after?

Before.

Okay. So they have to make $1.05 and then you would for your financial reporting subtract from there, but to calculate the earnout, that's really all I have to get. Okay. I think that sounds good. Appreciate it.

Thank you, Walter. Thank you.

I'd now like to turn the call back over to Annmarie Gayle for closing comments.

Thank you, operator. Thank you for your participation today. Have a great day. Thank you, everyone.