Coda Octopus Group Inc (CODA) 2022 Q4 法說會逐字稿

Good morning, and welcome to Coda Octopus Group's fiscal year-end 2022 earnings conference call. My name is Rob, and I'll be your operator today. For this call, Coda Octopus issued its financial results for the fiscal year ended October 31, 2022, 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, Nathan Parker. Following their remarks, we will open the call for questions.

Before we begin, Jeff Grampp from Gateway Group will make a brief introductory statement. Mr. Grampp, please proceed.

Thank you, Rob. Good morning, everyone, and welcome to Coda Octopus's fiscal year-end 2022 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 laws 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 under the caption Risk Factors in our 10-K.

You may get Coda Octopus's Securities and Exchange Commission filings for 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's 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-end 2022 conference call. I'm excited to speak to you today about Coda Octopus. I'm very, very excited about the company.

Now before we discuss our recent results and performance, I would like -- I would first like to provide some background about our company for those listeners who may be new to Coda Octopus Group.

Coda Octopus Group is an established business with a strong pedigree in underwater technology and defense engineering. We operate two discrete business operations. Our underwater technology business, in our filings sometimes referred to as our products business, and our engineering businesses.

We have a strong culture of intellectual property rights ownership in our technology business and have a number of patents covering our technology. And with the engineering business, we have sole-supplier status for a number of proprietary parts sold into mission-critical integrated defense systems.

We view these business units as complementary and synergistic to each other as we can jointly bid on projects where the combined scale provides a competitive advantage for such projects. We believe our business units also provide us with significant growth opportunities combined with solid current revenue and profitability. I'll be talking more about that today.

Now turning to our marine technology business, this business develops and supplies technology solutions to the underwater and diving market of both commercial and defense customers. We have been operating as a supplier of solutions comprising both hardware and software products for over 25 years, and all design development, manufacturing of our technology and solutions are performed within Coda Octopus.

Now we are a market leader in real-time 3D underwater imaging sonar technology, and we have the world's only real-time 3D imaging sonar capability. This technology is the only one that can generate a real-time 3D image of moving objects underwater in zero-visibility conditions, so the only technology in the world that can generate underwater a real-time 3D image of moving objects underwater in zero visibility conditions.

And that's important because much of subsea operations actually [are in] zero-visibility conditions. And then, we are the only solution in the market at that point. We market this technology under the Echoscope brand. That is the Echoscope brand.

Our other core technology relates to the transformational diving technology, the DAVD, which is Diver Augmented Vision Display System, which is the result of a direct requirement from the US Office of Naval Research under its future naval capabilities. So the DAVD came out of the requirement from the Office of Naval Research for its future naval capabilities [program].

The DAVD is the only technology that provides the real-time data platform to both the diver and dive supervisor, where the data hub for the diver is on a pair of fully transparent glasses embedded in the diver's helmet, facemask, or other diving suits.

So in other words, we are providing data to the diver for on a pair of transparent glasses, and that becomes this data hub for all types of different real-time information. And this real-time information is also shared by the dive supervisor on the surface.

Now our sonar technology is used in a variety of underwater applications. These include construction, mining, bridge inspection, offshore renewables, oil and gas, [dredging], port and harbor security, survey and mapping, and more generally for monitoring and inspecting moving objects underwater.

It is the only technology that can generate a real-time 3D image of moving objects underwater in zero-visibility conditions. This is significant as many underwater operations are stalled due to poor visibility conditions, resulting in significant cost overrun.

Now turning to our engineering business, our [other] operating segment, this is conducted through our two engineering subsidiaries, Colmek and Martech, where we act primarily as a subcontractor to prime defense contractors.

These engineering subsidiaries supply embedded solutions and subassemblies into mission-critical defense programs, where we have long-established relationships with the US and UK prime defense contractors such as Raytheon, Northrop Grumman and B.A.E.

We have a number of programs that we've been supplying proprietary parts for over 30 years, such as the US close-in weapons support program for the Phalanx radar-guided cannon used on combat ships. These long-term relationships provide us with long-tail recurring revenues.

Now the engineering businesses seek to leverage these long-standing relationships with clients to expand the number of programs it supplies -- into these programs. This is crucial for the growth strategy of the engineering business that is to grow the number of programs, that it supplies proprietary parts.

And that's really its business model: to really supply sub-assemblies into larger defense programs where there's the opportunity for long-tail recurring relationships. And because we have these long-standing relationships with clients, we often get the opportunity to bid for work on these programs.

Now, turning to our growth pillars that we are really postulating our growth on, I'd like to talk about this a little bit more. Our key growth pillars are our Echoscope and sonar series -- our Echoscope sonar series technology and our DAVD.

In order to fully understand where the company's growth opportunities lie, let me start with our sonar technology and the evolution we have made over the last several years. If you look back several years ago, we had limitations gaining broad adoption of our technology due to size, weight, power requirements, and price. Our technology was very expensive.

Until February 2019, our technology was limited to use on work-class vessels. These are very large vessels at sea, which is only a small section of our target market. And at the time, we only had one type of sonar to service the entire market. And because of those form factors we talked about -- size, weight, power, and also price -- the market was very limited for us.

In February 2019, we launched our fourth-generation sonar series and expanded our range of sonar offerings to cover six base models with various options. These options cover frequency, depth, range, and resolution of the sonar. That is really what gives the type or model that we're selling: frequency, depth, range, and resolution.

With this 4G sonar series, we have removed the barriers to adoption and opened the market opportunity for our technology as we have models that are suitable for all types of underwater vehicles, be they large or small. We built on this traction with our 4G sonar series by recently introducing our Echoscope PIPE, an acronym for Parallel Intelligent Processing Engine.

This is the most technologically advanced imaging sonar available in the market. The Echoscope PIPE introduces significant new capabilities to the subsea market by providing a single sensor that can generate multiple 3D images simultaneously in real time using up to 10 different acoustic parameters such as frequency, range, and many other filters.

Now, our previous generation of imaging sonar was capable of generating only one 3D image in real time. Our new generation of imaging sonar, which is the Echoscope PIPE, can generate multiple 3D images. And the data is therefore available to different parts of the survey operation.

This therefore allows customers to rely on one sensor and not having multiple sensors to do different tasks within this survey operation, thus reducing costs and making operations much more efficient for the subsea market.

So we have really not only moved the market onto real-time 3D imaging sonar but also generating multiple 3D images for the different parts of the survey operation from a single sensor. And that's the promise of the Echoscope PIPE, and this is why we are excited about the market.

With our company being a first mover in innovating and commercializing real-time 3D sonar technology as well as shifting market requirements for real-time 3D imaging in the subsea market, we have positioned Coda to be the market leader in real-time 3D underwater imaging visualization.

Real-time 3D data underwater transforms the market because users can make real-time decisions in situ as opposed to the current competing technology, which uses one mission to collect the data and another mission to process the data.

And this is the key difference between our technology and what I describe as the legacy technology. The legacy technology, which is the multi-beam technology, goes out to sea, collects the data, [comes away, and] process the data.

Now that the environment at sea is all -- is fast moving, so that is stale data. Our technology provides the only solution for real-time decision making.

I can go out on a bridge doing a bridge inspection. I can see all of the impairments in the bridge. I can see the [scope]. Right there and then, I can prepare my customer deliverables immediately there. I don't have to go away and post process the data. So we are really excited about our technology.

Now I'd like to give you an update on our PIPE, the Echoscope PIPE progress we have made in fiscal year 2022. Well, the headline here is that we've been successful in getting our Echoscope PIPE sensors into new defense programs.

This is really -- we have the opportunity before the company is at the -- these prime defense contractors roll out the new generation of underwater vehicles. We have the opportunity to be the sensor of choice on those platforms. And this year, we sold into four different US programs, who are working on the new generation of underwater vehicles.

We also sold into one new Japanese program, again, working on the new generation of underwater vehicles for the Japanese defense market. In addition to that, in the commercial space, we sold four Echoscope PIPE sonars on a new underwater vehicle that is going to be used in that exciting application of offshore renewables, where we have the lead in many areas. So we've made really good progress around our Echoscope PIPE.

So this progress made by our technology over the last four years, both in expanding the available models within our sonar series and getting onto some key new underwater vehicle programs in the defense sector, paves the way for us to increase our market share of imaging sonar market over the next two to three years.

Our goals as a management are to cement our place in the existing programs that we are currently working, and also, of course, to identify new programs, all the while expanding our share of the commercial market for our sonar.

In this way, we aim to increase our marine business revenue, selling depending on the model type and configuration between, say, 60 and 80 sonars per year along with DAVD sales. And therefore, in the next two to three years, we're targeting approximately $25 million in revenue for our technology business on a standalone basis compared to $14.7 million in the fiscal 2022.

So we're really hoping that year on year, we are increasing the number of sonars we're selling in the market, and Echoscope PIPE will be that new platform as the demand is more and more for a single sensor with multiple 3D images.

And at the same time, we're hoping to add to our revenues by the rollout of DAVD, and we're now going to talk a little bit more about DAVD, which is our second growth pillar.

So this DAVD technology, this is transformational as it radically changes diving operations by providing enhanced vision and operational awareness, even in zero-visibility conditions. And this technology is applicable to both defense and commercial markets globally.

For the DAVD, we are -- the DAVD -- we are the first movers in the market to transform diving operations by providing, via the [DAVD solution], real-time media content of all descriptions to the dive operations. Importantly, our technology is scalable and transferable to all types of diving operations.

Our main focus currently is in the defense, including the military and commercial, but excluding leisure diving at this stage, thereby providing Coda with a significant market opportunity. So the DAVD, which is transformational for the global diving market, is really -- we are targeting the defense market and the commercial market. And at the moment, we're leaving the leisure markets.

The DAVD technology moves the diver from the dark-room operations in diving by touch to a real-time integration platform shared by the diver and the dive supervisor on the surface and also moves away from a largely voice-directed dive operation.

So really, we are introducing a real-time platform, real-time data platform for the diver and the dive supervisor. This in turn significantly enhances efficiency, safety, timeliness, cost of operations, and guarantees the success of the dive operations.

We should remember that divers have limited time in the water. Any one time, it's approximately 20 minutes, and you'd have to get the diver in the water to the dive site to do the activity and out of the water.

So there are six key transformational aspects that DAVD provides for the market. First is location, where we provide real-time diver compass information, depth, and positioning information underwater. We provide navigation to the dive site. And we also identify along the way all hazards and waypoints to the dive site.

Second, we provide visibility. Here we enhance the diver experience with real-time video data, our 3D sonar data where required, and augmented-reality scene awareness for the diver underwater using our 3D models of the environment.

Third, communication. Here we communicate between diver and dive supervisor with rapid text messages, images, detailed instructions where required, and digital speech and audio.

Fourth, we provide data. Here the diver and the supervisor can share and access importantly all project data and information on demand in real time. This includes engineering information of all forms, drawings, videos, text messages, manuals, 3D models of installations, shape for whatever they're looking for. So really, a rich media content, which supports the diver and the dive supervisor in real time.

Fifth is safety as we provide navigation and dive time data synchronized in real time to ensure safe diver monitoring, including location, oxygen levels, pathfinding, hazards, and waypoints.

And sixth, we've made significant advancement of the audio quality for diving operations underwater. So we have moved away from noisy analog to digital audio link that will serve the entire diving community.

The DAVD is an Approved Navy Use item, including the accompanying Echoscope sonar, and it is currently used by the US -- by a number of US Navy teams such as MDSU, which is Mobile Diving and Salvage Unit; UCT, Underwater Construction Team; EXWC, which is Expeditionary Warfare Center; NSWC, which is Naval Surface Warfare Center in Panama City; and SERMC, which is Southeast Regional Maintenance Center.

During the fiscal 2022, we made significant progress in expanding the market for the DAVD. First, we have, in 2022, performed the customization of the DAVD for US military command, which is the most significant opportunity for the DAVD in the US currently.

This is also -- this was done as a [paid development], and we expect to deliver the first working prototype by early February. If trials are successful in spring, we expect to supply multiple units in rapid succession for further evaluation. And then, we expect a production order from this military command in fiscal 2023.

Second, the second important milestone for the DAVD is that the DAVD Gen 3 systems have now been supplied to the US, which have now -- sorry, which have now been supplied to the US Navy, have now moved from R&D to field operational status by the US Navy.

So they've now moved the DAVD project from R&D to field operational status. This is an important milestone for the adoption of the technology in higher quantities. To date, we have supplied 20 of the latest Gen 3 systems, which excludes the earlier generation. And for Gen 3, we have sold approximately $2 million worth of [DAVD purchases], including some of our imaging sonar.

Our first-mover advantage and progress with these customers provide a high barrier to entry into this market by competitors. The DAVD is a complex product with hardware and software components. The software development takes many years. In addition, the use of the transparent glasses underwater where we render the data to the driver, which is the [diver's hub], is patented in the US. And Coda has the exclusive license with this.

Lastly, we at Coda Octopus are leveraging our years of underwater experience and incorporating our own proprietary technologies such as our real-time 3D sonar and software. Our real-time 3D sonar is the only sonar that can produce real-time images underwater, including 3D models of the underwater environments in all water conditions, including in zero-visibility conditions.

We're targeting to grow this stream of revenues for the business, adding approximately $2 million to $3 million in revenues annually to the business over the next several years, representing about 50 incremental units of growth per year. So let me now turn the call over to our CFO, Nathan Parker, to walk you through our financials before providing my closing remarks. Nathan?

Thanks, Annemarie, and good morning, everyone. Let me take you through our fiscal 2022 results for the 12 months ended October 31, 2022. For the fiscal year 2022, we recorded revenues of $22.2 million, representing 4.2% growth compared to the $21.3 million of revenue we recorded in fiscal 2021.

The increase in revenue was attributable to further penetration in markets for our Echoscope and DAVD solutions and strong growth for our services business. It is important to note that we recorded this year-over-year growth despite currency headwinds of approximately $1.2 million as the US dollar, which is our reporting currency, strengthened significantly during fiscal 2022 compared to the currencies in many countries where we conduct business.

This dynamic has started to reverse itself more recently, which is encouraging to our business for the fiscal 2023 year. Without the adverse movements of currency resulting in lower translation of our revenues from our foreign subsidiaries, revenue would have increased by 9.9% instead of the 4.2% that we recorded.

Our marine technology business recorded revenue of $14.7 million for fiscal 2022, representing a 7% decrease compared to $15.8 million in fiscal 2021. This decline is primarily due to the negative currency translation impact resulting from the strengthening of the US dollar. Excluding this impact, revenue was approximately in line with the prior year at $15.6 million.

Our marine engineering business recorded revenue of $7.5 million in fiscal 2022, representing growth of 36% compared to $5.5 million in fiscal 2021 as sales orders began to materialize and performance returns to more normalized levels.

For fiscal 2022, we generated gross profit of $15.2 million, representing growth of 2.9% over the $14.8 million in fiscal 2021 due to the favorable year-over-year increase in revenue, which was partially offset by higher material costs.

Our gross margin percentage for fiscal 2022 of 68.3% compares to 69.2% for fiscal 2021 as a greater percentage of our overall 2022 fiscal sales were generated from the marine engineering business, which should additionally have lower margins.

Our marine technology business' gross margin improved slightly to 80% in fiscal 2022 compared to 79.9% in the prior year. Our marine engineering business' gross margin improved noticeably to 45.4% versus 38.6% in the prior year, as a greater percentage of revenue is generated from our engineering services contracts.

Now moving to our operating expenses, our total operating expenses for fiscal 2022 totaled $10.2 million, which is a 6.8% decrease from fiscal 2021 of $10.9 million due to lower research and development costs.

Our research and development costs for fiscal 2022 totaled $2.2 million, which is a 25% decrease from fiscal 2021 of $3 million due to reduced spending in our marine engineering business related to Thermite Octal development until we can really gauge both the market and customer requirements for this product offering, as well as a shift in our marine technology business expenditures away from the capital-intensive developmental phase of our real-time 3D sonar technology and F280 series to feature enhancements, including firmware and software improvements.

As a percentage of revenue, our research and development costs for fiscal 2022 decreased to 10% of total revenue compared to 14% in fiscal 2021.

Our selling, general, and administrative costs for fiscal 2022 totaled $7.9 million, which is essentially unchanged from fiscal 2021. As a percentage of revenue, our selling, general, and administrative costs for fiscal 2022 decreased to 35.5% of total revenue compared to 37.1% in fiscal 2021.

Looking forward at our cost structure, given the significant progress that we've made in R&D in the last four years, we anticipate refocusing a significant portion of our resources and strategy from research and development to global business development, brand building, and investor relations.

We believe we have developed world-class products and solutions that provide market-leading positions for Coda. Now we can have -- we've made meaningful progress in our markets through these investments to create shareholder value.

Operating income for fiscal 2022 totaled $5 million, a 30.4% increase from $3.8 million in fiscal 2021. Operating margin for fiscal '22 was 22.5% compared to 18.1% in fiscal 2021. The increase is primarily due to the higher revenue we generated, coupled with our lower operating expenses for the year.

EBITDA for fiscal 2022 totaled $5.9 million, which is a 5.1% decrease from $6.2 million in fiscal 2021 The slight decrease was due to our lower net income in fiscal 2022 compared to the prior year.

Net income before taxes for fiscal 2022 totaled $5.1 million or 23.1% of revenue at 2.3% decrease from $5.3 million or 24.6% of revenue in fiscal 2021. The slight decrease is due to a one-time $1.4 million benefit in fiscal 2021 from the payment -- Payroll Protection Program and Employee Retention Credits partially offset by higher revenue and lower operating expenses.

When adjusting for the Payroll Protection Program and our Employee Retention Credits we recorded in fiscal 2021, we grew our net income before taxes by 29.2% from $3.9 million to $5 million, which we think is a more accurate depiction of our strong results for fiscal 2022.

Net income after taxes for fiscal 2022 totaled $4.3 million or $0.40 per basic share compared to $4.9 million or $0.46 per basic share in 2021. The decrease is largely driven by an increase in the company's effective tax rate in fiscal 2022, as we have exhausted our past net operating loss carryforwards as well as the one-time Payroll Protection Program and Employee Retention Credits I previously mentioned.

Moving on to our balance sheet, as of October 31, 2022, we have approximately $22.9 million in cash on hand and no debt. This compares to $17.7 million of cash on hand and approximately $64,000 in debt as of October 31, 2021. We are able to grow our cash balances during fiscal 2022 while simultaneously continuing to invest in our business as we generated $6.7 million in net operating -- net cash from our operating activities.

That completes my financial summary, and I'll turn the call over to Annemarie for her closing remarks.

Thank you very much, Nathan, thank you.

So as we look into our fiscal 2023, our key management goals are to continue to develop the market for our main technologies, particularly in the defense space, where there are various new programs for the new generation of vehicles used at sea such as [underwater surface vehicles] and autonomous vehicles, where they're looking for the new generation of sensors, which we believe our Echoscope technology will be frontrunner for many of these new underwater vehicles that are emerging; and secondly, to introduce the DAVD technology to foreign [navies] and the commercial offshore sector.

We have been pleased with the traction of Echoscope PIPE and DAVD solution have been receiving and are hopeful about our future prospects representing these main pillars of our growth. We are excited about the outlook for Coda as we have world-class products and solutions that are transformational to the underwater imaging and diving market.

And we mean transformational because our technology, the Echoscope PIPE and our DAVD, are certainly the next generation of technology for these markets, which is set to displace the legacy technologies that are way behind our technology and where the market has now moved on to a real-time information platform.

This therefore provides us with significant growth opportunities in our markets. We have a demonstrated track record of generating high margins and solid profitability. And we have a very healthy balance sheet with cash in hand and no debt.

We're now happy to take your questions. Operator?

(Operator Instructions) Brian Kinstlinger, Alliance Global Partners.

Hi guys, and congratulations on hosting your first conference call here. First, as it relates to the revenue for the products business, excluding foreign exchange, it definitely had an impact that you highlighted. What were the other major challenges to growth in fiscal 2022 as sales in that business were relatively flat year over year?

Yes, I think that's a great question, Brian, and hi, thanks for the question. I think what we saw in the last fiscal year, and which actually we reported on, I think, in Q2, I think that our pipeline in terms of opportunities that we've been tracking and the level of [quotes] that we've been doing and preparing, they've been definitely much higher in the 2022 period.

But what we've seen is the conversion rates, many of the -- our pipeline centered around 2023. So we were quoting much more, but things were shifting into 2023. And I think this is partially where we're going to see a rebalancing or a rebounding in oil and gas.

And [that's why the] preparatory work for that, when you start, say, you're going to prospect a new oil and gas installation, then I think that takes time to plan. So what we're seeing is a lot of pipeline activities and then, moving out into 2023.

So what we expect, for example, in the 2023 period is to see [rentals] taking off much more than they had in the last two years, for example, Brian. So I think it's largely to do with timing more than anything else.

And also, we still had the overhang from COVID. We should still remember that can boost the sectors in which we operate. People are still working from home. What that means is that they're not really [executing] as many projects as we were doing pre-pandemic. So things are just being normalized, I think.

Great. My second question relates to the Echoscope being used on several defense contractors for underwater vehicle programs. You said selling to those were an opportunity for you -- for your technology to be embedded as vehicles are rolled out.

My question is, are these contractors still evaluating competing technology to Echoscope, or have you received design wins for any or all? And what's the next data point for these contractors?

Well, I don't know if they're evaluating other technology. But I think, if you are evaluating, then you're not purchasing our technology. The fact that we've been able to sell into these prime defense contractors is good evidence that we are part of the solution that they're working on, so they wouldn't invest so much money just for evaluating.

So I think we have a high degree of confidence from the moment we sell the first two systems into the program that we are part of the design. And more importantly, we have been allocated part numbers for those parts. So we think within their overall solution, when we get the contract, it will be for that particular program with this part number.

So I don't know if they're evaluating other technology, but the fact that our technology -- and this is what happened in the past where we were -- had this difficulty in expanding the market for technology because there were no new vehicles coming to the market.

But you can say now that there's a whole new set of opportunities for the business because of the new generation of underwater vehicles that are coming to the market and replacing the old generation that would have been equipped with the legacy technology.

I think I have a couple of more, the first on the DAVD. Can you speak to the advantages of being of operational status for the DAVD as opposed to being an R&D program?

Well, the thing is, when you're in R&D, you're still evaluating the technology. When it's operational, it means it's in the field for use. And now, it's now up to all of those [commands] to now purchase the item. When it's in R&D, then it's not being purchased. It's just being evaluated.

Now, it is operational. It's now issued to command at -- this is the diving technology that we're using, and it's now up to these commands to start putting in their orders.

Thank you. And then similar to the question on the products business, do you look at Colmek or the entire engineering services business -- you're still a bit below fiscal 2020 of $8 million in the peak of $12 million in fiscal '19. So what have been the prohibitive factors in that business? And how should we think about the timing of the recovery to get back to some of those levels?

Well, it's the same with -- I mean, I'm pleased with where the engineering business has got to this year. But as you rightly said, we need to get to that point of -- where we were in 2019, for example, where I think, on a stand-alone business, that business is trending as a $10 million business on its own.

So I think it has to do again with -- they supply into broader defense programs. And we've been [sounding] very, very slow, and really, not a lot of visibility on the activities that are going -- ongoing with the clients on these programs.

So this year, again, we're quoting more and hopeful for more than we did last year. But having said that, I think I'm pleased with the progress it has made over 2021, and we anticipate that it will continue in that direction.

Clearly, Brian, what -- that business got a couple of new programs last year that are key, and the whole -- the business model of the engineering business is to really get onto new programs year on year. And our target is to continue to expand the number of programs that we are supplying proprietary parts to.

Right. Last question, you gave us some good insight into two- to three-year outlook of where the business could be if things continue to execute well. First of all, the first quarter is basically done tomorrow. So any update on -- you've been -- you've had a business, it's very lumpy. Any update on the first-quarter trends as the quarter is basically closed, or any insight into the lumpiness you might expect in this year in fiscal '23?

I wish I could talk about the -- we're still evaluating the quarter. But what I can say, we've been seeing good traction in the level of quotation so far. So we always measure the business and its progress by the number of proposals we're putting out or the number of inquiries and actually writing proposals because by the time that we are writing a proposal, we have really, really qualified that it is our opportunity. It's a timing issue. And I can say that I see we are definitely writing more proposals than we were this time last year.

Okay. Thanks so much.

You're welcome, and thank you for the questions, Brian.

Graham Madison, Water Tower Research.

Hi, good morning and congratulations on the progress with the Echoscope PIPE. What do you attribute to the success you had in that area? Is it more in terms of what's driving growth? Is it more cost savings that you [are trying to derive] or in the efficiency? Or is it the technology benefits versus the other solutions out there?

I think it's all of the above because then if you imagine, that's exactly right. The key thing about the Echoscope technology is that although upfront, it's very, very costly, it's quite a significant return on investment for users.

If we take just block placement, if you're placing a block underwater like breakwaters, before we enter [that market], you are placing four blocks per day. With the Echoscope, depending on the type of block, we are placing anywhere between 180 to 270 blocks per day, hugely transformational -- hugely, so -- the cost --

Then when you think of the Echoscope PIPE -- let's think about our previous generation of our technology, the Echoscope. We generate underwater one real-time 3D image. And that's powerful because if you are in a darkened room and you can't see anything and you have one torch, then [you need a new torch].

The way to think about PIPE is that -- Echoscope PIPE -- is that there are many torches now. And therefore, the many torches, what that is going to do to the industry is that they can use a single sensor for different parts of the survey operation.

Currently, you're using the Echoscope. You're using a different sensor for short range. You're using many, many different senses. And the fact that we can now have, if you like, in one sensor, we can do a long range, a short range.

We can set up, if you like, 10 sequences. If you think of [using] -- we can set up 10 sequences. And therefore, using -- you can get 10 different images.

Think of your iPhone, where you can have all these different filters and use all these different [cameras] just to get a different image. This is what the Echoscope PIPE is doing underwater. So it's capability, it's cost, it's time, it's data security. It is all of the above. So we're really excited about Echoscope PIPE.

Very great. Thank you. And then one other question. As a theme, there's a tremendous amount of money being invested in the offshore renewable space. Are you starting to see demand from that area now, or is that more of a trend that's going to be growing next year and beyond?

No, we are seeing that, and we're quoting a lot of rental opportunities because then -- and that's a great question for us. Thank you for raising that. That's really actually right in our swim lane because then it's the only technology that can visualize the moving cable as you are [laying out your cable].

You have a precise cable touchdown point underwater within your engineering spec. And we are the only technology that can image this moving cable. And in addition, as we saw last year, we were awarded a new patent where now we can also, using the Echoscope, we can automatically track the cable into position and predict in the cable touchdown points.

So offshore renewables -- and I remember in 2019, there was quite a lot of offshore renewable projects going on. Without exception, we we're almost on all of those projects. And I think that's the year our rentals went through the roof. And so, we are very, very excited.

And also, in the US also, what's going to happen -- because Europe has the lead in terms of the experience for these offshore installations -- many of our customers are moving to the space like the Boskalis and the Van Oord of the world. And those are people we supply into and already talking about the US market for that and supplying our technology for those operations in the US.

So offshore renewables, we are super, super excited about it. Similarly, for oil and gas, which -- our business started in oil and gas. We don't just -- now because then -- oil and gas then, the price of oil fell over the last three, four years.

We sort of created new markets for technology. But on the rebound of oil and gas projects, there's also that opportunity for the business. So we are super excited about offshore renewables and similarly about oil and gas, where we started our business.

All right. Great. Thank you so much. I'll jump back in queue.

(Operator Instructions) David Wright, Henry Investment Trust.

Yes, hi, good morning. Thank you for having the call. A question for you, Annemarie. In talking about Echoscope, you've said quite a lot about it being good for being in the dark, things moving around, but you've also used the term subsea several times.

As I understand it, subsea is what's going on below the ocean floor with -- I guess there wouldn't be much stuff moving around. Can you straighten me out on my understanding of the --

Yes, that's probably some apologies, [some laziness in words]. Think about it as underwater then. If anything, underwater. So in our industry, [we talk of subsea] without having that precision that you're talking about. But what we mean is just anything underwater.

Right. So Echoscope, is that also a below-the-ocean-floor product?

It's not below the ocean floor. If anything, underwater.

Got it. Okay. And then I'm looking at your IR deck. It seems different people are in different places. For example, it says that you're in Denmark. It says that Nathan is in Orlando. Can you talk about who's where and what's done where?

Yes, certainly. So the biggest part of our operation is in Scotland in Edinburgh. And there is where we have our center of excellence for R&D and where we do our innovations and also our manufacturing. Having said that, we have started the process of transferring the US side of the DAVD development because that's a requirement of the US that we produce the DAVD in the States, so we have started.

That was interrupted by COVID, but we've started to build up our manufacturing capability in Orlando for the DAVD. But outside of that, for the products business, all of the development and manufacturing is done in Edinburgh, and that's where we have the largest part of the team.

Then also, in the UK, we have part of our engineering business, which is called Coda Octopus Martech, and that is in Dorset. And in Orlando, we have our President of Technology, Blair Cunningham. And that is really a sales office more than anything else, and really where we have our relationship with the Navy.

We do a lot of work with the Navy outside of our -- out of our Orlando office. And then Nathan is in, as you said, Coda Octopus Colmek, where he is co-locating there. And Colmek is our engineering business in Salt Lake City. So that's really the spread of the business.

And we have, because of Brexit, we have a small office here in Denmark where I'm based because then, with the UK leaving the European Union, it's really important that we have a presence in the European Union. And we have established a small office here, which I'm based, but I actually live in Denmark.

Okay, and a question for Nathan. In terms of the company's cash, can you tell me where it's held geographically and also how you have it invested?

Yes. So for our cash, again, it's around $22 million, around $9 million or $8.8 million of that is in foreign -- our foreign subsidiaries. And around $14 million of that is US based.

Okay. And then how do you --

Just to be more specific, sorry, is to say that the bulk of that cash in the foreign subsidiary is based in Scotland. [The base is] in Scotland.

Yes.

All right. And then your US cash, do you have any of that invested? You could be earning quite a lot of interest, I imagine.

Yes. We are in the process of doing that right now. We're going to be investing in short-term securities for right now, just getting up to speed so that we can make additional interest with the rate movements that we've seen in interest rates. So that's our plan for the short term.

Okay. Last question, in the press release, you talked about wanting to put some focus on investor relations this year. How do you see that actually manifesting itself?

Well, I think we've started that process by -- we've got our first earnings call, which -- clearly, we'll be doing a lot more conferences this year.

And, Jeff, maybe you can talk a little bit about our IR program?

But we're talking to investors more. We're going on the road more. We're trying to raise our profile, so -- in the past, I mean, we've been focused inward. But now, really, we are focused on just the IR and brand building.

So, Jeff, can you talk a little bit more about our IR program, please?

Sure. Hi David. So As Annemarie said, I think there's going to be much more focus prospectively on investor engagements, conference attendance, engaging with various Wall Street investment banks that are interested in Coda from a potential research standpoint. And again, just making sure we're having a much more concentrated effort on those points going forward.

Okay. Well, listen, good luck, and thanks very much for taking my questions.

Thank you, David.

Well, thank you, David. Thank you for asking.

Walter Ramsley, Walrus Partners.

Thank you. Congratulations on a good quarter. I got a couple of questions for Nathan. In fiscal 2023, what do you estimate the income tax rate will be?

For our fiscal 2023, we have used up all of our US net operating loss carryforwards, so we anticipate a similar tax rate to what we're seeing this year.

So that includes the deferred adjustment, or -- I mean, so what number are you using, 16 or 19? Is that deferred, or --

16.2.

Yes, 16.2 is the number that we're using right now.

So that will -- even though the R&D is -- I don't know, maybe the R&D effect will be the same, is that what you're expecting too?

Yes, that's our initial estimates right now. [It's what we're using for -- what we have for] fiscal year 2022.

Sounds good. And in the 10-K, there was some discussion there about the supply chain and how the semiconductors were really hard to come by, and the prices were way up there and all of that. Has that eased off for those -- I mean, is there a chance that things will improve on the supply chain front?

Well, we don't know what the outlook is, but we continue to be challenged in that area. But let me emphasize, this is not a Coda -- it is a global that we see. So we don't see any easing at the moment. I mean, we've been able to bear that cushion both in price and availability because historically, we have carried a lot of inventory. But that inventory is running out, so we continue to be concerned about supply chain.

Okay. And you mentioned also in the 10-K that it was really hard to find certain employees in any case. Although, on your website, there's only four jobs listed. So are you trying to hire, or [did you just] gave up on that?

Well, we're hiring. We're hiring software -- normally, that really is through recruitment companies because of the specialized skills that we need. So generally, we are not just using Indeed. We have recruitment consultants because of the kinds of skills we are looking for. So we have a number.

We're looking for business development, for example, for global business development. We're looking for software developers [as a scale] and electronic engineers.

I see. And then one last thing, I don't know if you can comment on it, but it would reassure the investors, I think. For 2022, the revenues were $22 million or, on average, $5.5 million per quarter. I mean, is that like a rock-bottom revenue run rate? Or is it possible it could even go lower than that?

Walter, I really can't see that. And I really -- this call -- I don't really want to give any guidance on that, actually. We will be putting out our management targets. And when we release those, [we'll have a look]. But on this call, we're still working through our targets, and I'm not able to discuss these on this call. I'm sorry.

Okay. I didn't think so, but I figured I'd ask. All right. Thanks for taking my questions.

Thank you, Walter.

Thank you, Walter.

Thank you very much. Jeff?

Thank you. At this time, [I think that's our] question-and-answer session, and I'll turn the call back to Annemarie Gayle.

Thank you very much, everyone, for joining the call today and for your interest in Coda Octopus. Have a great rest of your day and thank you again.

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

Thank you. Thank you, everyone.