Prepared remarks
Good morning. Welcome to Coda Octopus 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, Geoff, 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, is 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 the U.S. 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 U.S. 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 U.S. Marine Technology operations by 33.4% which was $2.83 million in fiscal year 2024 compared to $4.26 million in fiscal year 2023. Notwithstanding navigating these challenges on the U.S. 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 U.S 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 U.S. 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 U.S. election many defense programs are on hold until the new administration's 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 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 at 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 U.S. 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 carries CE marking certifying that the DAVD system meets the essential health, safety and environmental protection requirements set by the European Union and the U.K. 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 U.S. Navy for acquisition of the DAVD Technology. Following recent participation in international maritime warfare exercises in Norway, the U.K., and the U.S., 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 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 U.S. Navy and the foreign Navy has in fiscal year 2024 seen substantial progress in the required modifications to meet customer specifications.
The DAVD untethered variant imported the same augmented reality display technology that is used by divers wearing dive masks, operating at shallower depths and not physically tethered to a surface mothership for air supply. These divers are typically military divers performing special forces operations. Despite the funding delays, we have made significant advancements in the hardening program's 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 boasts a more compact design, a 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 U.S. 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 U.S., an estimated 10,000 divers use the same full face mask 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 divers and supervisors 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 diver 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 about this technology. The new DAVD Gen 4 Hub delivered under the DUS program cements this 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 are 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 mapping. This unique combined capability enables real-time decision-making. Coda Octopus is 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 a new generation of undersea vehicles and associated robotic programs. The new undersea vehicles for the remotely controlled and operated or fully autonomously are currently designed for either mapping and information gathering such as creating a detailed seabed map to identify targets of interest or performing specialized prosecution tasks such as neutralizing mines.
By embedding Echoscope 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 embedded in the system from the outset. They are currently undergoing test and evaluation. But these represent longer-term opportunities; they 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 EOD. We recently completed a successful 6-month test and evaluation period with a video ray 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 hull inspection operations. We are also actively pursuing several DoD contracts with both U.S. and foreign navies that wish to integrate both DAVD and Echoscope technologies for subsea vehicle control and diver 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 hull, which can compromise security; being able to assess whether a hull is compromised is a matter of global concern for all incoming vessels in all ports located in the U.S. 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 analytics 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 contracts. 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 U.S. 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, the U.S. engineering business unit was also affected by the reduced funding allocations under the 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 for 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. The 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, the tethered system is now operational across nine naval commands within the U.S. Navy. We are seeing annual budgeting for this product line by the U.S. 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 DAVD solution. We have reached a pivotal point in the DAVD untethered system hardening program, and we anticipate the first sales of this variance in fiscal year 2025.
The DAVD technology has now matured, and a key step forward was the delivery of the DAVD 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 SIBS 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 hull applications and close-range target inspection. We will also continue to prosecute our M&A strategy and in fiscal 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 the DAVD product line. To conclude, we would like to thank our shareholders for their continued support. We are now happy to answer any questions. Operator?
Questions and answers
Our first question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead with your question.
Hi. Great. Thanks for taking my questions. I've got about 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, the full year is behind us now, so I’m focusing on the fourth quarter. The gross margin in Marine was approximately 76%, which is lower than in the previous two quarters. In marine engineering, the margin was 52%, but revenue remained stable there. So once again, it was a bit lower than what we had seen 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. Can you tell us how much revenue the DAVD programs generated in fiscal 2024 and considering the funding challenges in the U.S., what are your thoughts on the range of outcomes for this product in the current fiscal year?
Yes. So I mean, overall, in fiscal year 2024, we saw really a significant reduction in funding from U.S. programs, and that's really typical first of all that is 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 U.S. 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 DAVD programs that we have in the pipeline. And when we think about the DAVD, 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 masks 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, I'm very, very pleased with the team and what we've achieved.
Can you provide some insight into the three new programs and the initial orders? How would you classify their size? Are they very small, very large, or somewhere in between? Any numerical details would be appreciated.
This year, on the Navy side for the tethered system, we anticipate $2 million in equipment purchases for the initial untethered system, with an expectation of $1 million for that. Additionally, for other development programs related to the technology, we expect another $2 million. In total, we are aiming for $5 million related to DAVD this fiscal year. We believe that the key focus for our business is the transition of the untethered variant from the R&D phase into the acquisition phase. It's important to note that we are only discussing opportunities with the U.S. at this point and have not yet addressed the various opportunities we are monitoring with foreign navies. Also, it's worth mentioning that the untethered program is a jointly funded initiative between the U.S. and a significant foreign navy, which will be aligned with the U.S. regarding acquisitions; however, we currently do not have their budget information. To summarize, on the U.S. side, we expect $5 million in adapt revenues from different sources this year, excluding other global opportunities we believe are imminent 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, tariffs can affect the business environment by hindering the free flow of goods and services. This can lead to a contraction in demand as exporting goods becomes more challenging. Overall, there is a noticeable caution in the environment. For example, the infrastructure budget in the U.S. is substantial, and numerous European offshore service providers are lined up for significant programs this year in the U.S. related to infrastructure projects, such as offshore renewables. Until we can understand the implications of the new policy shifts, there remain many uncertainties. This sentiment of caution and numerous unknowns is what I’m hearing from our customer base until the policies are established.
Great. One on Precision Acoustics. It sounds like it can be much greater under the Coda umbrella, but it sounds like they've under-invested. 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?
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.
I wanted to emphasize that what’s exciting about Precision Acoustic is that it has been operating with minimal business development efforts because it naturally fits into the market. We believe that by investing in business development in this area, we can increase revenue. I’m particularly excited about this potential. Additionally, the capabilities it brings to our group will enable us to compete for larger defense contracts. These are the two main highlights of 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.
There's no noticeable seasonality in the business. Since many of our customers are universities, there is some reliance on the budgets aligned with the university academic year. However, there isn't any significant seasonality at this time.
And in terms of the acquisition that we are currently looking at, it's larger than Precision Acoustics.
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?
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 seabed, 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 been 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 that many of these underwater 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. You're right, for us, it's a slam dunk. The Echoscope is more advanced because, as 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. By combining a single sensor for multiple applications, you're reducing cost and your payload and power requirements. I just wanted to mention that we have several ongoing programs, and we believe the Echoscope is a contender for many of these programs. Sorry, 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 question. We're actively working on this right now. The major turning point for us was in the DUS hardening program, where we've developed our new Gen 4 HUB, which is a game changer for the smaller full-face mask and scuba mask markets, which have a much higher volume compared to hard hat diving. You're correct that there are also other adjacent markets both underwater and above water that we're currently exploring. We definitely see this as an opportunity. Regarding the fighter pilot market, there could be potential there, but our focus remains on addressing the challenges of low visibility and noise in the water. Typically, we don't work with what I'd call a daylight heads-up display, although that doesn't mean we can't enter that market. Our primary attention has been on tackling the more difficult issues of vision in disrupted or noisy environments. All adjacent markets related to our safe assets are definitely areas we are looking to investigate further.
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. Let me start by saying that the data technology that DAVD Tethered technology includes many features to cater to various mission profiles. The DUS hardening addresses several aspects. First, we are transitioning from a diver using a hard hat helmet tethered to a surface ship to an agile swimmer with a rebreather and much lighter equipment. This required us to repackage the equipment to fit the existing rebreather gear effectively. Essentially, it involves miniaturizing the system as much as possible to reduce weight while ensuring it integrates well with the other dive gear that divers need to carry. This way, the DAVD system, with all its advantages, does not add extra weight for the diver. The second aspect involves the DAVD HUD, specifically the Gen 4 HUD. Our previous optics in the Gen 3 were too large to fit into the smaller masks, particularly the waveguide optics we had used before. This complete ground-up development will eventually replace all our heads and is significantly smaller, enabling it to fit into the smallest dive masks, which is something the EOD community is especially 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.
Our next question comes from Steve Emerson with Emerson Investment Group. Please proceed with your question.
I'm really pleased to see your significant progress in these large markets. However, given the current disappointing short-term results, could you provide more insight into the addressable markets? For example, how large are the markets for U.S. underwater warfare scuba divers? It would be helpful if you could provide a range. Additionally, could you elaborate on the size of the contracts you're competing for? I'm aware of the $5 million contract from the U.S. for scuba, but a better understanding of the market sizes would be beneficial.
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 hard 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 U.S. 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 U.S. 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 U.S. 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, I think that's correct, Annmarie. Many of the new groups, like EOD, are still in the early stages of discussions with us. The encouraging news is that everyone has been able to experience and explore the tethered system of DAVD, along with the initial version of the untethered system. We're actively discussing this with them, and they are looking into what additional sensors they can integrate into the DAVD system. As I mentioned earlier, we're aiming to create an underwater revolution similar to what happened with cell phones. This can only happen if we incorporate various sensor data or information, such as biomedical information regarding divers’ stress levels, or other types of sensors like magnetometers and ADT. All these elements are vital because they enhance the overall use of the technology, positioning us as a central player. We believe we are indeed becoming that key player.
Now it's about collaborating with those teams to ensure that they don’t simply replace existing technology but rather integrate it with their prior systems for a smooth transition. For example, many seals or EOD operators currently use an iPad underwater for display purposes, so the next logical step is to develop a heads-up display. However, it’s not straightforward to transfer all the necessary information into a heads-up display like in the automotive sector. Augmented reality requires specific skills to present the right information at the correct moment for the diver, depending on their activities. There’s a certain artistry involved, and it won’t be a direct one-to-one transfer. We're focused on the broader market to elevate the adoption curve. Our priority is to engage in high-volume applications, which we believe will yield the best results. We also consider our 15% conversion target over the initial five years to be a reasonable goal based on our models and observations.
Yes. I believe that regardless of the market size over time, our top priority is to deploy the untethered variant effectively, as this will pave the way for global acceptance within the military community, particularly among foreign Navies. It is crucial that we execute this successfully. We have reached a key moment in the program where we are now preparing to acquire a limited number of units this year. I see this as a crucial step towards boosting the adoption rate over time. This is indeed 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.
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 salespeople, 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 an easy question to answer, primarily because the business is largely privately owned and was almost a subsidiary of another company. Some of the financial transfers are a bit unclear. Therefore, I would prefer not to comment on the operating margin, except to say that 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?
I believe we should first discuss SG&A. We plan to add a few more employees over the course of the year, likely in the latter half. Currently, we have about 22 employees, which amounts to roughly one additional hire for the financial year. Regarding R&D, we are running several projects and hope to see some results in terms of product development.
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 regarding internal R&D, I believe our aim is to achieve a 5% increase in monetizing the capabilities of Precision Acoustics within the group.
Okay. That's helpful. Was SG&A $8.3 million last year? How should we project 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 an 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 finally, will there be a public disclosure regarding how Precision performed for the year, possibly through an 8-K or something similar?
No, I don't think there's a requirement for an 8-K for Precision Logistics. We finished our first quarter, and we'll be filing our consolidated first quarter results 45 days after the end of January.
Thank you for joining us today for Coda Octopus' conference call. You may now disconnect.