Business Overview and Chronology

Coda Octopus Group, Inc. (NASDAQ: CODA) is a global market leader in cutting-edge real-time 3D/4D/5D and 6D imaging sonar technology for subsea applications and revolutionary augmented reality diving technology. The company's innovative solutions have transformed the way industries operate underwater, delivering unprecedented visibility, efficiency, and safety.

Coda Octopus was founded in 1994 as Coda Technologies Limited, a start-up company that originated from a research group at Heriot-Watt University in Scotland. The company's initial focus was developing software for subsea mapping and visualization using sidescan sonar technology, which was widely used in commercial offshore geophysical surveys and naval mine-hunting.

In June 2002, Coda Octopus Limited acquired Octopus Marine Systems Ltd, a UK corporation, and changed its name to Coda Octopus Limited. Octopus Marine Systems was producing geophysical products similar to Coda's, but targeted at the less sophisticated, easy-to-use market.

In December 2002, Coda Octopus Ltd acquired OmniTech AS, a Norwegian corporation, which became a wholly owned subsidiary of the company and subsequently changed its name to Coda Octopus RD AS. OmniTech had been engaged for over ten years in developing a revolutionary real-time three-dimensional (3D) underwater imaging sonar technology, which Coda Octopus Products Limited in Edinburgh then developed further by creating the Underwater Survey Explorer software to control and display the images from the real-time 3D sonar device.

In July 2004, the company effected a reverse merger pursuant to a share exchange agreement between The Panda Project, Inc., a Florida corporation, and Coda Parent, an entity affiliated with Coda Octopus Limited. Panda acquired the shares of Coda Octopus Limited in consideration for the issuance of a total of 1.43 million shares of common stock to Coda Parent and other shareholders of Coda Octopus Limited. The company was then reincorporated in Delaware and changed its name to Coda Octopus Group, Inc.

Over the years, Coda Octopus has strategically expanded its business through key acquisitions, including Coda Octopus Martech Limited in 2006 and Coda Octopus Colmek, Inc. in 2007, which now make up the company's Marine Engineering Business segment. In 2024, the company further strengthened its capabilities with the acquisition of Precision Acoustics Limited, a recognized leader in the ultrasound and acoustic measurement field.

Coda Octopus' business is divided into two main segments: the Marine Technology Business and the Marine Engineering Business. The Marine Technology Business is the company's core, focusing on the development, manufacturing, and distribution of its proprietary underwater technologies, including the Echoscope real-time 3D/4D/5D/6D imaging sonar and the revolutionary Diver Augmented Vision Display (DAVD) system. The Marine Engineering Business operates as a subcontractor to prime defense contractors, designing and manufacturing specialized sub-assemblies for integration into larger defense systems.

Financial Overview

Coda Octopus has demonstrated its financial resilience, with consistent revenue growth and improving profitability. In the fiscal year 2024, the company reported total revenue of $20.32 million, a 5% increase from the previous fiscal year. The Marine Technology Business segment generated $12.81 million, or 63% of the company's consolidated revenue, while the Marine Engineering Business contributed $7.51 million, or 37%.

Gross profit margins have also shown a positive trend, increasing from 67.3% in fiscal year 2023 to 69.8% in fiscal year 2024. This improvement was driven by the mix of sales, with the higher-margin rental business seeing an 84.1% increase in revenue to $2.32 million.

Operating income grew by 30.8% to $3.58 million in fiscal year 2024, with the operating margin expanding from 14.2% to 17.6%. Net income after taxes increased by 16.7% to $3.65 million, or $0.32 per diluted share, compared to $3.12 million, or $0.28 per diluted share, in the prior fiscal year.

For the most recent quarter (Q4 FY 2024), Coda Octopus reported revenue of $5.05 million, up 12% year-over-year from $4.9 million in Q4 FY 2023. Net income for the quarter was $326,212. The increase in Q4 revenue was primarily driven by higher sales in the Marine Technology Business segment, particularly in the rental and Asian equipment sales categories.

Liquidity

Coda Octopus has maintained a strong balance sheet, with $22.48 million in cash and cash equivalents as of October 31, 2024, and no debt. The company's working capital stood at $39.08 million, providing ample liquidity to support its growth initiatives. The company also has access to a $4 million revolving line of credit with HSBC, which is currently undrawn.

Key financial ratios further underscore the company's strong financial position:

• Debt-to-Equity ratio: 0.008

• Current ratio: 11.03
• Quick ratio: 7.44

These ratios indicate that Coda Octopus has minimal debt, strong short-term liquidity, and the ability to meet its short-term obligations comfortably.

Segmental Performance

Marine Technology Business

The Marine Technology Business is the driving force behind Coda Octopus' growth, leveraging its proprietary real-time 3D/4D/5D/6D imaging sonar technology and diver augmented reality solutions. This segment's revenue increased by 5.7% to $12.81 million in fiscal year 2024, with the rental business contributing $2.32 million, up 84.1% year-over-year.

The Marine Technology Business segment achieved a gross profit margin of 77.9% and income from operations of $4.15 million in fiscal year 2024. However, the segment experienced a 33.4% decline in sales to the Americas, which the company attributed to reduced orders under U.S. defense programs due to shifting spending priorities under continuing budget resolutions. This decline was partially offset by the significant increase in rental income and a 19.0% increase in Asian market sales.

The company's flagship Echoscope technology continues to revolutionize underwater operations, enabling real-time monitoring, inspection, and visualization in even the most challenging low or zero-visibility conditions. The Echoscope's unique capabilities have made it a valuable tool for a wide range of applications, including offshore construction, renewable energy, oil and gas, and defense and security.

The DAVD (Diver Augmented Vision Display) system, developed in collaboration with the U.S. Navy, has also gained traction, with the tethered version now operational across nine naval commands. The company is also making progress on the untethered DAVD variant, which has the potential to transform the global defense and commercial diving markets.

Marine Engineering Business

Coda Octopus' Marine Engineering Business, comprising Coda Octopus Colmek, Inc. and Coda Octopus Martech Limited, operates as a trusted subcontractor to prime defense contractors. This segment contributed $7.51 million, or 37% of the company's total revenue, in fiscal year 2024, a 3.8% increase from the previous year.

The Marine Engineering Business achieved a gross profit margin of 55.8% and income from operations of $1.72 million in fiscal year 2024. Despite the challenges posed by reduced defense spending due to the use of continuing resolutions, the Marine Engineering Business was able to maintain its profitability, with gross margins improving from 51.6% in fiscal year 2023 to 55.8% in fiscal year 2024.

The Marine Engineering Business designs, engineers, manufactures, and supplies proprietary sub-assemblies for integration into larger defense systems. These long-standing relationships with prime contractors often lead to recurring revenue streams, as the company maintains preferred supplier status for the life of the underlying programs.

To diversify its revenue streams, the company is investing in its Thermite Octal line of mission computer products, which is expected to open up new opportunities in the defense sector.

Acquisition of Precision Acoustics Limited

On October 29, 2024, Coda Octopus completed the acquisition of Precision Acoustics Limited (PAL), a recognized leader in the ultrasound and acoustic measurement field. This strategic move expanded the company's capabilities and expertise in areas that are critical for advancing its Echoscope technology and positioning the group to compete for larger defense-related contracts.

Precision Acoustics specializes in acoustic hydrophone design and innovative acoustic materials, providing a comprehensive range of products and solutions primarily focused on medical imaging and non-destructive testing (NDT) applications. The acquisition is expected to enable Coda Octopus to integrate Precision Acoustics' capabilities with its existing technology platform, unlocking new market opportunities and research and development initiatives.

While PAL's results are not included in the company's fiscal year 2024 income statement due to the acquisition occurring just two days before the end of the fiscal year, the fair value of PAL's assets and liabilities are reflected in Coda Octopus' consolidated balance sheet as of October 31, 2024.

Geographic Performance

Coda Octopus operates on a global scale, with sales across multiple regions. In fiscal year 2024, the company's revenue distribution was as follows:

• Americas: 36%

• Europe: 32%
• Asia/Australia: 27%
• Middle East/Africa: 5%

This diversified geographic presence helps the company mitigate risks associated with regional economic fluctuations and allows it to capitalize on growth opportunities in various markets.

Challenges and Opportunities

Coda Octopus has navigated several challenges in recent years, including the impact of the COVID-19 pandemic and the funding constraints posed by the use of continuing resolutions for defense programs in the United States. The company's revenue from the Americas decreased by 20% in fiscal year 2024 due to the reduced allocation of funding to these programs.

However, Coda Octopus has demonstrated its ability to pivot and mitigate the impact of these challenges. The company's diversified revenue streams, with a growing presence in the commercial offshore and international markets, have helped offset the temporary slowdown in the U.S. defense sector.

Looking ahead, Coda Octopus sees significant opportunities in several key areas:

1. Expansion of the DAVD technology: The company is making progress in the development and commercialization of the untethered DAVD system, which has the potential to transform the global defense and commercial diving markets.

2. Integration of Echoscope technology into new underwater vehicle programs: Coda Octopus is actively working with prime defense contractors to integrate its Echoscope technology into the next generation of remotely operated and autonomous underwater vehicles, enabling real-time 3D/4D/5D/6D imaging and targeting capabilities.

3. Synergies from the Precision Acoustics acquisition: The addition of Precision Acoustics' expertise in acoustics and medical imaging technology is expected to enhance Coda Octopus' research and development capabilities, as well as open up new market opportunities in adjacent sectors.

4. Expansion into international markets: The company is focusing on growing its presence in Asia, Europe, and other regions, leveraging its strong technology portfolio and global sales and distribution network.

Industry Trends and Market Outlook

The subsea and offshore market that Coda Octopus serves is expected to experience robust growth in the coming years. Industry analysts project a compound annual growth rate (CAGR) of approximately 8-10% over the next five years. This growth is primarily driven by increasing demand in offshore wind energy, oil and gas exploration and production, and defense applications.

The rising adoption of advanced underwater imaging and sensing technologies across various industries presents a significant opportunity for Coda Octopus to expand its market share and drive revenue growth. The company's Echoscope and DAVD technologies are well-positioned to capitalize on these trends, offering unparalleled capabilities in real-time 3D/4D/5D/6D underwater imaging and augmented reality for divers.

Guidance and Future Outlook

While Coda Octopus does not provide comprehensive financial guidance, the company has shared some insights into its expectations for fiscal year 2025:

• The first quarter of fiscal year 2025 is expected to be challenging due to programs being funded by continuing resolutions. However, the company anticipates improvement starting from the second quarter onwards.

• For fiscal year 2025, Coda Octopus expects approximately $5 million in revenue from DAVD program orders, including: - $2 million for the tethered system - $1 million for the initial untethered system - $2 million for other DAVD development programs

• The company is also tracking three new DAVD program awards, which could provide additional revenue opportunities beyond the expected orders.

Management remains optimistic about the company's long-term growth prospects, driven by the increasing adoption of its innovative technologies across various industries and the potential synergies from the recent acquisition of Precision Acoustics Limited.

Conclusion

Coda Octopus Group has established itself as a global leader in real-time subsea intelligence and diving technology, driven by its innovative Echoscope and DAVD solutions. The company's diversified business model, strong financial performance, and strategic acquisitions have positioned it for continued growth and success in the dynamic underwater technology market.

Despite the challenges posed by the funding constraints in the U.S. defense sector, Coda Octopus has demonstrated its resilience and adaptability, leveraging its international presence and growing commercial offshore business to maintain steady progress. The company's focus on expanding its DAVD technology, integrating Echoscope into new underwater vehicle programs, and capitalizing on the Precision Acoustics acquisition presents a compelling growth story for investors.

With a solid balance sheet, a robust pipeline of opportunities, and a management team with a proven track record, Coda Octopus is well-positioned to capitalize on the increasing demand for real-time subsea intelligence and cutting-edge diving solutions across a diverse range of industries and applications. As the subsea and offshore markets continue to grow, Coda Octopus is poised to play a pivotal role in shaping the future of underwater technology and operations.