Coda Octopus Group Inc

Previous wording

Our Marine Technology Business is an established technology solution provider to the subsea and underwater imaging, surveying, diving market and underwater communications market. It has been operating as a supplier of solutions which include both hardware and software products for over 30 years. It owns key proprietary patented technology including real time volumetric 4D/5D and 6D imaging sonar technology and cutting-edge diving technology, that are used in both the underwater defense and commercial markets. It recently launched its new AI based underwater digital communications system which advances the offering in the market from analog voice communications underwater to digital voice communications underwater. All design, development and manufacturing of our technology and solutions are performed within the Company.

Current wording

Our Marine Technology Business is an established technology solution provider to the subsea and underwater imaging, surveying, diving market and underwater communications market. It has been operating as a supplier of underwater solutions which include both hardware and software products for over 30 years. It owns key proprietary patented technology including real time volumetric 4D/5D and 6D imaging sonar technology and cutting-edge diving technology, that are used in both the underwater defense and commercial markets. It recently launched its new AI based underwater digital communications system which advances the offering in the market from analog voice communications underwater to digital voice communications underwater. All design, development and manufacturing of our technology and solutions are performed within the Company.

Previous wording

Our imaging sonar technology products and solutions marketed under the name of Echoscope® and Echoscope PIPE® are used primarily in the underwater construction market, offshore renewables, offshore oil and gas, forward looking obstacle avoidance, complex underwater mapping, salvage operations, dredging, bridge inspection, underwater hazard detection, port & harbor security, mining, fisheries, real time 3D monitoring and inspection, commercial and defense diving, and marine sciences sectors. Uniquely our Echoscope® technology is a single sensor for multiple underwater applications and therefore serves a number of discrete market verticals such as breakwater construction, dredging, salvage, landing operations, complex survey and mapping, commissioning and decommissioning of assets underwater.

Current wording

Our imaging sonar technology products and solutions marketed under the name of Echoscope® and Echoscope PIPE® are used primarily in the underwater construction market, offshore renewables, offshore oil and gas, forward looking obstacle avoidance, complex underwater mapping, salvage operations, dredging, bridge inspection, underwater hazard detection, port & harbor security, mining, fisheries, real time 3D monitoring and inspection, commercial and defense diving, and marine sciences sectors. Uniquely our Echoscope®technology is a single sensor for multiple underwater applications and therefore serves a number of discrete market verticals such as breakwater construction, dredging, salvage, landing operations, complex survey and mapping, commissioning and decommissioning of underwater assets.

Previous wording

Our novel diving technology is distributed under the name “CodaOctopus®DAVD” (Diver Augmented Vision Display) to the global defense and commercial diving markets. The DAVD embeds inside of the diver’s Head up Display (HUD) a pair of transparent glasses which is used as the data hub for displaying real time data to the diver. We believe that the DAVD system has the potential to radically transform how diving operations are performed globally because it provides a fully integrated singular system for topside control and a fully connected HUD system for the diver allowing both the topside and diver to share a range of critical information including depth (pressure and temperature), compass and head tracking, real time dive timers and alerts, diver position and navigation, ultra-low light enhanced video system and enhanced digital voice communications. Current diving operations are limited in that the diver only shares analog voice communications with the topside without real time information including real time navigation, tracking and mapping of the dive area. The topside must also manage several independent systems for video, communications, and positioning. The Company’s solution addresses these deficiencies. Also, using our sonar technology, diving can be performed in zero visibility conditions, a common problem which besets these operations.

Current wording

Our novel diving technology is distributed under the name “CodaOctopus®DAVD” (Diver Augmented Vision Display) to the global defense and commercial diving markets. The DAVD embeds inside of the diver’s head up display (HUD) a pair of transparent glasses which is used as the data hub for displaying real time diving mission data to the diver. We believe that the DAVD system has the potential to radically transform how diving operations are performed globally because it provides a fully integrated singular system for topside control and a fully connected HUD system for the diver allowing both the topside and diver to share a range of critical information including depth (pressure and temperature), compass and head tracking, real time dive timers and alerts, diver position and navigation, ultra-low light enhanced video system and enhanced digital voice communications. Current diving operations are limited in that the diver only shares analog voice communications with the topside without real time information including real time navigation, tracking and mapping of the dive area. The topside must also manage several independent systems for video, communications, and positioning. The Company’s solution addresses these deficiencies. Also, using our sonar technology, diving can be performed in zero visibility conditions, a common problem which besets these operations thereby impacting the ability to perform diving operations when these conditions prevail, safety and the costs of these operations.

Previous wording

Our customers include offshore service providers to major oil and gas companies, renewable energy companies, underwater construction companies, law enforcement agencies, ports, mining companies, defense bodies (such as navies), prime defense contractors, research institutes and universities and diving companies.

Current wording

Our customers include offshore service providers, major oil and gas companies, renewable energy companies, underwater construction companies, law enforcement agencies, ports, mining companies, defense bodies (such as navies), prime defense contractors, research institutes and universities and diving companies.

Previous wording

The Services Business has operations in the USA and UK. Its central business model is working with the prime defense contractors to design and manufacture sub-assemblies for utilization into larger defense mission critical integrated systems (“MCIS”). Examples of such MCIS are the US Close-In-Weapons Support (CIWS) Program for the Phalanx radar-guided cannon used on combat ships and the AN/AQS24 Mine Hunting System Program, both of these being programs of record. These proprietary sub-assemblies, once approved within the MCIS program, afford the Services Business the status of preferred supplier. Such status permits it to supply these sub-assemblies and upgrades in the event of obsolescence or advancement of technology for the life of the MCIS program. Clients include prime defense contractors such as Raytheon, Northrop Grumman, Thales Underwater and BAE Systems. The scope of services provided by the Services Business for the subassemblies they supply extend to concept, design, prototype and contract manufacturing and post-sale support.

Current wording

The Services Business has operations in the USA and UK. Its central business model is working with the prime defense contractors to design and manufacture sub-assemblies for utilization into larger defense mission critical integrated systems (“MCIS”). Examples of such MCIS are the US Close-In-Weapons Support (CIWS) Program for the Phalanx radar-guided cannon used on combat ships and the AN/AQS24 Mine Hunting System Program, both of these being programs of record. These proprietary sub-assemblies, once approved within the MCIS program, afford the Services Business the status of preferred supplier. Such status permits it to supply these sub-assemblies and upgrades in the event of obsolescence or advancement of technology for the life of the MCIS program. Clients include prime defense contractors such as Raytheon, Northrop Grumman, Thales Underwater and BAE Systems. The scope of services provided by the Services Business for the subassemblies they supply extends to concept, design, prototype, contract manufacturing and post-sale support.

Previous wording

Our volumetric real time imaging sonar technology, Echoscope®, and DAVD are the most promising products for the Company’s near-term growth. We are widely regarded as the leading solution providers for underwater real time 3D visualization.

Current wording

Our volumetric real time imaging sonar technology, Echoscope PIPE®, and DAVD are the most promising products for the Company’s near-term growth. We are widely regarded as the leading solution providers for underwater real time 3D visualization.

Previous wording

Our real time 4D/5D/6D Imaging sonars are the only underwater imaging sonars which are capable of providing complex seabed mapping, real time inspection and monitoring and providing 4D/5D/6D data of moving underwater objects irrespective of water conditions including in zero visibility (which is a common and costly problem in underwater operations). Competing products such as the multibeam sonar can perform mapping (but not complex mapping) without the ability to perform real time inspection and monitoring of moving objects underwater. We also believe our Echoscope PIPE® is the only technology that can generate multiple real time 4D/5D/6D acoustic images using different acoustic parameters such as frequency, field of view, pulse length, filters and different beamforming modes.

Current wording

Our real time 4D/5D/6D Imaging sonars are the only underwater imaging sonars which are capable of providing complex seabed mapping, real time inspection and monitoring and providing 4D/5D/6D data of moving underwater objects irrespective of water conditions including in zero visibility (which is a common and costly problem in underwater operations). Competing products such as the multibeam sonar can perform mapping (but not complex mapping) without the ability to perform real time inspection and monitoring of moving objects underwater. We also believe our Echoscope PIPE® is the only technology that can generate multiple real time 4D/5D/6D acoustic images using different acoustic parameters such as frequency, field of view, pulse length, filters and different beamforming modes allowing users to increase the efficiency of their operations.

Previous wording

We also believe that the DAVD system is poised to radically change the way diving operations are performed globally by providing a fully integrated suite of sensor data shared in real time by the dive supervisor on the surface and the diver. Current diving is done largely by voice command missions from the topside using disparate suite of systems for video data, communications, and positioning.

Current wording

We also believe that the DAVD system is poised to radically change the way diving operations are performed globally by providing a fully integrated suite of sensor data shared in real time by the dive supervisor on the surface and the diver. Current diving is done largely by voice command missions from the topside using disparate suite of systems for video data, communications, and positioning. The DAVD technology changes this and offers the market an integrated suite of sensors providing real time mission critical information to both the diver and the dive supervisor on the surface and also allow both of them to visualize the same underwater scene.

Previous wording

The DAVD untethered variant (“DUS”) is going through evaluation, and we are contracted under a program designed to “harden” the technology for fast adoption by special forces (“DAVD Hardening Program”). Under the DAVD Hardening Program, since fiscal year 2023, we have received $1 million in funding and, pursuant to this, have supplied eight (8) systems which are currently used by the Program Sponsor for ongoing field evaluation. We are expecting to receive another $950,000 in funding but this is currently delayed due to many defense programs being funded through the use of continuing resolution until funding is available under a fully appropriated federal budget. This is not unusual during a Presidential election year. The DUS system represents our most significant market opportunity for the DAVD technology, and we continue to advance the technology based on field feedback arising from use of the evaluation systems.

Current wording

The DAVD untethered variant (“DUS”) is going through evaluation, and we are contracted under a program designed to “harden” the technology for fast adoption by special forces (“DAVD Hardening Program”). Under the DAVD Hardening Program, since fiscal year 2023, we have received $1.25 million in funding and, have supplied eight DUS systems which are currently used by the Program Sponsor for ongoing field evaluation. We have also continued to provide feature upgrades under this DAVD Hardening Program. We are expecting to receive another $700,000 in funding under the ongoing Hardening Program. Funding is currently delayed due to the upcoming Presidential Elections which have impacted funding under many defense programs. This is not unusual during a Presidential election year. The DUS system represents our most significant market opportunity for the DAVD technology, and we continue to advance the technology based on customer feedback. We continue to receive positive feedback on the DUS from the ongoing field trials by this user community and will reach a significant milestone in the DAVD Hardening Program later this year when we deliver the newly designed optical engines and HUD designed for face masks used by the special forces.

Previous wording

The concept of utilizing a pair of transparent glasses in the Head Up Display (HUD) underwater, is protected by patent. All component parts of the DAVD system are proprietary to the Company and include overall systems designs, software (4G USE® DAVD Edition), Diver Processing Pack – telemetry system (DPP), Top Side Controller and real time 3D Sonar. The Company benefits from the exclusive license from the United States Department of the Navy at Naval Surface Warfare Center Panama City Division to exploit the utility patent covering the concept of using the pair of transparent glasses as a data hub underwater. The DAVD is an “Approved Navy Use” item and benefits from CE Marking required under UK and European Union safety regulations.

Current wording

The concept of utilizing a pair of transparent glasses in the HUD underwater, is protected by patent. All component parts of the DAVD system are proprietary to the Company and include overall systems designs, software (4G USE® DAVD Edition), Diver Processing Pack – telemetry system (DPP), Top Side Controller and real time 3D Sonar. The Company benefits from the exclusive license from the United States Department of the Navy at Naval Surface Warfare Center Panama City Division to exploit the utility patent covering the concept of using the pair of transparent glasses as a data hub underwater. The DAVD is an “Approved Navy Use” item and benefits from CE Marking required under UK and European Union safety regulations.

Previous wording

Inflation measured as the Consumer Price Index is both volatile and significant in the countries in which we operate. For the 12-month period preceding April 2024, this was:

Current wording

Inflation measured as the Consumer Price Index has been significant and volatile in the countries in which we operate. Recent trends indicate that inflation is falling. For the 12-month period preceding July 2024, this was:

Previous wording

Although inflation is falling, prices which have increased due to inflation over the last year including material costs and wages have remained at their inflationary-inspired level and have become the base price.

Current wording

Although inflation is falling, prices which have increased due to inflation over the last year including cost of material and wages have remained at their inflationary-inspired level and have become the base price.

Previous wording

The ongoing war in Ukraine impacts our Services Business as most defense spending is now directed toward land-based applications rather than naval based applications. In addition, the ongoing political tension with China reduces demand for our product in in that country where we understand from our agent network that there is a “Buy-China” policy in place. Furthermore, ongoing addition of Chinese Suppliers on the US Bureau of Industry and Security (“BIS”) list may affect supply of components which are relevant for our products, making these obsolete and subject to significant re-engineering costs.

Current wording

The ongoing war in Ukraine impacts our Services Business as most defense spending is now directed toward land-based applications rather than naval based applications. In addition, the ongoing political tension with China reduces demand for our product in in that country where we understand from our agent network that there is a “Buy-China” policy in place. Furthermore, the ongoing addition of Chinese Suppliers on the US Bureau of Industry and Security (“BIS”) list may affect supply of components which are relevant for our products, making these obsolete and subject to significant re-engineering costs.

Previous wording

The Company has operations in the UK, USA and Denmark. Our consolidated results include the Company’s foreign subsidiaries’ results which are transacted in their native functional currency and translated into USD for reporting purposes. Revenue and expenses are translated using the average exchange rates in effect during the reporting period. In the Current Quarter, for the purpose of reporting revenue and expenses, the value of the British Pound when compared to the Previous Quarter increased against the USD by 2.0% and the Danish Kroner decreased by 0.7%, respectively. For the purpose of reporting asset and liabilities, the British Pound and the Danish Kroner both decreased by 0.5% and 3.1% respectively. The impact of currency fluctuations is discussed more fully below under Item 2 - “Inflation and Foreign Currency”. See also Note 5 (Foreign Currency Translation) to the unaudited consolidated financial statements.

Current wording

The Company has operations in the UK, USA and Denmark. Our consolidated results include the Company’s foreign subsidiaries’ results which are transacted in their native functional currency and translated into USD for reporting purposes. Unfavorable currency fluctuations may adversely affect our financial results. Revenue and expenses are translated using the average exchange rates in effect during the reporting period. In the Current Quarter, for the purpose of reporting revenue and expenses, the value of the British Pound when compared to the Previous Quarter increased against the USD by 0.7% and the Danish Kroner decreased by 0.8%, respectively. For the purpose of reporting assets and liabilities, the British Pound and the Danish Kroner both increased by 5.8% and 2.4% respectively. The impact of currency fluctuations is discussed more fully below under Item 2 - “Inflation and Foreign Currency”. See also Note 5 (Foreign Currency Translation) to the unaudited consolidated financial statements.

Previous wording

We are experiencing skill shortages in areas that are critical to our growth strategy including experienced sales and marketing personnel, software developers, skilled electronic technicians and various management positions.

Current wording

We are experiencing skill shortages in areas that are critical to our growth strategy including experienced sales and marketing personnel, software developers, skilled electronic engineers and production technicians and various management positions.

Previous wording

Year to date, we have been affected by funding delays under Defense Programs in the USA including the DAVD Hardening Program. Delays in approving the federal budget and making appropriations are not unusual in a Presidential election year. Although a federal budget was approved in March 2024, many programs are still awaiting the necessary funding appropriations and have therefore been operating under continuing resolutions until such appropriations are completed. This has adversely impacted on order intake and sales emanating from the Americas. As a result, our year to date sales in the Americas was $2,232,643 compared to $4,708,411 in the previous year to date period.

Current wording

Year to date, we have been affected by funding delays under Defense Programs in the USA including the DAVD Hardening Program. The upcoming Presidential election has resulted in funding gaps and slow down in procurement under Defense Programs. This is not unusual and generally the convention is to postpone new acquisitions until the outcome of the election is decided. This has adversely impacted on order intake and sales emanating from the Americas. As a result, we believe that this has impacted on our year to date sales in the Americas which was $4,688,741 compared to $7,315,039 in the previous year to date period. See Note 13 (Disaggregation of Revenue) for more information on this impact on our Business.

Previous wording

We are uncertain as to the extent of the impact the factors disclosed above and in our Form 10-K covering fiscal year ended October 31, 2023, is likely to have on our future financial results.

Current wording

We are uncertain as to the extent of the impact the factors disclosed above and in our Form 10-K covering fiscal year ended October 31, 2023 and those disclosed in our Form 10-Qs for the first and second quarters of this fiscal year, are likely to have on our future financial results.

Previous wording

These factors may adversely impact on our availability of free cash flow, working capital and business prospects. As of April 30, 2024, we had cash and cash equivalents of $23,709,676 and we used $1,253,725 of cash for operations in the six months to April 30, 2024. Based on our outstanding obligations and our cash balances, we believe we have sufficient working capital to effectively continue our business operations for the foreseeable future.

Current wording

These factors may adversely impact on our availability of free cash flow, working capital and business prospects. As of July 31, 2024, we had cash and cash equivalents of $25,217,965 and cash provided by operating activities was $458,013 in the nine months to July 31, 2024. Based on our outstanding obligations and our cash balances, we believe we have sufficient working capital to effectively continue our business operations for the foreseeable future.

Previous wording

Our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater solutions for imaging, mapping, defense and survey applications and from the engineering services that we provide. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential variable additional consideration. Our product sales do not include a right of return by the customer.

Current wording

Our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater solutions for imaging, mapping, defense, survey and diving applications and from the engineering services that we provide. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential variable additional consideration. Our product sales do not include a right of return by the customer.

Previous wording

The Company accounts for income taxes in accordance with Accounting Standards Codification 740, Income Taxes (ASC 740). Under ASC 740, deferred income tax assets and liabilities are recorded for the income tax effects of differences between the bases of assets and liabilities for financial reporting purposes and their bases for income tax reporting. The Company’s differences arise principally from the use of various accelerated and modified accelerated cost recovery system for income tax purposes versus straight line depreciation used for book purposes; their restricted stock awards differences between issuance price and grant date fair value price and from the utilization of net operating loss carry-forwards.

Current wording

The Company accounts for income taxes in accordance with Accounting Standards Codification 740, Income Taxes (ASC 740). Under ASC 740, deferred income tax assets and liabilities are recorded for the income tax effects of differences between the bases of assets and liabilities for financial reporting purposes and their bases for income tax reporting. The Company’s differences arise principally from the use of various accelerated and modified accelerated cost recovery systems for income tax purposes versus straight line depreciation used for book purposes; the restricted stock awards differences between stock award price at the date of award and the fair value price at the date of issuance and from the utilization of net operating loss carry-forwards.

Previous wording

The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, goodwill is reduced by the excess of the carrying amount of the reporting unit over that reporting unit’s fair value. Goodwill can never be reduced below zero, if any. At the end of each year, we evaluate goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings.

Current wording

The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, goodwill is reduced by the excess of the carrying amount of the reporting unit over that reporting unit’s fair value. Goodwill can never be reduced below zero. At the end of each year, we evaluate goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings.

Previous wording

Our consolidated financial results include the results of the Company’s foreign subsidiaries (UK and Danish operations). Foreign subsidiaries’ results are translated from their functional currencies into USD for reporting purposes. Fluctuations in currency can therefore impact our translated results, including revenue and income. Revenue and expenses are translated using the average exchange rates in effect during the reporting period. During the Current Quarter, the British Pound strengthened against the USD when compared to the Previous Quarter exchange rate (“the Constant Rate”); whereas the Danish Kroner slightly weakened against the USD. During the Current Quarter our total consolidated revenue was $5,323,178 compared to $5,301,509 in the Previous Quarter. The impact of foreign exchange rate fluctuation between the Previous Quarter and our Current Quarter is that our reported revenue would have been $62,281 or 1.2% lower in the Current Quarter when applying the Constant Rate and therefore the movement in exchange rates between the two periods, had a positive impact on our total consolidated revenue by increasing this by 1.2%. During the Current Quarter total operating expense decreased by 13.7%. Income from operations increased by 57.9%. Income before taxes increased by 59.6% and was $1,641,215 compared to $1,028,484 in the Previous Quarter. Further details concerning our financial results in the Current Quarter and the Current Six Month Period are discussed immediately below.

Current wording

Our consolidated financial results include the results of the Company’s foreign subsidiaries (UK and Danish operations). Foreign subsidiaries’ results are translated from their functional currencies into USD for reporting purposes. Fluctuations in currency can therefore impact our translated results, including revenue and income. Revenue and expenses are translated using the average exchange rates in effect during the reporting period. During the Current Quarter, the British Pound strengthened against the USD when compared to the Previous Quarter exchange rate (“the Constant Rate”); whereas the Danish Kroner slightly weakened against the USD. During the Current Quarter our total consolidated revenue was $5,476,544 compared to $4,890,532, in the Previous Quarter. The impact of foreign exchange rate fluctuation between the Previous Quarter and our Current Quarter was negligible. During the Current Quarter total operating expense increased by $155,154 or 6.2%. Income from operations increased by 61.2%. Income before taxes increased by 51.4% and was $1,631,246 compared to $1,077,166 in the Previous Quarter. Further details concerning our financial results in the Current Quarter and the Current Nine Month Period are discussed immediately below.

Previous wording

In the Current Quarter, the Products Business generated $3,524,714 or 66.2% of our consolidated revenues compared to $3,583,429 or 67.6% in the Previous Quarter, representing a slight fall of 1.6%. Gross profit margin increased from 75.3% in the Previous Quarter to 80.2% in the Current Quarter. In the Current Quarter we recorded sales commissions for this segment of $131,209 compared to $89,195 in the Previous Quarter, representing an increase of 47.1%. In the Current Quarter total operating expenses decreased by 8.5% in the Products Business and were $1,277,881 compared to $1,396,366 in the Previous Quarter. Income before tax was $1,736,910 in the Current Quarter compared to $1,451,588 in the Previous Quarter. Notable in the Current Quarter, sales generated by the Products Business from the USA decreased from $1,754,250 in the Previous Quarter compared to $640,943. This reflects the effects of the reduced funding available for Defense Programs (such as the DAVD Program), due to the use of continuing resolutions to fund these programs in the absence of appropriations under the federal budget.

Current wording

In the Current Quarter, the Products Business generated $3,048,544 or 55.7% of our consolidated revenues compared to $2,863,251 or 58.5% in the Previous Quarter, representing an increase of 6.5%. Gross profit margin increased from 82.1% in the Previous Quarter to 82.9% in the Current Quarter. In the Current Quarter we recorded sales commissions for this segment of $99,278 compared to $120,724 in the Previous Quarter, representing a decrease of 17.8%. In the Current Quarter total operating expenses increased by 7.3% in the Products Business and were $1,545,374 compared to $1,439,923 in the Previous Quarter. Income before tax was $1,154,300 in the Current Quarter compared to $1,091,700 in the Previous Quarter. Notable in the Current Quarter, sales generated by the Products Business from the USA decreased from $1,321,495 in the Previous Quarter to $682,477. We believe this is a result of the upcoming Presidential Election which has seen funding gaps and slowdown in procurement under Defense Programs (and which has affected programs such as DAVD). This is not unusual and generally the convention is to postpone new acquisitions until the outcome of the election is decided.

Previous wording

In the Current Quarter, the Services Business generated $1,798,464 or 33.8% of our consolidated revenues compared to $1,718,080 or 32.4% in the Previous Quarter, representing an increase in sales of 4.7%. Gross profit margin decreased from 53.9% in the Previous Quarter to 50.7% in the Current Quarter. In the Current Quarter total operating expenses decreased by 1.4% in the Services Business and were $653,871 compared to $663,273 in the Previous Quarter. In the Current Quarter the Services Business Income before tax was $321,360 compared to $285,390 in the Previous Quarter. This Business is reliant on funding from Defense Programs. Notable in the Current Quarter, sales generated by the Services Business from the USA decreased from $1,144,891 in the Previous Quarter compared to $799,214. This reflects the effects of the reduced funding available for Defense Programs (such as the AQS24 Mine Hunting Program), due to the use of continuing resolutions to fund these programs as opposed to a fully appropriated budget.

Current wording

In the Current Quarter, the Services Business generated $2,428,000 or 44.3% of our consolidated revenues compared to $2,027,281 or 41.5% in the Previous Quarter, representing an increase in sales of 19.8%. Gross profit margin increased from 50.0% in the Previous Quarter to 62.6% in the Current Quarter. This level of gross profit margin for the Services Business is atypical and has arisen because we utilized, against one of our engineering projects, inventory items which were in our stock at a much lower cost than market value. In the Current Quarter total operating expenses decreased by 4.2% in the Services Business and were $535,421 compared to $558,739 in the Previous Quarter and income before tax was $1,030,488 compared to $489,414 in the Previous Quarter. This Business is reliant on funding from Defense Programs.

Previous wording

Gross Profit Margins*:* Margin percentage was stronger in the Current Quarter at 70.2% (gross profit of $3,738,434) compared to 68.3% (gross profit of $3,623,241) in the Previous Quarter.

Current wording

Gross Profit Margins*:* Consolidated margin percentage was stronger in the Current Quarter at 73.9% (gross profit of $4,048,538) compared to 68.8% (gross profit of $3,365,224) in the Previous Quarter.

Previous wording

The decrease in Equipment Sales in the Current Quarter reflects the reduction in orders and sales emanating from the Americas caused by the funding gaps on Defense Programs described earlier. This has affected programs like the DAVD, resulting in reduced orders and sales in the Americas which in the Current Quarter was $640,943 compared to $1,754,250 in the Previous Quarter.

Current wording

The decrease in Equipment Sales in the Current Quarter reflects the reduction in orders and sales emanating from the Americas caused by the funding gaps on Defense Programs described earlier. This has affected programs like the DAVD, resulting in reduced orders and sales for this segment in the Americas, which in the Current Quarter was $682,477 compared to $1,321,495 in the Previous Quarter.

Previous wording

In the Current Quarter the Marine Technology Business incurred commission costs of $131,209 compared to $89,195 in the Previous Quarter, representing an increase of 47.1%.

Current wording

In the Current Quarter the Marine Technology Business incurred commission costs of $99,278 compared to $120,724 in the Previous Quarter, representing a decrease of 17.8%.

Previous wording

In the Current Quarter Depreciation expenses relating to our rental assets increased by 6.1% and was $105,623 compared to $99,519 in the Previous Quarter.

Current wording

In the Current Quarter depreciation expenses relating to our rental assets increased by 17.0% and were $105,337 compared to $90,003 in the Previous Quarter.

Previous wording

The main factors impacting the Gross Profit Margin of the Marine Technology Business in the Current Quarter are the increase in rental revenue and associated services (engineering support for rental projects).

Current wording

The main factors impacting the Gross Profit Margin of the Marine Technology Business in the Current Quarter are the reduction in equipment sale in conjunction with a significant increase in rental revenue and associated services (engineering support for rental projects), services and software sales.

Previous wording

Research and Development (R&D): R&D expenditures in the Current Quarter were $542,481 compared to $525,939 in the Previous Quarter, representing an increase of 3.1%.

Current wording

Research and Development (R&D): R&D expenditures in the Current Quarter were $496,359 compared to $568,287 in the Previous Quarter, representing a decrease of 12.7%.

Previous wording

During the Current Quarter the Products Business R&D expenditure decreased by 6.4% and was $485,061 as compared to $518,405 in the Previous Quarter. R&D expenditure is incurred by this business in connection with investments it makes in developing its products and solutions. This expenditure is an essential part of our business, as our market competitiveness is predicated on continued innovation.

Current wording

During the Current Quarter the Products Business R&D expenditure decreased by 17.5% and was $459,879 as compared to $557,260 in the Previous Quarter. R&D expenditure is incurred by this business in connection with investments it makes in developing its products and solutions. This expenditure is an essential part of our business, as our market competitiveness is predicated on continued innovation.

Previous wording

During the Current Quarter the Services Business R&D expenditure increased by 662.1% and was $57,420 compared to $7,534 in the Previous Quarter. The Services Business incurs research and development expenses primarily on advancing its Thermite® Octal range of mission computer products with the strategic goals of increasing and diversifying its revenues and improving gross profit margins. As we understand our customer base requirements for these mission computers, we may incur more R&D expenditure on developing this range of products.

Current wording

During the Current Quarter the Services Business R&D expenditure increased by 230.8% and was $36,480 compared to $11,027 in the Previous Quarter. The Services Business incurs research and development expenses primarily on advancing its Thermite® Octal range of mission computer products with the strategic goals of increasing and diversifying its revenues and improving gross profit margins. As we understand our customer base requirements for these mission computers, we may incur more R&D expenditure on developing this range of products.

Previous wording

Selling, General and Administrative Expenses (SG&A): SG&A expenses for the Current Quarter decreased by 17.7% to $1,845,570 from $2,242,194 in the Previous Quarter.

Current wording

Selling, General and Administrative Expenses (SG&A): SG&A expenses for the Current Quarter increased by 11.7% to $2,161,405 from $1,934,323 in the Previous Quarter.

Previous wording

SG&A includes transactions which are cash charges and non-cash charges. The non-cash charges transactions comprise depreciation, amortization, stock-based compensation, and exchange rate variance charges. In the Current Quarter non-cash transactions as a percentage of SG&A expenses were (0.3) % compared to 21.1% in the Previous Quarter.

Current wording

SG&A includes transactions which are cash charges and non-cash charges. The non-cash charges transactions comprise depreciation, amortization, stock-based compensation, and exchange rate variance charges. In the Current Quarter non-cash transactions as a percentage of SG&A expenses were 15.0 % compared to 17.2% in the Previous Quarter.

Previous wording

The main reason for the reduction in our SG&A expenses in the Current Quarter when compared to the Previous Quarter is the reduction in stock based compensation charges, which were ($60,862) in the Current Quarter compared to $196,261 in the Previous Quarter.

Current wording

The main reason for the increase in our SG&A expenses in the Current Quarter when compared to the Previous Quarter is the increase in Wages and Salaries (by 5.5%), Marketing Costs (by 180.2%) and General Office Costs which increased by 47.8%.

Previous wording

Wages and Salaries – In the Current Quarter this category of expense increased by 2.8%. We anticipate that on a full year basis in the fiscal year 2024 this category will increase materially over the fiscal year 2023. We are currently operating on a reduced headcount and have several vacancies and are also expanding our management team.

Current wording

Wages and Salaries – In the Current Quarter this category of expense increased by 5.5%. We anticipate that on a full year basis in the fiscal year 2024 this category will increase materially over the fiscal year 2023. We are currently operating on a reduced headcount and have several vacancies and are also expanding our management team.

Previous wording

Marketing– the increase in marketing is anticipated within our plans. This is an area of expenditure which we anticipate will increase materially in this fiscal year and subsequent years. As we shift our focus from R&D to business development and marketing, including undertaking efforts to build our brands, we anticipate a significant increase in this area of expenditure. In the Current Quarter, the increased costs are largely a reflection of the fees associated with hiring our Business Development Focus Group Consultants in the USA to assist the Company with developing its Defense Market strategy and identifying opportunities for the Company’s technology within US Defense Programs. On a full year basis, the cost of this service will be $222,000 excluding travel expenses.

Current wording

Marketing– In the Current Quarter this category of expense increased by 180.2%. The increase is anticipated within our plans. We anticipate this area of expenditure will increase materially in this fiscal year and subsequent years. As we shift our focus from R&D to business development and marketing, including undertaking efforts to build our brands, we anticipate a significant increase in this area of expenditure. In the Current Quarter, the increased costs are largely a reflection of the fees associated with hiring our Business Development Focus Group Consultants in the USA to assist the Company with developing its Defense Market strategy and identifying opportunities for the Company’s technology within US Defense Programs. On a full fiscal year basis, the cost of this service will be $222,000 excluding travel expenses.

Previous wording

General corporate administrative expenses in the Current Quarter were $456,299 or 8.6% of revenue and $708,494 or 13.4% of revenue in the Previous Quarter, respectively. For more information on general corporate administrative expenses, please see Note 12 (Segment Analysis).

Current wording

General corporate administrative expenses in the Current Quarter were $576,969 or 10.5% of revenue and $503,948 or 10.3% of revenue in the Previous Quarter, respectively. For more information on general corporate administrative expenses, please see Note 12 (Segment Analysis).

Previous wording

Other Income: In the Current Quarter, we had “total other income” of $290,832 compared to $173,376, representing an increase of 67.7% from the Previous Quarter. In the Current Quarter we had $293,468 interest income earned on our certified deposit accounts. These accounts are for fixed 3-month rolling periods and constitute “cash equivalents” in our current unaudited Consolidated Financial Statements for the period ended April 30, 2024 (see Note 6 (Composition of Certain Financial Statement Captions) for more detailed analysis of this. We anticipate that the interest earned on these certified deposit accounts will be material in the future if interest rates remain the same or continue to rise.

Current wording

Other Income: In the Current Quarter, we had “total other income” of $240,472 compared to $214,552 in the Previous Quarter, representing an increase of 12.1%. In the Current Quarter we had $230,009 interest income earned on our certified deposit accounts. These accounts are for fixed 3-month rolling periods and constitute “cash equivalents” in our current unaudited Consolidated Financial Statements for the period ended July 31, 2024 (see Note 6 Composition of Certain Financial Statement Captions) for more detailed analysis of this. We anticipate that the interest earned on these certified deposit accounts will remain to be material in the future if we continue to hold this level of cash and interest rates remain at this level.

Previous wording

Income before income taxes: In the Current Quarter, we had income before income taxes of $1,641,215 as compared to $1,028,484 in the Previous Quarter, representing an increase of 59.6%. Income before income taxes increased due to an increase in gross profit in conjunction with a reduction in total operating expenses, and an increase in total other income attributable to an increase in interests earned on our certified deposits detailed in Note 6 (Composition of Certain Financial Statement Captions).

Current wording

Income before income taxes: In the Current Quarter, we had income before income taxes of $1,631,246 as compared to $1,077,166 in the Previous Quarter, representing an increase of 51.4%. Income before income taxes largely increased due to an increase in revenue and gross profit in the Current Quarter.