Coda Octopus Group, Inc.

Previous wording

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. All statements other than statements of historical fact made herein are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurance can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

Current wording

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. All statements other than statements of historical fact made herein are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurance can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations. Actual results and outcomes could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions, tariff and trade policies, reduction in government spending in Defense sector and customer demand and spending, inflation, interest rates, and world events, risks of inventory management, variability in demand, economic and geopolitical conditions and additional or unforeseen circumstances, developments, or events may give rise to or amplify many of these risks.

Previous wording

We sell our goods and services internationally, with $3,910,878 or 75.1% of our consolidated revenue in the Current Quarter generated outside of the United States and 20% of our revenue from the Defense sector. Macroeconomic factors, including changes in inflation and interest rates, as well as global economic and geopolitical developments, world events, significant changes in trade policies and funding policies, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. These factors may impact customer demand for our products and services and our ability to forecast spending patterns. We expect some or all of these factors to continue to impact our operations in fiscal year 2025.

Current wording

We sell our goods and services internationally, with $4,150,361 or 59.1% of our consolidated net revenue in the Current Quarter derived from outside of the United States. Macroeconomic factors, including changes in inflation and interest rates, as well as global economic and geopolitical developments including unpredictable shifts in global tariffs, world events, significant changes in trade policies and funding policies, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. These factors may adversely affect customer demand for our products and services and our ability to forecast spending patterns and therefore overall demand for our goods and services. We expect some or all of these factors to continue to impact our operations in fiscal year 2025.

Previous wording

The new U.S. Administration is rapidly changing key policies in the area of trade, defense and foreign policy which has resulted in general uncertainty around the world. As part of this, offshore renewable permits have been suspended for some developments in the U.S. and many leading developers such as Shell, Orsted, BP and Total Energy have either reduced or halted their US offshore renewable programs. We believe that these factors have resulted in weak demand for our solutions across all sectors which caused a decrease in revenue by our Marine Technology Business. Notwithstanding the change in the U.S Policy on renewables (where it has suspended permits for offshore renewable developments), its new policy on prioritizing domestic energy production of Oil & Gas also favors our products and solutions and we believe that this new policy will in the foreseeable future offset any reduction of revenue from US offshore renewables which we may experience. Furthermore, a key part of our strategy as a Group relies on Defense spending. Although it is widely reported in the Press that the policy of the new U.S Administration is to reduce Defense spending by 8% over a number of years, its foreign policy on Defense has also seen Europe including the United Kingdom committing to significantly increase spending on Defense, with Germany expecting to spend about €400 billion ($428 billion) on defense over the coming years in addition to creating a special fund of €500 billion ($535 billion) for infrastructure spending over the next 10 years. The Leaders of the European Union member states have also agreed to allow the member states to exceed the debt ceilings that are in place to allow the countries to borrow for defense investments. We therefore believe that despite the short-term disruption caused by uncertainty around the new U.S. Administration’s critical policies relating to trade, defense spending and foreign policy, we believe that these changes will favor our Business in the medium to long term.

Current wording

The new U.S. Administration is rapidly changing key policies in the area of trade, defense and foreign policy which has resulted in general uncertainty around the world. Our core business has a leading solution in the offshore renewable market. Following the change in U.S policy many offshore renewable permits for U.S. developments have been suspended and many leading developers such as Shell, Orsted, BP and Total Energy have either reduced or halted their US offshore renewable programs. We believe that these factors have resulted in weak demand from European developers and offshore suppliers for our rental solutions which caused a decrease in rental revenue and associated services from the geographic region of Europe (the Marine Technology’s main rental hub) in the Current Quarter. Nevertheless, we believe that new U.S. policy on prioritizing domestic energy production of Oil & Gas also favors our products and solutions, and we believe that in the foreseeable future this will offset reduction of revenue from U.S. offshore renewables. Furthermore, a key part of our growth strategy as a Group relies on Defense spending and the U.S. new foreign policy on Defense has also seen Europe including the United Kingdom committing to significant increases defense spending, with Germany expecting to spend about €400 billion ($428 billion) on defense over the coming years in addition to creating a special fund of €500 billion ($535 billion) for infrastructure spending over the next 10 years. European Union member states have also agreed to allow the member states to exceed the debt ceilings that are in place to allow the countries to borrow for defense investments. We therefore believe that despite the short-term disruption caused by uncertainty around the new U.S. Administration’s critical policies, many of these changes are likely to be favorable for our Business. In the Current Quarter we saw increased customer engagements on Defense projects along with more pace in the procurement process.

Previous wording

Our Marine Technology Business is an established technology solution provider of over 30 years to the offshore subsea market. It owns key proprietary technology (comprising both hardware and software) including its real time 3D imaging sonar and its cutting-edge augmented reality diving solution DAVD (Diver Augmented Vision Display) system. These solutions are used in both the underwater Defense and Commercial markets. This Business recently launched its new underwater digital communications system which advances the offering in the market from analog voice communications to digital voice communications underwater (Voice-Hub-4). All innovation, design, development, manufacturing and support are performed within the Company.

Current wording

Our Marine Technology Business constitutes our core business and is critical for our growth strategy. It is an established technology solution provider of over 30 years to the offshore subsea market. It owns key proprietary technology (comprising both hardware and software) including its real time 3D volumetric imaging sonar and its cutting-edge augmented reality diving solution DAVD (Diver Augmented Vision Display) system. These solutions are used in both the underwater Defense and Commercial markets. It recently launched its new underwater digital communications system which advances the offering in the market from analog voice communications to digital voice communications underwater (Voice-Hub-4). All innovation, design, development, manufacturing and support are performed within the Company.

Previous wording

Although we generate most of our revenues from our real time 3D sonar and DAVD which include both proprietary hardware and software, we have a number of other products such as our inertial navigation systems (F280 Series®) and our geophysical hardware (DA4G) and software solutions (GeoSurvey and Survey Engine®, which include artificial intelligence based automatic detection systems). 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, prime defense contractors, navies, research institutes and universities and diving companies.

Current wording

Although we generate most of our revenues from our real time 3D sonar and DAVD which include both proprietary hardware and software, we have several other products such as our inertial navigation systems (F280 Series®) and our geophysical hardware (DA4G) and software solutions (GeoSurvey and Survey Engine®, which include artificial intelligence based automatic detection systems). 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, prime defense contractors, navies, 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 Prime Defense Contractors to design and manufacture sub-assemblies for utilization into larger defense mission critical integrated systems (“MCIS”). An example of such MCIS is the US Close-In-Weapons Support (CIWS) Program for the Phalanx radar-guided cannon used on combat ships. 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 encompasses concept, design, prototype and manufacturing.

Current wording

The Marine Engineering Business has operations in the USA and UK. Its central business model is working with Prime Defense Contractors to design and manufacture sub-assemblies for utilization into larger defense mission critical integrated systems (“MCIS”). An example of such MCIS is the US Close-In-Weapons Support (CIWS) Program for the Phalanx radar-guided cannon used on combat ships. These proprietary sub-assemblies, once approved within the MCIS program, afford this 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 Marine Engineering Business encompasses concept, design, prototype and manufacturing.

Previous wording

We also believe that the DAVD system, which is a new technology and presents significant capabilities to the diving market, 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, which is a relatively new technology and presents significant capabilities to the diving market, 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.

Previous wording

We sell our goods and services globally and a large percentage of our revenue emanates from international sales. Any change in policy that restricts the free flow of goods and services is likely to dampen demand for our goods and services. The recent change in trade policy by the U.S. vis-à-vis the rest of the world has created significant uncertainties. Our revenue mix is a combination of outright sales and rentals. Rentals are driven by offshore projects. However, since the change in the U.S Administration policy on the funding of offshore renewables programs, we have seen reduced demand for our rental solutions. We also have seen a dampening of demand for outright sales, which we believe is caused by a general level of uncertainty regarding the U.S. Administration policies including those relating to trade, energy transition and renewables.

Current wording

We sell our goods and services globally and a large percentage of our revenue emanates from international sales. Any change in U.S. policy that restricts the free flow of goods and services is likely to dampen demand for our goods and services globally. The recent change in trade policy by the U.S. vis-à-vis the rest of the world has created significant uncertainties. Our revenue mix is a combination of outright sales and rentals. Rentals are driven by offshore projects. However, since the change in the U.S Administration policy on the funding of offshore renewables programs, we have seen reduced demand for our rental and associated solutions from our European customers who were the front runners for developing many offshore renewables projects in the USA. Furthermore, some of our products sold in the U.S. market are manufactured in the UK. Therefore, we are subject to a 10% tariff on items which are imported into the U.S. from the UK. In the Current Quarter approximately 36.7% of our Marine Technology Business revenue was generated from sales made in the U.S.

Previous wording

The Company has operations in the UK, USA, Denmark, Australia and India. The results of operations, our intercompany balances associated with our international operations, products and service offerings are exposed to foreign exchange rate fluctuations. Due to these fluctuations, operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances (such as assets and liabilities). We also hold cash equivalents in foreign currencies such as British Pounds, Euros and Danish Kroner. When the U.S. Dollar strengthens compared to these currencies, cash equivalents when translated, may be materially less than expected and vice versa. The impact of currency fluctuations is discussed more fully below under “Inflation and Foreign Currency”. See also Note 5 (Foreign Currency Translation) to the Unaudited Consolidated Financial Statements and the section of this report which concerns “Inflation and Foreign Currency”.

Current wording

The Company has operations in the UK, USA, Denmark, Australia and India. The results of operations, our intercompany balances associated with our international operations, products and service offerings are exposed to foreign exchange rate fluctuations. Due to these fluctuations, operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances (such as assets and liabilities). We also hold cash equivalents in foreign currencies such as British Pounds, Euros and Danish Kroner. When the U.S. Dollar strengthens compared to these currencies, cash equivalents when translated, may be materially less than expected and vice versa. In the Current Quarter the USD weakened against the British Pound and Danish Kroner, which resulted in direct cost of sale and also total operating expenses of our foreign subsidiaries when translated into USD for reporting purposes being higher. The impact of currency fluctuations is discussed more fully below under “Inflation and Foreign Currency”. See also Note 5 (Foreign Currency Translation) to the Unaudited Consolidated Financial Statements and the section of this report which concerns “Inflation and Foreign Currency”.

Previous wording

The Services Business revenues are highly concentrated and are generated from sub-contracts with Prime Defense Contractors. The sales cycle is generally protracted, and this may affect quarterly revenues. It is also dependent on the federal government appropriating budget for Defense projects and where the federal government is unable to find consensus in the US Congress or there is a change in spending priorities, this may affect the timely award of sub-contracts from Prime Defense Contractors to our Services Business, which is reliant on these awards. Furthermore, the Marine Technology Business key opportunities which are critical to its growth strategy are in the Defense Market for both its imaging sonars and the DAVD, both of which are key pillars of the Company’s growth strategy. Due to the protracted nature of the government procurement process and cycle for Defense spending under federal and/or state budgets, the sales cycle can be long and unpredictable, thus affecting timing of orders and thus quarterly revenues.

Current wording

The Marine Engineering Business revenues are highly concentrated and are mostly generated from sub-contracts with Prime Defense Contractors, although recently we have received direct contracts from the Department of Defense. The sales cycle is generally protracted, and this may affect quarterly revenues. It is also dependent on the federal government appropriating budget for Defense projects and where the federal government is unable to find consensus in the U.S. Congress or there is a change in spending priorities, this may affect the timely award of sub-contracts from Prime Defense Contractors to our Marine Engineering Business, which is reliant on these awards. Furthermore, our Core Business, the Marine Technology Business, key opportunities are in the Defense Market for both its imaging sonars and the DAVD, both of which are key pillars of the Company’s growth strategy. Due to the protracted nature of the government procurement process and cycle for Defense spending under federal and/or state budgets, the sales cycle can be long and unpredictable, thus affecting timing of orders and thus quarterly revenues.

Previous wording

These factors may adversely impact on our availability of free cash flow, working capital and business prospects. As of January 31, 2025, we had cash and cash equivalents of $22,541,963, and cash provided by our operations of $641,511. Based on our outstanding obligations and our cash and cash equivalents as well as our revolving line of credit with HSBC NA, we believe we have sufficient working capital to meet our anticipated cash needs for the next twelve months. However, any projections of future cash flows are subject to substantial uncertainty.

Current wording

These factors may adversely impact on our availability of free cash flow, working capital and business prospects. As of April 30, 2025, we had cash and cash equivalents of $24,462,301, and cash provided by our operations of $2,103,980. Based on our outstanding obligations and our cash and cash equivalents, as well as our revolving line of credit with HSBC NA, we believe we have sufficient working capital to meet our anticipated cash needs for the next twelve months. However, any projections of future cash flows are subject to substantial uncertainty.

Previous wording

Our Marine Technology Business revenues are derived from both sales and rental of underwater solutions for imaging, mapping, Defense and survey applications. PAL’s revenues are derived from sales of acoustic sensors and materials and for our Engineering Services Business from engineering services performed for third party customers who are primarily Defense Contractors. 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 additional variable consideration. Our product sales do not include a right of return by the customer.

Current wording

Our Marine Technology Business revenues are derived from both sales and rental of underwater solutions for imaging, mapping, survey applications and diving. PAL’s revenues are derived from sales of acoustic sensors and materials and for our Marine Engineering Business from engineering services performed for third party customers who are primarily Defense Contractors. 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 additional variable consideration. Our product sales do not include a right of return by the customer.

Previous wording

We value our inventory based on our cost. We adjust the value of our inventory to the extent our management determines that our cost cannot be recovered due to obsolescence or other factors. In order to make these determinations, our management uses estimates of future demand and sales prices for each product to determine appropriate inventory reserves and to make corresponding reductions in inventory values to reflect the lower of cost or market value. In the event of a higher incidence of inventory obsolescence, we could be required to increase our inventory reserve, which would increase our cost of sales and decrease our gross profit.

Current wording

We value our inventory based on our cost. We adjust the value of our inventory to the extent our management determines that our cost cannot be recovered due to obsolescence or other factors. In order to make these determinations, our management uses estimates of future demand and sales prices for each product to determine appropriate inventory reserves and to make corresponding reductions in inventory values to reflect the lower of cost or net realizable value. In the event of a higher incidence of inventory obsolescence, we could be required to increase our inventory reserve, which would increase our cost of sales and decrease our gross profit.

Previous wording

Consolidated Results of Operations

Current wording

Consolidated Results of Operations for the Current Quarter compared to the Previous Quarter

Previous wording

Our consolidated results of operations include the results of the Company’s foreign subsidiaries. Our foreign subsidiaries’ results are translated from their respective functional currencies into United States Dollar (USD) for reporting purposes. Currency fluctuations can therefore impact (positively or negatively) on our consolidated results including revenue, profitability and the value of our assets and liabilities included on the consolidated balance sheet. During the Current Quarter, the USD strengthened against the British Pound and the Danish Kroner, resulting in translated foreign revenues being $76,562 lower when using the Previous Quarter exchange rate (for a discussion of the effect of foreign exchange rates see Item 2 “Inflation and Foreign Currency”). Consolidated Revenue in the Current Quarter increased by 16.8% and was $5,209,715 compared to $4,461,191 in the Previous Quarter. During the Current Quarter total operating expenses increased by 9.3% and income from operations increased by 19.2%. Agents’ sales commission costs were 16.3% lower in the Current Quarter and were $245,509 compared to $293,184 in the Previous Quarter due to the reduction in sales from Asia (see Notes 15 and 16 to the unaudited Consolidated Financial Statements for more information on Segment reporting and Disaggregation of Revenue by segment and geography). Pre-tax income in the Current Quarter was $934,860 compared to $782,944 in the Previous Quarter, representing an increase of 19.4%. A more detailed analysis of our results of operations is set out below.

Current wording

Our consolidated results of operations include the results of the Company’s foreign subsidiaries. Our foreign subsidiaries’ results are translated from their respective functional currencies into United States Dollar (USD) for reporting purposes. Currency fluctuations can therefore impact (positively or negatively) on our consolidated results including revenue, profitability and the value of our assets and liabilities included on the consolidated balance sheet. During the Current Quarter, the USD weakened against the British Pound and the Danish Kroner, resulting in translated foreign revenues being higher by $81,131 than when using the Previous Quarter exchange rate. In addition, the associated costs of our foreign subsidiaries including cost of sales and operating expenses when translated from their respective functional currencies into USD for reporting purposes were higher due to the weakening of the USD (for a discussion of the effect of foreign exchange rates see Item 2 “Inflation and Foreign Currency”). Consolidated net revenue in the Current Quarter increased by 31.8% and was $7,017,459 compared to $5,323,178 in the Previous Quarter. During the Current Quarter total operating expenses increased by 42.8% and income from operations decreased by 19.5%. Commission costs were 195.2% higher in the Current Quarter and were $390,384 compared to $132,222 in the Previous Quarter due to more units of hardware sales emanating from Asia which unusually incurred a higher commission cost due to quantities purchased (see Notes 15 and 16 to the unaudited Consolidated Financial Statements for more information on Segment reporting and Disaggregation of Revenue by segment and geography). Pre-tax income in the Current Quarter was $1,265,610 compared to $1,641,215 in the Previous Quarter, representing a decrease of 22.9%, largely caused by lower gross profit margins and higher total operating expenses which primarily is a result of the weakening of the USD against the British Pound and Danish Kroner. A more detailed analysis of our results of operations is set out below.

Previous wording

PAL was acquired on October 29, 2024 and therefore for the purpose of this MD&A discussion, no prior year comparison financial data is presented.

Current wording

PAL was acquired on October 29, 2024 and therefore for the purpose of our MD&A discussion, no prior year comparative financial data is presented.

Previous wording

In the Current Quarter, the Services Business generated $1,621,645 or 31.1% of our consolidated revenues compared to 918,425 or 20.6% in the Previous Quarter, representing an increase in sales of 76.6%. Gross profit margin increased from 56.4% in the Previous Quarter to 58.9% in the Current Quarter, reflecting the mix of engineering projects. In the Current Quarter total operating expenses increased by 9.5% in the Services Business and were $684,246 compared to $625,086 in the Previous Quarter. Net income before tax in the Current Quarter was $297,795 compared to a net loss of $35,713 in the Previous Quarter.

Current wording

In the Current Quarter, the Marine Engineering Business generated $1,840,300 or 26.2% of our consolidated net revenues compared to $1,798,464 or 33.8% in the Previous Quarter, representing an increase in sales of 2.3%. Gross profit margin increased from 50.7% in the Previous Quarter to 55.5% in the Current Quarter, reflecting the mix of engineering projects. In the Current Quarter total operating expenses decreased by 12.9% in the Marine Engineering Business and were $569,435 compared to $653,871 in the Previous Quarter. Pre-tax income in the Current Quarter was $477,722 compared to $321,360 in the Previous Quarter.

Previous wording

Our Marine Technology Business margins increased in the Current Quarter due to less units of outright sales in Asia and therefore reducing the level of commission costs associated with sales in this region. Commission costs incurred by this business unit were $209,695 compared to $293,184 in the Previous Quarter, representing a decrease of 28.5%. Since there are more variable factors affecting gross profit margins in the Marine Technology Business (Products Business), a table showing a summary of break-out of sales generated by this business in the Current Quarter compared to the Previous Quarter is set out below:

Current wording

In the Current Quarter, gross profit margins for the Marine Technology Business were 67.7% compared to 80.2% in the Previous Quarter and for the Marine Engineering Business these were 55.5% in the Current Quarter compared to 50.7% in the Previous Quarter and for PAL it was 65.4%. Our consolidated commission costs incurred in the Current Quarter increased by 195.2% and were $390,384 compared to $132,222 in the Previous Quarter. This is largely due to a significant percentage of our consolidated net sales in the Current Quarter emanating from the strategic region of Asia with an associated higher commission cost due to quantities purchased, combined with a significantly higher number units of hardware sales compared to rentals and associated services. Since there are more variable factors affecting gross profit margins in the Marine Technology Business, a table showing a summary of break-out of sales generated by this business in the Current Quarter compared to the Previous Quarter is set out below:

Previous wording

Further information on the performance of each business segment, including revenues by type and geography, can be found in Notes 15 and Note 16 to the unaudited consolidated financial statements for the Current and Previous Quarters.

Current wording

Further information on the performance of each business segment, including revenues by type and geography, can be found in Notes 15 and 16 to the unaudited consolidated financial statements for the Current and Previous Quarters.

Previous wording

During the Current Quarter our Products Business R&D expenditure decreased by 12.0% and was $405,812 as compared to $461,375 in the Previous Quarter. R&D expenditure is incurred by this business in connection with investments it makes in developing its products and solutions and a significant component of these expenditures comprises wages and salaries. This expenditure is an essential part of our business, as we need to continue to innovate our solutions on an ongoing basis. In the Current Quarter, R&D expenditure decreased due to a reduction in headcount during the period.

Current wording

During the Current Quarter our Products Business R&D expenditure increased by 16.6% and was $565,385 as compared to $485,061 in the Previous Quarter. R&D expenditure is incurred by this business in connection with investments it makes in developing its products and solutions and a significant component of these expenditures comprises wages and salaries. This expenditure is an essential part of our business, as we need to continue to innovate our solutions on an ongoing basis. The increase is related to exchange rate variance as all of the costs related to this category have been translated from British Pound to USD and during the Current Quarter the USD weakened against the British Pound, the functional currency in which these costs are incurred.

Previous wording

This is a newly acquired business unit and therefore there is no financial comparison data for the Previous Quarter. During the Current Quarter PAL incurred R&D expenditure of $90,964. R&D expenditure is incurred by this business in connection with investments it makes in developing its acoustic sensors, solutions and materials. A significant component of these expenditures comprises wages and salaries and we anticipate that R&D costs associated with this business unit will be approximately $450,000 on an annualized basis.

Current wording

This is a newly acquired business unit and therefore there is no financial comparative data for the Previous Quarter. During the Current Quarter, PAL incurred R&D expenditure of $95,266. R&D expenditure is incurred by this business in connection with investments it makes in developing its acoustic sensors, solutions and materials. A significant component of these expenditures comprises wages and salaries and we anticipate that R&D costs associated with this business unit will be approximately $450,000 on an annualized basis.

Previous wording

During the Current Quarter the Services Business R&D expenditure increased by 88.4% and was $46,350 compared to $24,602 in the Previous Quarter. The Services Business incurs research and development expenses mainly 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.

Current wording

During the Current Quarter, the Marine Engineering Business R&D expenditure decreased by 48.9% and was $29,344 compared to $57,420 in the Previous Quarter. The Marine Engineering Business incurs research and development expenses mainly 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.

Previous wording

SG&A includes both cash charges and non-cash charges. The non-cash charges comprise Depreciation, Amortization, Stock-based compensation and Exchange Rate Variance charges. In the Current Quarter non-cash items as a percentage of SG&A expenses were 2.6% compared to 15.5% in the Previous Quarter. This is caused by the strengthening of the USD against the British Pound and Danish Kroner resulting in exchange rate variance adjustment loss of ($318,279) in the Current Quarter compared to adjustment benefit of $118,261 in the Previous Quarter. Due to the acquisition of PAL, Amortization costs increased significantly and were $127,759 compared to $17,246 in the Previous Quarter.

Current wording

Selling, General and Administrative Expenses (SG&A): SG&A expenses for the Current Quarter increased by 47.4% to $2,719,602 from $1,845,570 in the Previous Quarter. The inclusion of PAL into the Group has resulted in SG&A in the Current Quarter being 22.4% or $608,923 higher. Another factor in the Current Quarter is that non-cash charges as a component of SG&A increased significantly. A large component of this variation is expenses related to the exchange rate variance charges to our SG&A expenses of $312,285 in the Current Quarter compared to a gain on these transactions of $67,491 in the Previous Quarter. SG&A includes both cash charges and non-cash charges. The non-cash charges comprise Depreciation, Amortization, Stock-based compensation and Exchange Rate Variance charges. In the Current Quarter non-cash items as a component of SG&A expenses were 24.7% or $670,542 compared to (0.3%) or ($6,107) in the Previous Quarter. This is caused by the weakening of the USD against the British Pound and Danish Kroner resulting in an expense to our SG&A costs in the Current Quarter. Due to the acquisition of PAL, Amortization costs increased significantly and were $130,548 compared to $16,623 in the Previous Quarter.

Previous wording

Wages and Salaries – this category of expenses increased primarily due to the inclusion of PAL into the Group. Wages & Salaries related to PAL in the Current Quarter are $112,904. Without PAL, this category of expenses would have been more in line with the Previous Quarter ($906,799 compared to $899,047 in the Current Quarter) reflecting a reduction in payroll expenses. On an annual basis, we anticipate that this area of expenditure will increase significantly as we are operating on reduced headcount and payroll costs is an area of which is exposed to significant inflationary pressures.

Current wording

Wages and Salaries – this category of expenses increased primarily due to the inclusion of PAL into the Group. Wages and salaries related to PAL in the Current Quarter are $112,987. Without PAL, this category of expenses would have been more in line with our Previous Quarter ($937,631 in the Current Quarter compared to $932,509 in the Previous Quarter). We anticipate that on a full year basis in the fiscal year 2025 this category will increase materially over the fiscal year 2024 as we are currently operating on a reduced headcount and are seeking to recruit for several vacant positions along with expanding our management team, some of which may include additional costs relating to our succession planning strategy.

Previous wording

Overhead related costs as a percentage of revenue for Current Quarter, compared to the Previous Quarter

Current wording

Overhead related costs as a percentage of net revenue for Current Quarter, compared to the Previous Quarter

Previous wording

Other Income: In the Current Quarter, we had “Other Income” of $272,838 compared to $227,560, representing an increase of 19.9% from the Previous Quarter. A significant component of other income is interest earned on our certified deposits of $194,171. In February 2023, the Company established certified deposit accounts with its existing bankers. These accounts are for fixed 3-month rolling periods and constitute “cash equivalents” in our current unaudited Consolidated Financial Statements for the period ended January 31, 2025 (see Note 7 (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 “Other Income” of $177,926 compared to $290,832, representing a decrease of 38.8% from the Previous Quarter. A significant component of “Other Income” is interest earned on our certified deposits of $145,594. In February 2023, the Company established certified deposit accounts with its existing bankers. These accounts are for a fixed term of up to 3-month rolling periods and constitute “cash equivalents” in our current unaudited Consolidated Financial Statements for the period ended April 30, 2025 (see Note 7 (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.

Previous wording

Net Income before income taxes: In the Current Quarter, we had pre-tax income of $934,860 compared to $782,944 in the Previous Quarter, representing an increase of 19.4%. Pre-tax income increased due to an increase in our consolidated revenue which is largely attributed to the addition of PAL to our Group. Without the inclusion of PAL, our pre-tax income would have been $378,811, representing a decrease of 51.6% caused largely by the reduction in our Core Business revenue for the reasons discussed earlier.

Current wording

Income before income taxes: In the Current Quarter, we had pre-tax income of $1,265,610 compared to $1,641,215 in the Previous Quarter, representing a decrease of 22.9%. Pre-tax income decreased, despite the increase in our consolidated net revenue by 31.8%, due to the combination of factors discussed earlier.

Previous wording

Net Income: In the Current Quarter we had Net Income of $912,975 compared to $629,888 in the Previous Quarter, representing an increase of 44.9%. In the Previous Quarter we recorded Current Tax Benefit of $34,015 compared to a Current Tax Expense of $48,874 in the Current Quarter reflecting provision for income tax. We also recorded a Deferred Tax Expense of $187,071 in the Previous Quarter compared to a Deferred Tax Benefit of $26,989 in the Current Quarter, which relates to the granting of stock awards. Our effective tax rate is subject to significant variation due to several factors including variability in our pre-tax income and/or loss and the mix of jurisdictions to which such income or losses relate, the applicability of special tax regimes, changes in tax regulations, changes in our stock price, changes in our deferred tax assets and liabilities, their valuation, foreign currency gains (losses). The mix of jurisdictions and related income or losses also affects our tax liability for Global Intangible Low-Taxed Income (GILTI). In the Current Quarter, the U.S. subsidiaries generated 27.3% of our consolidated revenue and did not generate any taxable income. The Company’s UK subsidiaries have carryforward losses and R&D Tax credits which are applied to defray income tax liability and therefore no provision has been made for tax liability for the UK subsidiaries in our consolidated results for the Current Quarter. We have made a provision for our Danish subsidiary of 22.0% for the Current Quarter.

Current wording

Net Income: In the Current Quarter we had Net Income of $908,762 compared to $1,415,238 in the Previous Quarter, representing a decrease of 35.8%. In the Previous Quarter we recorded Current Tax Expense of $191,073 compared to a Current Tax Expense of $374,701 in the Current Quarter reflecting provision for income tax. We also recorded a Deferred Tax Expense of $34,904 in the Previous Quarter compared to a Deferred Tax Benefit of $17,853 in the Current Quarter, which relates to the granting of stock awards. Our effective tax rate is subject to significant variation due to several factors including variability in our pre-tax income and/or loss and the mix of jurisdictions to which such income or losses relate, the applicability of special tax regimes, changes in tax regulations, changes in our stock price, changes in our deferred tax assets and liabilities, their valuation, foreign currency gains (losses). The mix of jurisdictions and related income or losses also affects our tax liability for Global Intangible Low-Taxed Income (GILTI). In the Current Quarter, the U.S. subsidiaries generated 35.1% of our consolidated net revenue and generated taxable income which resulted in a provision for income tax in the Current Quarter. The Company’s UK subsidiaries have carryforward losses and qualify for R&D Tax credits which are applied to defray a percentage of our income tax liability. In Current Quarter we have made provision of $167,083 for tax liability for the UK subsidiaries and $32,658 for our Danish subsidiary, where the corporation tax rate is 22%.

Previous wording

Comprehensive Income*.* In the Current Quarter comprehensive loss was $115,611 compared to comprehensive income $1,659,468 for the Previous Quarter reflecting adjustments resulting from foreign currency translations. This category is affected by fluctuations in foreign currency exchange transactions both relating to our profit and loss expenses and the valuation of our assets and liabilities on our balance sheet. In the Current Quarter, the USD strengthened against the British Pound, Danish Kroner and Euro and we had a loss of $1,028,586 on foreign currency translation adjustment transactions compared to a gain of $1,029,580 in the Previous Quarter. A significant part of the Company’s operations is based in the UK and Denmark, and therefore a major part of our assets and liabilities recorded in our consolidated balance sheet and financial transactions are translated from the functional currencies of these subsidiaries into USD for reporting purposes. See the section below which concerns “Inflation & Foreign Currency” which shows the impact of the currency adjustments on our Income Statement and Balance Sheet in the Current Quarter compared to the Previous Quarter.

Current wording

Comprehensive Income*.* In the Current Quarter comprehensive income was $2,709,201 compared to comprehensive income $977,555 for the Previous Quarter reflecting adjustments resulting from foreign currency translations. This category is affected by fluctuations in foreign currency exchange transactions both relating to our revenue and expenses and the valuation of our assets and liabilities on our balance sheet. In the Current Quarter, the USD weakened against the British Pound, Danish Kroner and Euro and we had a gain of $1,800,439 on foreign currency translation adjustment transactions compared to a loss of ($437,683) in the Previous Quarter. A significant part of the Company’s operations is based in the UK and Denmark, and therefore a major part of our assets and liabilities recorded in our unaudited consolidated balance sheet and financial transactions are translated from the functional currencies of these subsidiaries into USD for reporting purposes (Note 7 “property and equipment (by geographic areas) provide an indication of the split of our property). See the section below which concerns “Inflation & Foreign Currency” which shows the impact of the currency adjustments on our Income Statement and Balance Sheet in the Current Quarter compared to the Previous Quarter.

Previous wording

Research and Development (R&D): R&D expenditures in the Current Quarter increased by 11.8% and were $543,126 compared to $485,977 in the Previous Quarter.

Current wording

Research and Development (R&D): R&D expenditures in the Current Six Month Period were $1,233,121 compared to the $1,028,458 in the Previous Six Month Period, representing an increase of 19.9%.

Previous wording

Marketing and associated travel costs: We incur marketing expenses in connection with the promotion of our goods and services. These expenses include participation in industry trade shows, marketing events such as demonstrations of our technology and travel for marketing activities. These costs also include fees associated with the retention of a US Focus Group, which has been retained to assist with our marketing strategy and efforts.

Current wording

Marketing and associated travel costs: We incur marketing expenses in connection with the promotion of our goods and services. These expenses include wages and salaries of our Digitalization Team which is responsible for content creation and video production relating to our products and solutions and fees associated with the retention of a U.S. based Focus Group, which has been retained to assist with our marketing strategy and efforts. They also include costs associated with participation in industry trade shows, marketing events such as demonstrations of our technology and travel for marketing activities.

Previous wording

General corporate administrative expenses in the Current Quarter were $781,308 or 15.0% of revenue and $609,500 or 13.7% of revenue in the Previous Quarter, respectively. For more information on general corporate administrative expenses, please see Note 15 (Segment Analysis).

Current wording

General corporate administrative expenses in the Current Six Month Period were $1,254,538 or 10.3% of net revenue and $1,065,799 or 10.9% of net revenue in the Previous Six Month Period, respectively. For more information on general corporate administrative expenses, please see Note 15 (Segment Analysis).

Previous wording

As of January 31, 2025, the Company had an accumulated deficit of $6,493,516, working capital of $39,382,917, cash of $22,541,963 and stockholders’ equity of $53,113,057. In the Current Quarter, the company generated cash from operations of $641,511.

Current wording

As of April 30, 2025, the Company had an accumulated deficit of $5,584,754, working capital of $42,069,443, cash of $24,462,301 and stockholders’ equity of $55,888,497. For the six months ended April 30, 2025, the Company’s operating activities provided $2,103,980 cash.

Previous wording

The Company’s consolidated results are a combination of its US and foreign operations and these companies maintain their accounts in the functional currencies of their jurisdictions which are noted above. Fluctuations in currency exchange rates can directly impact on the Company’s sales, profitability and financial position when the transactions of the foreign subsidiaries are translated from their functional currencies into USD for financial reporting. In addition, the Company is also subject to currency fluctuation risk with respect to certain foreign currency denominated receivables and payables incurred in the ordinary course of its business operations (cross-border transactions such as inventory purchasing). In general, the Company’s subsidiaries perform financial transactions in their native currencies. Occasionally, a subsidiary may perform financial transactions in currencies other than its native or functional currency (purchasing inventory from a foreign supplier, for example, in foreign currency). Furthermore, the Company holds significant cash balances in foreign currencies, such as British Pound, Euro and Danish Kroner. The Company cannot predict the extent to which currency fluctuations may affect its business and financial position, and there is a risk that such fluctuations may have an adverse impact on the Company’s sales, profits, cash and cash equivalent balances and its overall financial position.

Current wording

The Company’s consolidated results are a combination of its U.S. and foreign operations and these companies maintain their accounts in the functional currencies of their jurisdictions which are noted above. Fluctuations in currency exchange rates can directly impact on the Company’s sales, profitability and financial position when the transactions of the foreign subsidiaries are translated from their functional currencies into USD for financial reporting. In addition, the Company is also subject to currency fluctuation risk with respect to certain foreign currency denominated receivables and payables incurred in the ordinary course of its business operations (cross-border transactions such as inventory purchasing). In general, the Company’s subsidiaries perform financial transactions in their native currencies. Occasionally, a subsidiary may perform financial transactions in currencies other than its native or functional currency (purchasing inventory from a foreign supplier, for example, in foreign currency). Furthermore, the Company holds significant cash balances in foreign currencies, such as British Pound, Euro and Danish Kroner. The Company cannot predict the extent to which currency fluctuations may affect its business and financial position, and there is a risk that such fluctuations may have an adverse impact on the Company’s sales, profits, cash and cash equivalent balances and its overall financial position.

Previous wording

Information regarding the effect of foreign exchange rates versus the U.S Dollar on our net sales, operating expenses, and operating income and balance sheet items is provided to show reported period operating results had the foreign exchange rates remained the same as those in effect in the Previous Quarter. The effect on our net sales, operating expenses and operating income along with our balance sheet items from changes in our foreign exchange rates versus the U.S. Dollar is as follows:

Current wording

Information regarding the effect of foreign exchange rates versus the U.S. Dollar on our net sales, operating expenses, and operating income and balance sheet items is provided to show the periods ended the three months and six months operating results had the foreign exchange rates remained the same as those in effect in the correlated previous periods. The effect on our net sales, operating expenses and operating income along with our balance sheet items from changes in our foreign exchange rates versus the U.S. Dollar is as follows:

Previous wording

This table shows that the effect of exchange rates changes (the Current Quarter’s exchange rate compared to the Previous Quarter’s exchange rate) decreased our net income from operations by $43,725 and net assets by $930,553, in the Current Quarter.

Current wording

This table shows that the effect of exchange rates changes (the Current Quarter’s exchange rate compared to the Previous Quarter’s exchange rate) decreased our net income from operations by $20,014 and increased net assets by $1,083,474, in the Six Month period, as assets are compared to October 31, 2024.