Coda Octopus Group, Inc.

Coda Octopus Group, Inc. operates in the underwater technology and defense engineering services industries through three distinct segments: Marine Technology Business, Acoustic Sensors and Materials Business (PAL), and Defense Engineering Services Business. The Marine Technology Business, considered the core business, focuses on proprietary real-time volumetric imaging sonar technology (Echoscope®) and diving technology (DAVD), serving commercial offshore and defense sectors. The Acoustic Sensors and Materials Business, acquired in October 2024, specializes in acoustic sensors, materials, and consultancy for medical, subsea, and defense markets. The Defense Engineering Services Business provides embedded solutions and sub-assemblies for mission-critical integrated defense systems, often enjoying sole-source status for its components. The company emphasizes cross-group synergies, combining shared customer relationships, complementary technologies, and engineering expertise to deliver end-to-end solutions in underwater acoustics and measurement, particularly for demanding environments.

The core business model revolves around developing, manufacturing, selling, and renting proprietary hardware and software solutions. Revenue streams include outright sales of equipment and software, equipment rentals, engineering parts, and various services such as installation, training, and post-sales technical support. The Marine Technology Business generates revenue from both sales and rentals, with rentals being a significant component driven by offshore development projects. The Defense Engineering Services Business primarily operates as a subcontractor to prime defense contractors, providing engineering services and manufacturing sub-assemblies, often leading to recurring, long-tail revenues due to sole-source status for program life cycles. PAL's revenue is derived from the sale of acoustic sensors and materials, in addition to calibration services.

The Marine Technology Business offers real-time volumetric imaging sonar (Echoscope®, Echoscope PIPE®, and Echoscope PIPE NANO Gen Series®), diving technology (DAVD), digital audio communications systems (Voice HUB_4), GNSS-Aided Navigation Systems (F280 Series®), and geophysical solutions (DA4G®, GeoSurvey®, and Survey Engine®). The Echoscope technology is highlighted for its ability to image moving objects in 3D in zero visibility, distinguishing it from competing multibeam sonars. The DAVD system, with its Head-Up Display (HUD), aims to revolutionize diving operations by providing real-time information to divers and surface supervisors, especially when paired with Echoscope technology for zero-visibility conditions.

The Acoustic Sensors and Materials Business (PAL), acquired on October 29, 2024, specializes in acoustic hydrophone design, innovative acoustic materials, and calibration services for medical devices, being one of only two organizations in the UK with ISO/IEC 17025 accreditation for ultrasonic free-field sensitivity calibration. This expertise is intended to be leveraged across the group, particularly in advancing Echoscope technology and qualifying for larger defense contracts.

The Defense Engineering Services Business, comprising Coda Octopus Engineering, Inc. (COEI) and Coda Octopus Martech Limited, designs, manufactures, and supplies proprietary sub-assemblies for integration into larger defense systems, such as Raytheon's Close-in Weapon Support (CIWS) and Northrop Grumman's Mine Hunting Systems Program (AQS-24). This segment benefits from long-term preferred/sole supplier status for its components, ensuring recurring revenues and opportunities for technology refresh and obsolescence management.

For the fiscal year ended October 31, 2025, consolidated net revenue increased by 30.7% to $26,563,126 ¹ from $20,316,161 ² in the previous fiscal year. PAL contributed $5,409,954 ³ or 20.4% ⁴ to this consolidated net revenue. Without PAL, consolidated net revenue would have increased by 4.1% ⁵ to $21,153,172 ⁶. Gross Profit Margin decreased by 3.3% points ⁷ to 66.5% ⁸ (gross profit of $17,662,368 ⁹) from 69.8% ¹⁰ (gross profit of $14,173,105 ¹¹) in the prior year, reflecting changes in sales mix and a 21.0% ¹² increase in commission costs to $896,046 ¹³ from $740,507 ¹⁴. Total operating expenses rose by 24.0% ¹⁵ to $13,126,340 ¹⁶ from $10,588,974 ¹⁷, with PAL adding 17.8% ¹⁸ or $2,335,355 ¹⁹ to these expenses. Income from operations increased by 26.6% ²⁰ to $4,536,028 ²¹ from $3,584,131 ²². Net income before taxes grew by 19.5% ²³ to $5,512,217 ²⁴ from $4,611,288 ²⁵. Net income for the year was $4,129,930 ²⁶, an increase of 13.3% ²⁷ from $3,645,996 ²⁸ in the prior year. Basic EPS was $0.37 ²⁹ and diluted EPS was $0.37 ³⁰ for 2025, compared to $0.33 ³¹ and $0.32 ³² respectively for 2024. Cash and cash equivalents stood at $28,682,615 ³³ as of October 31, 2025, and the company generated $7,211,168 ³⁴ in net cash from operating activities. Total assets were $64,493,562 ³⁵ and total liabilities were $6,378,148 ³⁶. The company had no outstanding debt under its $4,000,000 ³⁷ revolving line of credit.

Year-over-year, the Marine Technology Business revenue increased by 3.2% ³⁸ to $13,221,339 ³⁹ in 2025 from $12,806,603 ⁴⁰ in 2024. Its gross profit margin decreased by 3.4% points ⁴¹ to 74.5% ⁴² from 77.9% ⁴³, primarily due to a 36.6% ⁴⁴ reduction in rental revenue, which typically yields higher margins, and a 30.5% ⁴⁵ increase in equipment sales. Defense Engineering Services Business revenue increased by 5.6% ⁴⁶ to $7,931,833 ⁴⁷ from $7,509,558 ⁴⁸, with its gross profit margin rising by 2.8% points ⁴⁹ to 58.6% ⁵⁰ from 55.8% ⁵¹, reflecting a shift towards more manufacturing units over design work. Research and Development (R&D) expenditure increased by 9.2% ⁵² to $2,447,762 ⁵³ from $2,242,429 ⁵⁴, with PAL contributing $414,370 ⁵⁵ to R&D. Without PAL, R&D would have decreased by 9.3% ⁵⁶ to $2,033,392 ⁵⁷. Selling, General and Administrative (SG&A) expenses increased by 27.9% ⁵⁸ to $10,678,578 ⁵⁹ from $8,346,545 ⁶⁰, with PAL accounting for an 18.0% ⁶¹ or $1,920,985 ⁶² increase. Non-cash charges within SG&A increased by 64.5% ⁶³ to $1,697,959 ⁶⁴ from $1,032,463 ⁶⁵, driven by a 63.3% ⁶⁶ increase in stock-based compensation to $224,786 ⁶⁷ and a 776.7% ⁶⁸ increase in amortization expenses to $530,218 ⁶⁹ due to the PAL acquisition.

During fiscal year 2025, the company launched its Echoscope PIPE NANO Gen Series® ⁷⁰, an ultra-compact real-time 3D imaging sonar, which is a critical step for next-generation subsea AI-enabled autonomy and addresses the growing market for smaller underwater vehicles, drones, and robotics. The DAVD untethered solution (DUS) saw significant progress, with the delivery of 16 DAVD Untethered Systems for the U.S. Navy MK16 Rebreather system ⁷¹ following the successful completion of the DUS Hardening Program. The company also received its first small batch order for the DAVD system from a European-based foreign navy ⁷². The acquisition of Precision Acoustics Limited (PAL) on October 29, 2024, for $6,538,569 ⁷³ in cash, net of acquired cash of $4,605,285 ⁷⁴, was a significant development, aimed at leveraging PAL's expertise in acoustic and medical imaging technologies for the subsea market and to qualify for larger Defense-related contracts.

Management anticipates that the Echoscope® technology and the DAVD system will be the primary drivers for near-term growth. The Echoscope® is expected to see scalable growth in the defense sector, particularly with the deployment of new classes of underwater vehicles, including manned, unmanned surface, and fully autonomous platforms, where it provides essential real-time 3D imaging for navigation, situational awareness, and mission execution. The recently launched Echoscope PIPE NANO Gen Series® in fiscal year 2025 is positioned to address the growing market for smaller underwater vehicles, drones, and robotics, enabling AI-enabled autonomy and reducing SWaP (Size, Weight, and Power) constraints. The company has already seen real progress in the Defense underwater vehicle market with successful trials of the NANO sonar.

The DAVD system is expected to radically change diving operations globally by providing an integrated suite of real-time sensor data to divers and surface supervisors. The DAVD tethered variant is in early stages of adoption with the US Navy in over 14 commands ⁷⁵, and the untethered solution (DUS) represents a significant market opportunity, with over 14,000 divers in the USA alone who could utilize it, including U.S. Special Operations Forces (SOF), EOD, US Army, Marine Corps, US Coast Guard, first responders, and law enforcement. The company delivered 16 DAVD Untethered Systems for the U.S. Navy MK16 Rebreather system ⁷⁶ in fiscal year 2025 and received a first small batch order from a European-based foreign navy ⁷⁷, with training contracted for the second quarter of fiscal 2026.

Regarding operational outlook, the company expects to continue investing in its Thermite® Octal range of mission computers within the Defense Engineering Services Business to diversify revenue and improve gross profit margins. The acquisition of PAL is expected to result in an increase in R&D expenditure as the company seeks to leverage PAL's expertise to bring more products and solutions to market. The company also plans to combine its engineering capabilities with its product offerings to provide complete systems with installation and support.

Planned capital allocation includes continued investment in research and development, which is foundational to the business strategy for growth and competitiveness. The main R&D costs are wages and salaries, researching, prototyping, validation, and testing. The acquisition of PAL is expected to increase R&D expenditure. Investing activities for the year ended October 31, 2025, included $1,170,718 ⁷⁸ for purchases of long-lived assets, which covered implementation costs for a new ERP system, new plant and equipment, and a new survey vessel (COCO II) for R&D testing, production testing, and customer training. The company had no authorized share repurchase programs as of October 31, 2025, and currently intends to retain future earnings to finance business expansion, not expecting to pay cash dividends in the foreseeable future.

Management explicitly flagged several structural headwinds and execution risks. Changes in global trade policy, including tariffs, are a concern, as approximately 32% ⁷⁹ of the Marine Technology Business revenue from the U.S. and 18.9% ⁸⁰ of PAL's sales to the U.S. are subject to tariffs. Changes in funding policy for offshore renewables by the U.S. Administration have led to reduced demand for rental solutions from European customers. Foreign exchange risks, particularly with the British Pound, Danish Kroner, and Euros against the US Dollar, can impact financial results, with foreign subsidiaries generating 66.2% ⁸¹ of consolidated revenue in 2025. Macroeconomic factors like inflation and interest rates, global economic and geopolitical developments, and the ongoing U.S. Government shutdown and use of Continuing Resolutions (CRs) are expected to continue impacting operations in fiscal year 2026, affecting customer demand and the timing of defense program awards. Geopolitical tensions, especially concerning trade with China, are a significant concern, as export controls on real-time 3D sonars and inertial navigation systems for certain countries, including China, are likely to significantly impact revenues from Asia. The company also faces skill shortages in critical areas, leading to inflationary wages and high workforce turnover, and acknowledges the inherent uncertainty of maintaining its leading technological position given the fast pace of innovation, including in AI.

The company faces several material risks, including macroeconomic factors such as inflation and interest rates, which directly impact operating costs, bill of materials, and customer demand, potentially reducing demand for goods and services and affecting the ability to compete for key skills. Geopolitical instability, particularly changes in global trade policy and export controls, poses a significant risk, as evidenced by the 10% tariff on products imported into the U.S. from the UK, affecting approximately 32% ⁷⁹ of Marine Technology Business revenue and 18.9% ⁸⁰ of PAL's sales to the U.S. The curtailment of access to the Chinese market due to export license refusals is expected to significantly impact revenues and growth strategy, given China's large planned investments in offshore renewables. Global conflicts can disrupt supply chains, increase inflation, and reduce demand. Operational risks include skill shortages in critical areas like electronic engineering and computer science, leading to inflationary wages and high workforce turnover, which can hinder business plans and innovation. The long and unpredictable sales cycle for defense contracts, coupled with reliance on U.S. federal government appropriations and the use of Continuing Resolutions, creates uncertainty in order intake and revenue timing. Technological advancements by competitors, particularly in AI, could surpass the company's solutions, despite its proprietary Echoscope® and DAVD technologies. Furthermore, the company is exposed to foreign exchange risks, with 66.2% ⁸¹ of consolidated net revenue generated by foreign subsidiaries, and significant cash balances held in foreign currencies, making financial results vulnerable to currency fluctuations.

Management's message to shareholders conveys a tone of cautious optimism, highlighting strong consolidated financial performance in fiscal year 2025 driven by strategic acquisitions and product innovation, while acknowledging significant macroeconomic and geopolitical headwinds. They emphasize that the overall consolidated financial results were up, with consolidated net revenue increasing by 30.7% ¹ to $26,563,126 ¹ compared to $20,316,161 ² in the previous fiscal year, and net income rising by 13.3% ²⁷ to $4,129,930 ²⁶. A key strategic priority is the continued investment in and commercialization of the Echoscope® technology, particularly the new Echoscope PIPE NANO Gen Series® ⁷⁰, which is seen as critical for addressing the growing market for small underwater vehicles and AI-enabled autonomy in the defense sector. Another strategic priority is the global adoption and evolution of the DAVD system, with management noting the delivery of 16 DAVD Untethered Systems for the U.S. Navy MK16 Rebreather system ⁷¹ and initial orders from a European-based foreign navy ⁷². Finally, the acquisition of Precision Acoustics Limited (PAL) is a significant strategic move, intended to leverage its expertise to advance Echoscope technology and enable the group to compete for larger Defense contracts, despite the initial increase in R&D expenditure.