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Overview of the Company’s Financial Performance
CodaOctopus Corporation is a diversified technology company that operates three main business segments: Marine Technology, Acoustic Sensors and Materials, and Marine Engineering. The company sells its products and services internationally, with 75.1% of its revenue generated outside the United States.
In the current quarter, the company reported consolidated revenue of $5,209,715, an increase of 16.8% compared to the previous quarter. This increase was driven by the acquisition of the Acoustic Sensors and Materials business (PAL) in October 2024, which contributed 25.2% of total revenue. However, the company’s core Marine Technology business saw a 35.8% decrease in revenue compared to the previous quarter, which the company attributes to broader macroeconomic factors and uncertainty around the new U.S. administration’s policies on trade, energy, and defense spending.
The company’s gross profit margin decreased from 69.2% in the previous quarter to 65.8% in the current quarter, largely due to the lower-margin Acoustic Sensors and Materials and Marine Engineering businesses contributing a higher percentage of total revenue. The Marine Technology business maintained a strong gross margin of 73.1%.
Overall, the company reported pre-tax income of $934,860 in the current quarter, an increase of 19.4% compared to the previous quarter. Net income after taxes was $912,975, up 44.9% from the previous quarter. However, the company recorded a comprehensive loss of $115,611 in the current quarter due to unfavorable foreign currency translation adjustments, compared to comprehensive income of $1,659,468 in the previous quarter.
Factors Affecting the Business
The company identified several key factors that have impacted its business in the current quarter:
Inflation: Inflation has affected the global economy, with the consumer price index rising 1.5% in Denmark, 3.9% in the UK, and 3.0% in the U.S. over the 12-month period preceding January 2025. This has increased the company’s costs of operations and materials, and may have dampened demand for its products and services.
Changes in Global Trade Policy: The company sells its products and services globally, and any changes in trade policy that restrict the free flow of goods and services could negatively impact demand. The recent changes in U.S. trade policy have created significant uncertainty, leading to reduced demand for the company’s rental solutions and dampening demand for outright sales.
Currency Fluctuations: The company’s operations in the UK, Denmark, Australia, and India expose it to foreign exchange rate fluctuations, which can positively or negatively impact its consolidated revenue, profitability, and the value of its assets and liabilities.
Concentration of Business Opportunities: The company’s Services Business is highly dependent on subcontracts with prime defense contractors, and the sales cycle for these opportunities is generally long and unpredictable, which can affect quarterly revenues. Additionally, the key growth opportunities for the company’s Marine Technology Business are in the defense market, which is also subject to the unpredictable government procurement process.
Impact on Liquidity, Balance Sheet, and Assets: These factors may adversely impact the company’s available cash flow, working capital, and business prospects. However, as of January 31, 2025, the company had $22,541,963 in cash and cash equivalents and $641,511 in cash provided by operations, and believes it has sufficient working capital to meet its anticipated cash needs for the next twelve months.
Segment Performance
Marine Technology Business (Core Business): This segment, which includes the company’s real-time 3D imaging sonar and diver augmented vision display (DAVD) systems, generated $2,275,809 or 43.7% of consolidated revenue in the current quarter, a decrease of 35.8% compared to the previous quarter. The company attributes this decrease to weak worldwide demand, which it believes is due to broader macroeconomic factors and uncertainty around the new U.S. administration’s policies. Gross profit margin for this segment increased from 72.5% in the previous quarter to 73.1% in the current quarter, due to reduced commission costs and hardware sales.
Acoustic Sensors and Materials Business (PAL): This newly acquired business segment generated $1,312,261 or 25.2% of consolidated revenue in the current quarter, with a gross profit margin of 61.7%.
Marine Engineering Business: This segment, which provides engineering services to prime defense contractors, generated $1,621,645 or 31.1% of consolidated revenue in the current quarter, an increase of 76.6% compared to the previous quarter. Gross profit margin for this segment increased from 56.4% to 58.9%, reflecting the mix of engineering projects.
Key Growth Opportunities
The company’s most promising products for near-term growth are its real-time 3D imaging sonar technology and DAVD system. The company believes its sonar technology is the only underwater imaging solution capable of providing complex seabed mapping, real-time inspection and monitoring, and 3D/4D/5D/6D data of moving underwater objects, even in zero visibility conditions. The DAVD system is a new technology that the company believes can radically change the way diving operations are performed globally by providing a fully integrated suite of sensor data shared in real-time between the diver and the surface supervisor.
The company is also targeting the special forces market with its untethered DAVD system, and has reached a key milestone in delivering a new generation of the DAVD head-up display with a smaller form factor and higher resolution. The company anticipates receiving initial orders for this untethered DAVD variant in fiscal year 2025.
Critical Accounting Policies
The company’s critical accounting policies include revenue recognition, business combinations, and inventory allowance. Revenue is recognized when products are sold or services are provided to customers under formal contracts. For business combinations, the company records acquired assets and liabilities at fair value, with any excess purchase price recorded as goodwill. The company also adjusts the value of its inventory to account for obsolescence or other factors that may prevent the full cost from being recovered.
Consolidated Results of Operations
In the current quarter, the company’s consolidated revenue increased by 16.8% to $5,209,715, compared to $4,461,191 in the previous quarter. This increase was driven by the addition of the Acoustic Sensors and Materials business, as well as a 76.6% increase in revenue from the Marine Engineering business. However, the Marine Technology business saw a 35.8% decrease in revenue.
Gross profit margin decreased from 69.2% in the previous quarter to 65.8% in the current quarter, primarily due to the lower-margin Acoustic Sensors and Materials and Marine Engineering businesses contributing a higher percentage of total revenue.
Operating expenses increased by 9.3%, with research and development expenses increasing by 11.8% and selling, general, and administrative expenses increasing by 8.7%. The increase in SG&A expenses was largely due to the inclusion of the Acoustic Sensors and Materials business.
Despite the decrease in revenue from the Marine Technology business, the company’s pre-tax income increased by 19.4% to $934,860 in the current quarter, compared to $782,944 in the previous quarter. This was primarily due to the contribution from the newly acquired Acoustic Sensors and Materials business.
Net income after taxes increased by 44.9% to $912,975 in the current quarter, compared to $629,888 in the previous quarter. However, the company recorded a comprehensive loss of $115,611 in the current quarter due to unfavorable foreign currency translation adjustments, compared to comprehensive income of $1,659,468 in the previous quarter.
Liquidity and Capital Resources
As of January 31, 2025, the company had $22,541,963 in cash and cash equivalents, $39,382,917 in working capital, and $53,113,057 in stockholders’ equity. The company also has a $4,000,000 revolving line of credit with HSBC NA, with no outstanding balance as of January 31, 2025.
The company believes its cash flow from operations and available cash and credit facilities will be sufficient to meet its anticipated cash needs for the next twelve months. However, the company notes that projections of future cash flows are subject to substantial uncertainty.
Inflation and Foreign Currency
The company’s consolidated financial results are impacted by fluctuations in foreign exchange rates, as its subsidiaries maintain accounts in their respective functional currencies (U.S. Dollars, British Pounds, Danish Kroner, Australian Dollars, and Indian Rupees). In the current quarter, the strengthening of the U.S. Dollar against the British Pound and Danish Kroner resulted in a $76,562 decrease in translated foreign revenues and a $930,553 decrease in net assets, compared to the previous quarter.
Outlook
The company faces several challenges in the current quarter, including the impact of inflation, changes in global trade policy, currency fluctuations, and the concentration of its business opportunities in areas with long and unpredictable sales cycles. These factors have contributed to a decrease in revenue from the company’s core Marine Technology business, which the company attributes to broader macroeconomic uncertainty.
However, the company remains optimistic about its long-term growth prospects, particularly in its real-time 3D imaging sonar technology and DAVD diving system. The company believes these products offer unique capabilities that can disrupt their respective markets, and it is targeting key growth opportunities in the defense and special forces sectors.
The company’s acquisition of the Acoustic Sensors and Materials business has also diversified its revenue streams and provided a new avenue for growth. While the integration of this business may present some challenges, the company believes it will contribute positively to its overall financial performance in the coming years.
Overall, the company appears to be navigating a challenging macroeconomic environment, but is taking steps to position itself for long-term success through strategic investments in its core technology offerings and targeted acquisitions. Investors will likely be closely watching the company’s ability to capitalize on its growth opportunities while managing the various risks and uncertainties it faces.
