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Coda Octopus Group, Inc. - Quarter Report: 2022 January (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2022

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File Number 001-38154

 

CODA OCTOPUS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   34-2008348

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

3300 S Hiawassee Rd, Suite 104-105,

Orlando, Florida

  32835
(Address of principal executive offices)   (Zip Code)
     
Registrant’s telephone number, including area code:   (863) 937 8985

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   CODA   Nasdaq

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one): ☐

 

Large accelerated filer ☐   Accelerated filer ☐   Non-accelerated filer   Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

 

The number of shares outstanding of issuer’s common stock, $0.001 par value as of March 15, 2022 is 10,857,195.

 

 

 

 

 

 

INDEX

 

  Page
PART I - Financial Information  
   
Item 1: Financial Statements 3
   
Consolidated Balance Sheets as of January 31, 2022 (Unaudited) and October 31, 2021 3
   
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended January 31, 2022 and 2021 (Unaudited) 5
   
Consolidated Statements of Stockholders’ Equity for the Three Months Ended January 31, 2022 and 2021 (Unaudited) 6
   
Consolidated Statements of Cash Flows for the Three Months Ended January 31, 2022 and 2021 (Unaudited) 7
   
Notes to Unaudited Consolidated Financial Statements 8
   
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
   
Item 3: Quantitative and Qualitative Disclosures about Market Risks 28
   
Item 4: Controls and Procedures 28
   
PART II - Other Information 29
   
Item 1: Legal Proceedings 29
   
Item 1A: Risk Factors 29
   
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 29
   
Item 3: Default Upon Senior Securities 29
   
Item 4: Mine Safety Disclosures 29
   
Item 5: Other Information 29
   
Item 6: Exhibits 29
   
Signatures 30

 

2

 

 

PART I. FINANCIAL INFORMATION

 

CODA OCTOPUS GROUP, INC.

Consolidated Balance Sheets

January 31, 2022 and October 31, 2021

 

   2022   2021 
   Unaudited     
ASSETS          
           
CURRENT ASSETS          
Cash  $20,711,228   $17,747,656 
Accounts Receivable, net   1,535,682    4,207,996 
Inventory   11,159,798    10,691,177 
Unbilled Receivables   401,661    1,080,384 
Prepaid Expenses   313,945    1,202,327 
Other Current Assets   651,724    627,619 
           
Total Current Assets   34,774,038    35,557,159 
           
FIXED ASSETS          
Property and Equipment, net   6,743,670    6,037,101 
           
OTHER ASSETS          
Goodwill and Other Intangibles, net   3,794,880    3,794,383 
Deferred Tax Asset   86,643    76,776 
           
Total Other Assets   3,881,523    3,871,159 
           
Total Assets  $45,399,231   $45,465,419 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

3

 

 

CODA OCTOPUS GROUP, INC.

Consolidated Balance Sheets (Continued)

January 31, 2022 and October 31, 2021

 

   2022   2021 
   Unaudited     
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
           
Accounts Payable  $319,605   $1,454,611 
Accrued Expenses and Other Current Liabilities   805,573    740,449 
Note Payable   -    63,559 
Deferred Revenue   1,288,231    1,999,841 
           
Total Current Liabilities   2,413,409    4,258,460 
           
LONG TERM LIABILITIES          
           
Deferred Revenue, less current portion   153,176    157,886 
           
Total Long Term Liabilities   153,176    157,886 
           
Total Liabilities   2,566,585    4,416,346 
           
STOCKHOLDERS’ EQUITY          
           
Common Stock, $.001 par value; 150,000,000 shares authorized, 10,857,195 shares issued and outstanding as of January 31, 2022 and October 31, 2021, respectively   10,858    10,858 
Additional Paid-in Capital   61,508,306    61,183,131 
Accumulated Other Comprehensive Loss   (1,425,909)   (1,667,059)
Accumulated Deficit   (17,260,609)   (18,477,857)
           
Total Stockholders’ Equity   42,832,646    41,049,073 
           
Total Liabilities and Stockholders’ Equity  $45,399,231   $45,465,419 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

4

 

 

CODA OCTOPUS GROUP, INC.

Consolidated Statements of Income and Comprehensive Income

For the Periods Indicated

(Unaudited)

 

   2022   2021 
   Three Months Ended January 31, 
   2022   2021 
         
Net Revenues  $5,838,208   $5,050,459 
Cost of Revenues   1,678,274    1,735,537 
           
Gross Profit   4,159,934    3,314,922 
           
OPERATING EXPENSES          
Research & Development   672,890    583,139 
Selling, General & Administrative   2,111,112    1,813,366 
           
Total Operating Expenses   2,784,002    2,396,505 
           
INCOME FROM OPERATIONS   1,375,932    918,417 
           
OTHER INCOME (EXPENSE)          
Other Income   79,994    92,025 
Interest Expense   (11,278)   (14,514)
           
Total Other Income   68,716    77,511 
           
INCOME BEFORE INCOME TAX EXPENSE   1,444,648    995,928 
           
INCOME TAX (EXPENSE) BENEFIT           
Current Tax (Expense) Benefit   (285,609)   24,725 
Deferred Tax Benefit   58,209    108,191 
           
Total Income Tax (Expense) Benefit   (227,400)   132,916 
           
NET INCOME  $1,217,248   $1,128,844 
           
NET INCOME PER SHARE:          
Basic  $0.11   $0.10 
Diluted  $0.11   $0.10 
           
WEIGHTED AVERAGE SHARES:          
Basic   10,857,195    10,751,881 
Diluted   11,396,861    11,308,881 
           
NET INCOME  $1,217,248   $1,128,844 
           
Foreign Currency Translation Adjustment   241,150    925,613 
           
Total Other Comprehensive Income  $241,150   $925,613 
           
COMPREHENSIVE INCOME  $1,458,398   $2,054,457 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

5

 

 

CODA OCTOPUS GROUP, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended January 31, 2022 and 2021

(Unaudited)

 

   Shares   Amount   Capital   Income (Loss)   Deficit   Total 
               Accumulated         
           Additional   Other         
   Common Stock   Paid-in   Comprehensive   Accumulated     
   Shares   Amount   Capital   Income (Loss)   Deficit   Total 
                         
Balance, October 31, 2020   10,751,881   $10,753   $60,132,415   $(2,321,278)  $(23,425,622)  $34,396,268 
                               
Employee stock based compensation   -    -    174,447    -    -    174,447 
Foreign currency translation adjustment   -    -    -    925,613    -    925,613 
Net Income   -    -    -    -    1,128,844    1,128,844 
Balance, January 31, 2021   10,751,881   $10,753   $60,306,862   $(1,395,665)  $(22,296,778)  $36,625,172 
                               
Balance, October 31, 2021   10,857,195   $10,858   $61,183,131   $(1,667,059)  $(18,477,857)  $41,049,073 
Employee stock based compensation   -    -    325,175    -    -    325,175 
Foreign currency translation adjustment   -    -    -    241,150    -    241,150 
Net Income   -    -    -    -    1,217,248    1,217,248 
Balance, January 31, 2022   10,857,195   $10,858   $61,508,306   $(1,425,909)  $(17,260,609)  $42,832,646 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

6

 

 

CODA OCTOPUS GROUP, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

   2022   2021 
   Three Months Ended January 31, 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $1,217,248   $1,128,844 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   161,466    366,183 
Stock based compensation   325,175    174,447 
Deferred income taxes   (9,750)   (108,191)
Funding from Paycheck Protection Program recognized as income   -    (89,971)
(Increase) decrease in operating assets:          
Accounts receivable   2,608,920    144,023 
Inventory   (613,670)   (853,446)
Unbilled receivables   675,179    (450,180)
Prepaid expenses   863,618    (10,805)
Other current assets   (26,093)   (47,225)
Increase (decrease) in operating liabilities:          
Accounts payable and other current liabilities   (1,047,139)   (540,604)
Deferred revenue   (693,455)   316,639 
Net Cash Provided by Operating Activities   

3,461,499

    29,714 
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property and equipment   (987,093)   (406,083)
Purchases of other intangible assets   (14,871)   (3,061)
Net Cash Used in by Investing Activities   (1,001,964)   (409,144)
CASH FLOWS FROM FINANCING ACTIVITIES          
Repayment of note   (63,559)   (125,142)
Proceeds from Paycheck Protection Program   -    526,545 
Net Cash (Used in) Provided by Financing Activities   (63,559)   401,403 
           
EFFECT OF CURRENCY TRANSLATION ON CHANGES IN CASH   567,596     925,613 
           
NET INCREASE IN CASH   2,963,572    947,586 
           
CASH AT THE BEGINNING OF THE PERIOD   17,747,656    15,134,289 
           
CASH AT THE END OF THE PERIOD  $20,711,228   $16,081,875 
SUPPLEMENTAL CASH FLOW INFORMATION          
Cash paid for interest  $11,278   $14,514 
Cash paid for taxes  $51,264   $- 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

7

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Coda Octopus Group, Inc. (“Coda,” “the Company,” or “we”) operates two distinct operating business units. These are the Marine Technology Business (“Products Business”, “Products Operations” or “Products Segment”) and the Marine Engineering Business (“Services Business”, “Engineering Business” or “Engineering Operations”). The Marine Technology Business sells technology solutions to the subsea and underwater markets. These are designed, developed, manufactured and supported by the Business. Among the solutions it designs and develops, and which currently is its main revenue generating product, is its real time 3D volumetric imaging sonar which is a patented unique and leading product in the subsea/underwater market and marketed under the name Echoscope® and Echoscope PIPE® - PIPE is an acronym for Parallel Intelligent Processing Engine. It also recently launched a new diver management system (Diver Augmented Vision Display (DAVD)) system addressing the global defense and commercial diving market and which it believes is a significant part of its growth pillars. The requirements for the DAVD system emanated from Office of Naval Research and the concept of using a pair of transparent glasses in the Head up Display (HUD) is patented and licensed to the Company by United States Department of the Navy at Naval Surface Warfare Center Panama City Division. The Marine Engineering Business are sub-contractors to Prime Defense Contractor and generally supplies proprietary sub-assemblies to these Primes for incorporation into broader mission critical defense systems. These parts typically are supplied for the life of the program to which they pertain.

 

The consolidated financial statements include the accounts of Coda Octopus Group, Inc. and our domestic and foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.

 

NOTE 2 – REVENUE RECOGNITION

 

The Company recognizes revenue under the Financial Accounting Standards Board’s Topic 606, Revenue from Contracts with Customers (“Topic 606”).

 

Topic 606 has established a five-step process to determine the amount of revenue to record from contracts with customers. The five steps are:

 

  Determine if we have a contract with a customer;
     
  Determine the performance obligations in that contract;
     
  Determine the transaction price;
     
  Allocate the transaction price to the performance obligations; and
     
  Determine when to recognize revenue.

 

Our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater technologies and equipment for real time 3D imaging, mapping, defense and survey applications and from the engineering services which we provide primarily to prime 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 sales do not include a right of return by the customer.

 

8

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 2 – REVENUE RECOGNITION (Continued)

 

With regard to our Marine Technology Business (“Products Business”), all of our products are sold on a stand-alone basis and those market prices are evidence of the value of the products. To the extent that we also provide services (e.g., installation, training, post-sales technical support etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been provided to the customer and evidence of the provision of those services exist.

 

Revenue derived from either our subscription package offerings or rental of our equipment is recognized when performance obligations are met, in particular, on a daily basis during the subscription or rental period.

 

For arrangements with multiple performance obligations, we recognize product revenue by allocating the transaction revenue to each performance obligation based on the relative fair value of each deliverable and recognize revenue when performance obligations are met including when equipment is delivered, and for rental of equipment, when installation and other services are performed.

 

Our contracts sometimes require customer payments in advance of revenue recognition and are recognized as revenue when the Company has fulfilled its obligations under the respective contracts. Until such time, we recognize this prepayment as deferred revenue.

 

For software license sales for which any services rendered are not considered distinct to the functionality of the software, we recognize revenue upon delivery of the software.

 

With respect to revenues related to our Services Business, there are contracts in place that specify the fixed hourly rate and other reimbursable costs to be billed based on material and direct labor hours incurred and, revenue is recognized on these contracts based on material and the direct labor hours incurred. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred (materials and direct labor hours) to date to estimated total services (materials and direct labor hours) for each contract. This method is used as we consider expenditures for direct materials and labor hours to be the best available measure of progress on these contracts.

 

On a quarterly basis, we examine all of our fixed-price contracts to determine if there are any losses to be recognized during the period. Any such loss is recorded in the quarter in which the loss first becomes apparent based upon costs incurred to date and the estimated costs to complete as determined by experience from similar contracts. Variations from estimated contract performance could result in adjustments to operating results.

 

Recoverability of Deferred Costs

 

In accordance with Topic 606, we defer costs on projects for service revenue. Deferred costs consist primarily of incremental direct costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties. The pricing of these service contracts is intended to provide for the recovery of these types of deferred costs over the life of the contract.

 

9

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 2 – REVENUE RECOGNITION (Continued)

 

We recognize such costs in accordance with our revenue recognition policy by contract. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized over time, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each quarterly balance sheet date, we review deferred costs, to ensure they are ultimately recoverable.

 

Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.

 

Deferred Commissions

 

Our incremental direct costs of obtaining a contract, which consists of sales commissions are deferred and amortized over the period of the contract performance. We classify deferred commissions as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets, and other assets, net, respectively, in our consolidated balance sheets. As of January 31, 2022, and October 31, 2021, we had deferred commissions of $0 and $0, respectively. Amortization expense related to deferred commissions was $0 and $3,884 in the three months years ended January 31, 2022, and 2021, respectively.

 

Other Revenue Disclosures

 

See Note 15 – Disaggregation of Revenue for a breakdown of revenues from external customers and cost of those revenues between our Product Segment and Services Segment including information on the split of revenues by geography.

 

NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial instruments include cash, accounts receivable, accounts payable, accrued expenses and notes payable. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair values because of the short-term nature of these instruments. The aggregate carrying amount of the notes payable approximates fair value as they bear interest at a market interest rate based on their term and maturity.

 

The fair value of the Company’s long-term debt approximates its carrying amount based on the fact that the Company believes it could obtain similar terms and conditions for similar debt.

 

NOTE 4 – FOREIGN CURRENCY TRANSLATION

 

Assets and liabilities are translated at the prevailing exchange rates at the balance sheet dates. Related revenues and expenses are translated at weighted average exchange rates in effect during the reporting period. Stockholders’ equity, fixed assets and long-term investments are recorded at historical exchange rates. Resulting translation adjustments are recorded as a separate component in stockholders’ equity as part of accumulated other comprehensive income or (loss) as may be appropriate. Foreign currency transaction gains and losses are included in the consolidated statements of income and comprehensive income.

 

10

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 5 – INVENTORY

 

Inventory is stated at the lower of cost (First in, First Out method) or net realizable value. Inventory consisted of the following components:

   January 31,   October 31, 
   2022   2021 
         
Raw materials and parts  $7,926,535   $7,525,419 
Work in progress   793,246    919,619 
Finished goods   2,440,017    2,246,139 
Total Inventory  $11,159,798   $10,691,177 

 

NOTE 6 – FIXED ASSETS

 

Property and equipment consisted of the following as of:

   January 31,   October 31, 
   2022   2021 
         
Buildings  $6,019,236   $5,298,028 
Land   200,000    200,000 
Office machinery and equipment   1,666,436    1,622,871 
Rental assets   2,427,189    2,326,486 
Furniture, fixtures and improvements   1,206,402    1,218,217 
Totals   11,519,263    10,665,602 
Less: accumulated depreciation   (4,775,593)   (4,628,501)
           
Total Property and Equipment, net  $6,743,670   $6,037,101 

 

NOTE 7 – OTHER CURRENT ASSETS

 

Other current assets consisted of the following as of:

   January 31,   October 31, 
   2022   2021 
         
Deposits  $32,280   $63,992 
Other Tax Receivables   43,156    - 
Employee Retention Credit Receivables   

576,288

    563,627 
Total Other Current Assets  $651,724   $627,619 

 

11

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 8 – ESTIMATES

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues including unbilled and deferred revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates related to the percentage of completion method used to account for contracts including costs and earnings in excess of billings, billings in excess of costs and estimated earnings and the valuation of goodwill.

 

NOTE 9 – CONTRACTS IN PROGESS

 

Costs and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have not been invoiced to customers as of the date of the balance sheet. These amounts are stated on the consolidated balance sheets as Unbilled Receivables of $401,661 and $1,080,384 as of January 31, 2022, and October 31, 2021, respectively.

 

Our Deferred Revenue of $1,151,451 and $1,879,790 as of January 31, 2022, and October 31, 2021, respectively, consists of billings in excess of costs and revenues received as part of our warranty obligations upon completing a sale, as elaborated further in the last paragraph of this note.

 

Sales of equipment include a separate performance obligation for warranty, which is treated as deferred revenue, along with extended warranty sales, which may be purchased by customers. These amounts are amortized over the relevant warranty period (12 months is our standard warranty or 24, 36 or 60 months for extended warranty, sold as Through Life Support (TLS) Package) from the date of sale. These amounts are stated on the consolidated balance sheets as a component of Deferred Revenue and were $289,956 and $277,937 as of January 31, 2022 and October 31, 2021, respectively.

 

NOTE 10 – CONCENTRATIONS

 

Significant Customers

 

During the three months ended January 31, 31, 2022, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenue from these customers was $1,855,731, or 32% of net revenues during the period. Receivables from these customers was less than 10% of net receivables as of January 31, 2022.

 

During the three months ended January 31, 2021, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues from these customers was $1,303,807, or 26% of net revenues during the year. Total accounts receivable from these customers as of January 31, 2021 was $862,850 or 46% of accounts receivable.

 

12

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 11 – NOTE PAYABLE

 

   January 31,   October 31, 
   2022   2021 
         
Secured note payable to HSBC NA with interest payable on the 28th day of each month at 4.56% per annum. Our monthly repayment obligation under this loan is $43,777 (comprising both principal and interest repayment). The maturity of this Loan was December 28, 2021  $-   $63,559 
         
Total   -    63,559 
Less: current portion   -    (63,559)
Total Long Term Note Payable  $-   $- 

 

The HSBC loan was satisfied in full in the Current Quarter.

 

The Company entered into a $4,000,000 revolving line of credit facility with HSBC NA on November 27, 2019, with the interest rate established as the applicable prime rate. This revolving line of credit facility is subject to annual renewal and has been extended to November 2022. The outstanding balance on the line of credit was $0 as of January 31, 2022 and October 31, 2021.

 

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

 

There have been no new accounting pronouncements not yet effective that have significant or potential significance, to our Consolidated Financial Statements.

 

NOTE 13 – EARNINGS PER SHARE

 

   Three Months   Three Months 
   Ended   Ended 
   January 31,   January 31, 
Fiscal Period  2022   2021 
Numerator:          
Net Income  $1,217,248   $1,128,844 
           
Denominator:          
Basic weighted average common shares outstanding   10,857,195    10,751,881 
Unvested portion of options and restricted stock awards   539,666    557,000 
Diluted outstanding shares   11,396,861    11,308,881 
           
Net Income per share          
           
Basic  $0.11   $0.10 
Diluted  $0.11   $0.10 

 

13

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 14 -SEGMENT ANALYSIS

 

Based on the fundamental difference in the types of offering products versus services, we operate two distinct reportable segments which are managed separately. Coda Octopus Products (“Marine Technology Business” or “Products Segment”) operations are comprised primarily of sale of underwater technology sonar solutions, products for underwater operations including hardware and software; diver management system; and rental of solutions and products to the underwater market. Coda Octopus Martech and Coda Octopus Colmek (“Marine Engineering Business” or “Services Segment”) provides engineering services primarily as sub-contractors to prime defense contractors.

 

Segment operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Corporate includes general corporate administrative costs (“Overhead”).

 

The Company evaluates performance and allocates resources based upon segment operating income.

 

There are inter-segment sales which have been eliminated in our financial statements but are disclosed in the tables below for information purposes.

 

The following table summarizes segment asset and operating balances by reportable segment as of and for the three months ended January 31, 2022, and 2021, respectively.

 

The Company’s reportable business segments sell their goods and services in four geographic locations:

 

  Americas
     
  Europe
     
  Australia/Asia
     
  Middle East/Africa

 

14

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 14 -SEGMENT ANALYSIS (Continued)

 

   Marine
Technology
Business
(Products)
   Marine
Engineering
Business
(Services)
   Overhead   Total 
                 
Three Months Ended January 31, 2022                    
                     
Net Revenues  $3,823,748   $2,014,460   $-   $5,838,208 
                     
Cost of Revenues   572,292    1,105,982    -    1,678,274 
                     
Gross Profit   3,251,456    908,478    -    4,159,934 
                     
Research & Development   529,375    143,515    -    672,890 
Selling, General & Administrative   753,614    651,149    706,349    2,111,112 
                     
Total Operating Expenses   1,282,989    794,664    706,349    2,784,002 
                     
Income (Loss) from Operations   1,968,467    113,814    (706,349)   1,375,932 
                     
Other Income (Expense)                    
Other Income   9,049    70,945    -    79,994 
Interest Expense   (4,882)   (5,026)   (1,370)   (11,278)
                     
Total Other Income (Expense)   4,167    65,919    (1,370)   68,716 
                     
Income (Loss) before Income Taxes   1,972,634    179,733    (707,719)   1,444,648 
                     
Income Tax (Expense) Benefit                    
Current Tax (Expense) Benefit    (266,520)   24,036    (43,125)   (285,609)
Deferred Tax Benefit   6,708    204    51,297    58,209 
                     
Total Income Tax (Expense) Benefit   (259,812)   24,240    8,172    (227,400)
                     
Net Income (Loss)  $1,712,822   $203,973   $(699,547)  $1,217,248 
                     
Supplemental Disclosures                    
                     
Total Assets  $30,847,114   $13,893,382   $658,735   $45,399,231 
                     
Total Liabilities  $1,635,666   $501,339   $429,580   $2,566,585 
                     
Revenues from Intercompany Sales - eliminated from sales above  $389,395   $115,823   $600,000   $1,105,218 
                     
Depreciation and Amortization  $135,658   $16,657   $9,151   $161,466 
                     
Purchases of Long-lived Assets  $986,093   $1,000   $14,871   $1,001,964 

 

15

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 14 -SEGMENT ANALYSIS (Continued)

 

   Marine
Technology
Business
(Products)
   Marine
Engineering
Business
(Services)
   Overhead   Total 
                 
Three Months Ended January 31, 2021                    
                     
Net Revenues  $3,748,279   $1,302,180   $-   $5,050,459 
                     
Cost of Revenues   894,275    841,262    -    1,735,537 
                     
Gross Profit   2,854,004    460,918    -    3,314,922 
                     
Research & Development   441,744    141,395    -    583,139 
Selling, General & Administrative   733,825    567,559    511,982    1,813,366 
                     
Total Operating Expenses   1,175,569    708,954    511,982    2,396,505 
                     
Income (Loss) from Operations   1,678,435    (248,036)   (511,982)   918,417 
                     
Other Income (Expense)                    
Other Income   2,036    18    -    92,025 
Interest Expense   (2,253)   (5,151)   (7,110)   (14,514)
                     
Total Other Income (Expense)   (217)   (5,133)   (7,110)   77,511 
                     
Income (Loss) before Income Taxes   1,678,218    (253,169)   (519,092)   995,928 
                     
Income Tax (Expense) Benefit                    
Current Tax (Expense) Benefit   12,653    -    12,072    24,725 
Deferred Tax (Expense) Benefit   (11,155)   152,086    (32,740)   108,191 
                     
Total Income Tax (Expense) Benefit   1,498    152,086    (20,668)   132,916 
                     
Net Income (Loss)  $1,679,716   $(101,083)  $(539,760)  $1,128,844 
                     
Supplemental Disclosures                    
                     
Total Assets  $24,767,757   $14,362,811   $1,224,954   $40,355,522 
                     
Total Liabilities  $1,573,260   $1,436,624   $720,466   $3,730,350 
                     
Revenues from Intercompany Sales - eliminated from sales above  $370,629   $49,201   $675,000   $1,094,830 
                     
Depreciation and Amortization  $312,122   $47,645   $6,416   $366,183 
                     
Purchases of Long-lived Assets  $399,975   $4,177   $4,992   $409,144 

 

16

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 15 –DISAGGREGATION OF REVENUE

 

   For the Three Months Ended January 31, 2022 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Disaggregation of Total Net Sales               
Revenues               
Primary Geographical Markets               
Americas  $2,057,668   $1,204,282   $3,261,950 
Europe   491,016    810,178    1,301,194 
Australia/Asia   815,084    -    815,084 
Middle East/Africa   459,980    -    459,980 
                
Total Revenues  $3,823,748   $2,014,460   $5,838,208 
                
                
Major Goods/Service Lines               
Equipment Sales  $1,958,845   $436,864   $2,395,709 
Equipment Rentals   630,468    -    630,468 
Software Sales   304,796    -    304,796 
Engineering Parts   -    1,300,618    1,300,618 
Services   929,639    276,978    1,206,617 
                
Total Revenues  $3,823,748   $2,014,460   $5,838,208 
                
                
Goods transferred at a point in time  $2,263,641   $436,866   $2,724,343 
Services transferred over time   1,560,107    1,577,594    3,113,865 
                
Total Revenues  $3,823,748   $2,014,460   $5,838,208 

 

17

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 15 –DISAGGREGATION OF REVENUE (Continued)

 

   For the Three Months Ended January 31, 2021 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Disaggregation of Total Net Sales               
Revenues               
Primary Geographical Markets               
Americas  $549,278   $516,441   $1,065,719 
Europe   1,125,112    785,739    1,910,851 
Australia/Asia   2,008,210    -    2,008,210 
Middle East/Africa   65,679    -    65,679 
                
Total Revenues  $3,748,279   $1,302,180   $5,050,459 
                
                
Major Goods/Service Lines               
Equipment Sales  $2,793,487   $220,957   $3,014,444 
Equipment Rentals   334,363    -    334,363 
Software Sales   225,222    -    225,222 
Engineering Parts   -    856,347    856,347 
Services   395,207    224,876    620,083 
                
Total Revenues  $3,748,279   $1,302,180   $5,050,459 
                
                
Goods transferred at a point in time  $3,056,037   $220,957   $3,276,994 
Services transferred over time   692,242    1,081,223    1,773,465 
                
Total Revenues  $3,748,279   $1,302,180   $5,050,459 

 

18

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Consolidated Financial Statements

January 31, 2022 and October 31, 2021

 

NOTE 16COVID-19

 

The Company faces various risks related to the global outbreak of coronavirus disease (“COVID-19”).

 

The Engineering Services Business is dependent on its workforce to deliver its products and services primarily to the U.S. and U.K. Governments. If significant portions of the Engineering Services Business’s workforce are unable to work effectively, or if the U.S. or UK. Government and/or other customers’ operations are curtailed due to illness, quarantines, government actions, facility closures, or other restrictions in connection with the COVID-19 Pandemic, the Engineering Services Business’s operations is likely be severely impacted. The Engineering Services Business may be unable to perform fully on its contracts and costs may increase as a result of the COVID-19 outbreak. These cost increases may not be fully recoverable either from our customers or under existing insurance policies. At this time, the Company’s management cannot predict with any precision the full extent of the impact which COVID-19 Pandemic will have on the Company, but management continues to mitigate where it can and monitor the situation, to assess further possible implications to operations, the supply chain, and customers, and to take actions in an effort to mitigate adverse consequences.

 

Additionally, the Company is subject to flow downs from prime defense contractors under Defense Federal Acquisition Regulation Supplement (“DFARS”). Recent flow-down entailed Executive Order 14042 which mandates the vaccination of all staff. We may not be able to enforce mandatory vaccination resulting in losing key staff members, thus impacting on our ability to provide contractual engineering services.

 

Further, the Pandemic may continue to affect the Company’s results of operation, financial position, and liquidity.

 

The Marine Technology Business is dependent on its workforce and/or distributors/resellers to sell and deliver its products and services. Developments such as social distancing, shelter -in- place directives and travel restrictions introduced by governments have impacted the Marine Products Business’s ability to deploy its workforce effectively. These same developments may affect the operations of the Company’s suppliers, Customers and distributors/resellers, as their own workforces and operations are disrupted by efforts to curtail the spread of this virus. The Company, being a manufacturing company, in large part is unable to work remotely. The Company’s activities are performed in certain international locations that are also impacted by the COVID-19 outbreak. Furthermore, it is critical for the Marine Technology Business to have in-person engagement with customers for the demonstration of its products from a vessel at sea. The restriction on global travel has resulted in significantly less customer engagement which affects the demand for its goods and services. These disruptions continue to impact the business. Particularly, its ability to perform sustained and meaningful business development and marketing activities, which require demonstrations at sea at customer locations. Asia which is a significant region for our solutions and products, still has strict restrictions as they relate to foreigners entering these countries. These restrictions cumulatively affect demand for our goods and services.

 

NOTE 17 – INCOME TAXES

 

The Company’s effective tax rate for the three months ended January 31, 2022, and 2021, was 16.0% and (11.8%) respectively. The increase in the effective tax rate for the three months ended January 31, 2022, as compared to January 31, 2021, resulted from the US companies becoming tax paying entities having used up their net operating loss carry-forwards.

 

19

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The information herein contains forward-looking statements. 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 assurances 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.

 

The following discussion and analysis should be read in conjunction with our financial statements, included herewith and the audited financial statements included in our annual report on Form 10-K filed with the Securities and Exchange Commission on February 14, 2022. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

General Overview

 

Throughout these discussions, the following terminologies listed immediately below are used and have the meanings ascribed to them in the said table.

 

Current Quarter”: Three-month period ended January 31, 2022

 

Previous Quarter”: Three-month period ended January 31, 2021

 

We operate two distinct business operations. These are:

 

  the Marine Technology Business (also referred to in this Form 10-Q as “Products Business”, “Products Operations” or “Products Segment”); and
     
  the Marine Engineering Business (also referred to in this Form 10-Q as “Engineering Business”, “Engineering Operations”, or “Services Segment”).

 

Our Marine Technology Business is a technology solution provider to the subsea and underwater market. It owns key proprietary technology including real time volumetric imaging sonar technology and diving technology, both of which are applicable to the underwater defense and commercial markets. All design, development and manufacturing of our technology and solutions are performed within the Company.

 

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 wind energy industry (offshore renewables), and offshore oil and gas, complex underwater mapping, salvage operations, dredging, bridge inspection, underwater hazard detection, port security, mining, fisheries, commercial and defense diving, and marine sciences sectors. Our diving technology marketed under the name “CodaOctopus® DAVD” (Diver Augmented Vision Display) addresses the global defense and commercial diving markets and has the potential to radically change how diving operations are performed globally because it delivers a real time information platform for diving and allows diving operations to be performed in zero visibility water conditions and provides real time map of the dive area.

 

20

 

 

We generate most of our revenues from our real time 3D sonar which includes both hardware and proprietary software. Our customers include service providers to major oil and gas companies, renewable energy companies, law enforcement agencies, ports, mining companies, defense bodies, research institutes and universities.

 

Our Services Business acts primarily as a sub-contractor to prime defense contractors and engineer sub-assemblies which are utilized in broader defense programs. The Services Business has operations in the USA and UK. Its central business model is the design and manufacture of 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 for these items. 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.

 

Key Pillars for our Growth Plans

 

Our volumetric real time imaging sonar technology and our Diver Augmented Vision Display (“DAVD”) are our most promising products for the Group’s near-term growth.

 

Our real time 3D/4D/5D/6D Imaging sonars are the only underwater imaging sonars capable of providing not only complex seabed mapping but inspecting and monitoring in real time 3D/4D/5D /6D moving underwater objects irrespective of water conditions including in zero visibility water conditions (a perennial problem in underwater operations). Competing technology can perform mapping (but not complex mapping) without the ability to perform real time inspection and monitoring of moving objects underwater. We believe our Echoscope PIPE® is the only technology that can generate multiple real time 3D/4D/5D and 6D acoustic images using different acoustic parameters such as frequency, field of view, pulse length and acoustic filters.

 

We are widely considered the leading solution providers for real time 3D visualization underwater.

 

We also believe that the DAVD system is poised to radically change the way commercial and diving operations are performed globally by advancing the methods of communication, ability to consume and use digital information and real time imaging sonar data, thereby improving safety and reducing the costs of these operations. The DAVD HUD (Head Up Display) concept is protected by patent and is manufactured and distributed under License from United States Department of the Navy at Naval Surface Warfare Center Panama City Division to the Company.

 

Both the Marine Technology Business and Marine Engineering Business have established synergies in terms of customers and specialized engineering skill sets (hardware, firmware and software) encompassing capturing, computing, processing and displaying data in harsh environments. Both businesses jointly bid for projects for which their common joint skills provide competitive advantage and make them eligible for such projects.

 

Factors Affecting our Business

 

Following is a short description of some of the most critical and pressing factors that affect our business. For a more detailed discussion of these and additional factors, refer to our Form 10-K for the fiscal year ended October 31, 2021, that is hereby incorporated by reference.

 

21

 

 

General Impact

 

Our operations continue to be impacted by the Coronavirus outbreak (“Pandemic”). We rely on the ability to sell our solutions offered by the Marine Technology Business, globally. Asia is a very significant market for our technology solutions including Japan, China, South Korea. All these countries without exception have severe restrictions which continue to affect our ability to have in-person visits with customers to demonstrate our new offerings which underpin our growth strategy including Echoscope PIPE® and CodaOctopus® DAVD (Diver Augmented Vision Display System) and our new enterprise software solution 4G USE®. Our products and solutions, including the top end software which controls the sonar and DAVD are complex and do require in-person demonstration and training for customers to benefit optimally from their adoption.

 

In addition, we are significantly impacted by the increasing unavailability of critical components for our products and also parts for bespoke engineering by our Engineering Segment. This is further compounded by significant price increases which, on the Marine Technology Business side, we are unlikely to be able to pass on to our customers. This is therefore likely to impact our realizable margins.

 

We are also experiencing skills shortage in areas that are critical to our growth strategy including in experienced sales and marketing personnel. In addition, the competition is very fierce for skills and we are seeing significant increase in costs associated with wages and salaries and demands from potential candidates to work from home as a precondition to joining our team. This is further exacerbated by the United Kingdom leaving the European Union, which complicates hiring qualified candidates from EU member states.

 

The Services Business continues to experience difficulties in closing orders due to a combination of factors including delays in Defense Prime Contractors securing their orders. This means that sub-contracting is slow.

  

Impact on Revenues and Earnings

 

Until the business environment normalizes, we are uncertain as to the extent of the impact the Pandemic will have on our future financial results. In the Current Quarter both the Marine Technology Business and our Engineering Business have been impacted by the constraints caused by the Pandemic which in turn is impeding our ability to do meaningful business development and opportunities pipeline building all of which affect our financial performance as a business.

 

Impact on Liquidity, Balance Sheet and Assets

 

Failure to curb the coronavirus Pandemic in the near future, coupled with the projected downturn in the global economic outlook, may adversely impact on our availability of free cash flow, working capital and business prospects. As of January 31, 2022, we had cash and cash equivalents of approximately $20,711,288 and in the Current Quarter we generated approximately $3,461,499 of cash from operations. 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.

 

Critical Accounting Policies

 

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements that have been prepared under accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported values of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported levels of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Below is a discussion of accounting policies that we consider critical to an understanding of our financial condition and operating results and that may require complex judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, “Summary of Accounting Policies” of our Consolidated Financial Statements for the year ended October 31, 2021.

 

22

 

 

Revenue Recognition

 

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.

 

With regard to our Products Segment, all of our products are sold on a stand-alone basis and those market prices are evidence of the value of the products. To the extent that we also provide services (e.g., installation, training, etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been provided to the customer and evidence of the provision of those services exist.

 

For further discussion of our revenue recognition accounting policies, refer to Note 2 – “Revenue Recognition” in these consolidated financial statements and in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

 

Recoverability of Deferred Costs

 

We defer costs on projects for service revenue. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties.

 

We recognize such costs on a contract by contract basis in accordance with our revenue recognition policy. For revenue recognized under the completed contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer acceptance. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized ratably over the term of the contract, costs are also recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each balance sheet date, we review deferred costs, to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.

 

23

 

 

Income Taxes

 

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 and from the utilization of net operating loss carry-forwards.

 

Deferred tax assets and liabilities are the amounts by which the Company’s future income taxes are expected to be impacted by these differences as they reverse. Deferred tax assets are based on differences that are expected to decrease future income taxes as they reverse. Correspondingly, deferred tax liabilities are based on differences that are expected to increase future income taxes as they reverse.

 

For income tax purposes, the Company uses the percentage of completion method of recognizing revenues on long-term contracts which is consistent with the Company’s financial reporting under U.S. generally accepted accounting principles.

 

Intangible Assets

 

Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (or goodwill), customer relationships, non-compete agreements and licenses. Goodwill was allocated to our reporting units based on the original purchase price allocation. Goodwill is not amortized and is evaluated for impairment annually or more often if circumstances indicate impairment may exist. Customer relationships, non-compete agreements, patents and licenses are being amortized on a straight-line basis over periods of 2 to 15 years. The Company amortizes its limited lived intangible assets using the straight-line method over their estimated period of benefit. Annually, or sooner if there is indication of a loss in value, we evaluate the recoverability of intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.

 

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. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. There were no impairment charges during the periods presented.

 

Consolidated Results of Operations

 

Summary

 

In the Current Quarter our financial results have been adversely impacted by a number of factors. These are:

 

  The ongoing Pandemic continues to affect our business development activities as in-person meeting and demonstrations with our customers are required due to the nature of our offerings.
  Weaker than expected backlog of orders in the Services Segment.
  Sustained increases in component prices.
  Significant lead times for routine components for our products.

 

Segment Summary

 

In the Current Quarter the Products Business generated 65.5% of our consolidated revenues compared to 74% in the Previous Quarter. In the Current Quarter the Products Business realized an increase in net income before taxes of 17.5%. This was $1,972,634 in the Current Quarter compared to $1,678,218 in the Previous Quarter. Revenues generated in the Current Quarter increased by 2% and was $3,823,748 compared to $3,748,279. Gross Profit Margin increased and was 85% in the Current Quarter compared to 76.1% in the Previous Quarter. Total Operating Expenses increased by 9.1%. In the Current Quarter the Products Business completed significant milestone deliverables for our DAVD GEN 3.0 funded Program including expanding the capability to the Full Face Mask (FFM). Previously the DAVD was compatible with the Kirby Morgan Helmets. We also completed the introduction of the capability to support multiple divers and automating a number of key functions for the DAVD system.

 

In the Current Quarter the Services Business generated 34.5% of our consolidated revenues compared to 26% in the Previous Quarter. In the Current Quarter the Services Business’s recorded net income before taxes of $179,733 compared to loss before income taxes of $253,169 in the Previous Quarter. Revenues generated in the Current Quarter increased by 54.7% and was $2,014,460 compared to $1,302,180 in the Previous Quarter. Gross Profit Margin was 45.1% in the Current Quarter compared to 35.4% in Previous Quarter. Total Operating Expenses increased by 12.1% in the Current Quarter.

 

24

 

 

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

 

Revenue: Total consolidated revenues for the Current Quarter and the Previous Quarter were $5,838,208 and $5,050,459 respectively, representing an increase of 15.6%. Revenue in both the Products and Services Businesses increased over the Previous Quarter. Revenue in the Products Business increased by 2% and Services Business by 54.7%.

 

Gross Profit Margins: Margin percentage was stronger in the Current Quarter at 71.3% (gross profit of $4,159,934) compared to 65.6% (gross profit of $3,314,922) in the Previous Quarter.

 

Gross Profit Margins reported in our financial results may vary according to several factors. These include:

 

  The percentage of consolidated sales attributed to the Marine Technology Business. The Gross Profit Margin yielded by the Marine Technology Business is generally higher than that of the Services Business;
  The percentage of consolidated sales attributed to the Services Business. The Services Business yields a lower gross profit margin on generated sales which are largely based on time and materials contracts
  The mix of sales within the Marine Technology Business during the reporting period:
      Outright Sale versus Rentals;
      Hardware Sale versus Software;
      Mix of Services rendered in the period – Offshore Engineering Services versus Paid Customer Research and Development Projects;
  The mix of engineering projects performed (Design prototyping versus manufacturing), may also affect Gross Profit Margins;
  Level of commissions on products which may vary according to volume. Both the Services and Marine Technology Businesses work with sales/distribution agents.
  Level of Rental Assets in the Marine Technology Business’ Rental Pool and therefore subject to depreciation.

 

In the Current Quarter Gross Profit Margins for the Products operations were 85.0% compared to 76.1% in the Previous Quarter. For the Services operation these were 45.1% in the Current Quarter compared to 35.4% % in the Previous Quarter.

 

Since there are more variable factors affecting Gross Profit Margins in the Products Business, a table showing a summary of break-out of sales generated by the Products Business in the Current Quarter compared to the Previous Quarter is set out below:

 

   Current Quarter
Products
   Previous Quarter
Products
   Percentage
Change
 
Equipment Sales  $1,958,845   $2,793,487    (29.88)%
Equipment Rentals   630,468    334,363    88.56%
Software Sales   304,796    225,222    35.33%
Services   929,639    395,207    135.23%
                
Total Net Sales  $3,823,748   $3,748,279    2.01%

 

In the Current Quarter the Products Business incurred Commission costs of $138,372 compared to $281,105, representing a 50.8% fall, resulting in Gross Profit Margins being higher.

 

Further information on the performance in the Current Quarter compared to the Previous Quarter of each Segment including revenues by product and geography can be found in Note 14 and Note 15 to the Unaudited Consolidated Financial Statements.

 

We believe that the decrease in the Equipment Sales category in the Current Quarter is due to the impending industry trade show, Oceanology 2022, which is scheduled to take place on March 15 -17, 2022. We typically see postponement of capital investment decisions until after the event.

 

Research and Development (R&D): R&D expenditures in the Current Quarter were $672,890 compared to $583,139 in the Previous Quarter, representing an increase of 15.4%.

 

Segment 

January 31,

2022

  

January 31,

2021

   Percentage
Change
 
Services Segment R&D Expenditures  $143,515   $141,395   Increase of 1.50% 
Products Segment R&D Expenditures  $529,375   $441,744   Increase of 19.84% 

 

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Selling, General and Administrative Expenses (SG&A): SG&A expenses for the Current Quarter increased by 16.4% to $2,111,112 from $1,813,366 in the Previous Quarter. In the Previous Quarter SG&A was reduced by $83,500 representing payroll assistance received under the UK Coronavirus Job Retention Scheme (CJRS) for UK staff who were furloughed during the Current Quarter. SG&A also includes non-cash item relating to charges for stock-based compensation which in the Current Quarter was $325,175 compared to $174,447, representing an 86.4% increase. The main variances in SG&A therefore relates to these two items discussed here.

 

Key Areas of SG&A Expenditure across the Group for the Current Quarter compared to the Previous Quarter are:

 

Expenditure 

January 31,

2022

  

January 31,

2021

   Percentage
Change
 
Wages and Salaries  $903,162   $838,306   Increase of 7.74% 
Legal and Professional Fees (including accounting and audit)  $359,018   $336,109   Increase of 6.82% 
Rent for our various locations  $15,745   $9,765   Increase of 61.24% 
Marketing  $13,766   $11,330   Increase of 21.5% 

 

The increase in the “Wages and Salaries” category of expenditure reflects $83,500 in contributions under the CJRS which resulted in the reduction in SGA during the Previous Quarter . Nevertheless, we expect this area of expenditure to increase as we are investing in business development and sales resources and we also expect an increase in labor costs due to general skills shortage and also inflationary pressures in both the US and UK.

 

The increase in “Legal and Professional” reflects additional costs associated with increasing our accounting functions.

 

The increase in Marketing is anticipated within our plans and reflects an increase in marketing activities. This is an area of expenditures 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.

 

Operating Income: In the Current Quarter Operating Income increased by 49.8% and was $1,375,932 as compared to $918,417 in the Previous Quarter. The increase in Operating Income is due to the increase in consolidated revenues realized in the Current Quarter.

 

Interest Expense: Interest expense in the Current Quarter was $11,278 compared to $14,514 in the Previous Quarter, representing a fall of 22.3%. In the Current Quarter we paid the last interest payable on the HSBC NA debentures. All indebtedness under the debentures have been satisfied in full and therefore there will be no further interest payments in the foreseeable future. Please refer to Note 11 – Note Payable to the Unaudited Consolidated Financial Statements for further details pertaining to this HSBC Loan for more information on this.

 

Other Income: In the Current Quarter, we had Other Income of $79,994 compared to $92,025, representing a fall of 13.1% from the Previous Quarter. In the Previous Quarter we had contributions under the Paycheck Protection Program of $89,971 compared to $0 in the Current Quarter. Similarly in the Previous Quarter we had $0 for Employee Retention Credit, compared to $68,917 in the Current Quarter.

 

Income before income taxes: In the Current Quarter, we had income before income taxes of $1,444,648 as compared to $995,928 in the Previous Quarter, representing an increase of 45.1%. Income before income tax increased largely due to the increase in the Current Quarter of our consolidated revenues.

 

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Net Income: In the Current Quarter we had Net Income of $1,217,248 compared to $1,128,844 in the Previous Quarter, representing an increase of 7.8%. In the Previous Quarter we recorded Current Tax Benefit of $24,725 and in the Current Quarter we recorded Current Tax Expense of $285,609 and similarly we recorded Deferred Tax Benefit in the Current Quarter of $58,209 compared to $108,191 in the Previous Quarter. The Company has now utilized its net operating loss carry forwards and therefore it is expected that the US companies will become tax paying entities.

 

Comprehensive Income. In the Current Quarter Comprehensive Income was $1,458,398 compared to $2,054,456 for the Previous Quarter. This category is affected by fluctuations in foreign currency exchange transactions. In the Current Quarter we had a foreign currency translation adjustment of $241,150 compared to $925,613 in the Previous Quarter. With the removal of the uncertainty of the future relationship between the United Kingdom and the European Union (“EU”) following its withdrawal from the EU and the entering into a trade agreement, we anticipate that the British Pound will be less volatile against the US$ and other major currencies.

 

Liquidity and Capital Resources

 

At January 31, 2022, the Company had an accumulated deficit of $17,260,609, working capital of $32,360,629, cash of $20,711,228 and stockholders’ equity of $42,832,646. For the Current Quarter, the Company’s operating activities provided cash of $3,461,499.

 

The Company entered into a $4,000,000 revolving line of credit with HSBC NA on November 27, 2019, at prime. The outstanding balance on the line of credit was $0 as of January 31, 2022. This revolving credit line will expire on November 26, 2022, unless renewed by the bank.

 

Financing Activities

 

Secured Promissory Note

 

On April 28, 2017, the Company and its US based subsidiaries entered into a loan agreement with HSBC Bank NA (the “Lender”) for a loan in the principal amount of $8,000,000 (the “Loan”). The annual interest rate was fixed at 4.56%. The obligations in connection with the repayment of the Loan were secured by all assets of Coda Octopus Group, Inc., and its US subsidiaries. Our foreign subsidiaries were joint and several guarantors of the obligations. This loan was paid in full in December 2021 and all obligations under the HSBC Loan have now been satisfied.

 

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Inflation and Foreign Currency

 

The Company maintains its books in functional currency. In this connection, these are:

 

  US Dollars for US Operations;
  British Pound for United Kingdom Operations;
  Danish Kroner for our Danish Operations; and
  Australian Dollars for our Australian Operations.

 

Note 4 (Foreign Currency Translation) of our Unaudited Consolidated Financial Statements discusses fully the applicable rates used for our Balance Sheet and Income Statement.

 

Fluctuations in currency exchange rates can affect the Company’s sales, profitability and financial position when the foreign currencies of its international operations are translated into U.S. dollars for financial reporting. In addition, we are also subject to currency fluctuation risk with respect to certain foreign currency denominated receivables and payables. The Company cannot predict the extent to which currency fluctuations may affect the Company’s business and financial position, and there is a risk that such fluctuations will have an adverse impact on the Company’s sales, profits and financial position. Also, because differing portions of our revenues and costs are denominated in foreign currency, movements can impact our margins by, for example, decreasing our foreign revenues when the dollar strengthens without correspondingly decreasing our expenses. The Company does not currently hedge its currency exposure.

 

Since the United Kingdom’s decision to withdraw from the European Union in 2016, the British Pound has been extremely volatile and because a significant part of our operations is based in the United Kingdom we suffered, since then, significant adverse exchange rate movements. However, since the final withdrawal from the EU by the United Kingdom in December 2020, the British Pound has been regaining its strength and we anticipate that the volatility that we experienced during the lead up to UK leaving the European Union will abate.

 

The impact of currency fluctuations on the three months ended January 31, 2022, is shown below. In this context “Constant Rates” is defined as the weighted average exchange rate prevailing in the Previous Quarter.

 

   British Pounds   Australian Dollar   Danish Kroner   US Dollar 
   Actual   Constant   Actual   Constant   Actual   Constant   Actual   Constant   Total 
   Results   Rates   Results   Rates   Results   Rates   Results   Rates   Effect 
Revenues   2,535,282    2,601,843    -    -    388,743    410,428    2,924,025    3,012,271    (88,246)
Costs   2,262,261    2,321,654    24,254    25,575    70,145    74,058    2,356,660    2,421,286    (64,626)
Net profit (losses)   273,021    280,189    (24,254)   (25,575)   318,598    336,370    567,365    590,984    (23,619)
Assets   22,672,721    23,102,691    32,500    34,633    2,142,098    2,209,870    24,847,319    25,347,194    (499,875)
Liabilities   (1,119,560)   (1,140,792)   (2,610)   (2,781)   (19,688)   (20,311)   (1,141,858)   (1,163,884)   22,026 
Net assets   21,553,161    21,961,900    29,890    31,852    2,122,410    2,189,559    23,705,461    24,183,311    (477,850)

 

This table shows that the effect of constant exchange rates, versus the actual exchange rate fluctuations, decreased our net income on activities in the Current Quarter by $23,619 and decreased net assets by $477,850. In addition, the Company booked transactional exchange rate gain of $241,150 during the Current Quarter.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures

 

a) Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of January 31, 2022. Based upon that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

 

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(b) Changes in Internal Controls.

 

There was no change in our internal controls over financial reporting that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting during the quarter covered by this Report.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

Item 1A. Risks Factors

 

Not required for smaller reporting companies

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

Item 6. Exhibits

 

31 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)
   
32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS Inline XBRL Instance Document.
   
101.SCH Inline XBRL Taxonomy Extension Schema Document
   
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
   
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Coda Octopus Group, Inc. (Registrant)
   
Date: March 16, 2022 /s/ Annmarie Gayle
  Annmarie Gayle
  Chief Executive Officer
   
Date: March 16, 2022 /s/ Michael Midgley
  Michael Midgley
  Chief Financial Officer

 

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