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 JulyJanuary 31, 20222023
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: |
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 September 14, 2022March 15, 2023 is .
INDEX
2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
For the Three Months Ended July 31 2022 and 2021
Contents
CODA OCTOPUS GROUP, INC.
Consolidated Balance Sheets
JulyJanuary 31, 20222023 and October 31, 20212022
2022 | 2021 | 2023 | 2022 | |||||||||||||
Unaudited | Unaudited | |||||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash | $ | 21,370,920 | $ | 17,747,656 | $ | 24,522,383 | $ | 22,927,371 | ||||||||
Accounts Receivable, net | 4,254,168 | 4,207,996 | 3,142,879 | 2,870,600 | ||||||||||||
Inventory | 10,183,213 | 10,691,177 | 11,177,386 | 10,027,111 | ||||||||||||
Unbilled Receivables | 416,394 | 1,080,384 | 650,774 | 602,115 | ||||||||||||
Prepaid Expenses | 397,127 | 1,202,327 | 381,011 | 240,464 | ||||||||||||
Other Current Assets | 469,175 | 627,619 | 431,807 | 343,061 | ||||||||||||
Total Current Assets | 37,090,997 | 35,557,159 | 40,306,240 | 37,010,722 | ||||||||||||
FIXED ASSETS | ||||||||||||||||
Property and Equipment, net | 6,123,548 | 6,037,101 | 6,071,611 | 5,832,532 | ||||||||||||
OTHER ASSETS | ||||||||||||||||
Goodwill and Other Intangibles, net | 3,825,878 | 3,794,383 | 3,830,437 | 3,824,394 | ||||||||||||
Deferred Tax Asset | 163,553 | 76,776 | 295,817 | 259,810 | ||||||||||||
Total Other Assets | 3,989,431 | 3,871,159 | 4,126,254 | 4,084,204 | ||||||||||||
Total Assets | $ | 47,203,976 | $ | 45,465,419 | $ | 50,504,105 | $ | 46,927,458 |
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
CODA OCTOPUS GROUP, INC.
Consolidated Balance Sheets (Continued)
JulyJanuary 31, 20222023 and October 31, 20212022
2022 | 2021 | 2023 | 2022 | |||||||||||||
Unaudited | Unaudited | |||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts Payable | $ | 836,978 | $ | 1,454,611 | $ | 1,414,610 | $ | 793,247 | ||||||||
Accrued Expenses and Other Current Liabilities | 1,416,326 | 740,449 | 1,612,168 | 1,731,706 | ||||||||||||
Note Payable | - | 63,559 | ||||||||||||||
Deferred Revenue | 2,056,487 | 1,999,841 | 805,045 | 943,569 | ||||||||||||
Total Current Liabilities | 4,309,791 | 4,258,460 | 3,831,823 | 3,468,522 | ||||||||||||
LONG TERM LIABILITIES | ||||||||||||||||
Deferred Revenue, less current portion | 102,815 | 157,886 | 101,813 | 76,127 | ||||||||||||
Total Long Term Liabilities | 102,815 | 157,886 | ||||||||||||||
Total Liabilities | 4,412,606 | 4,416,346 | 3,933,636 | 3,544,649 | ||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||
Common Stock, $ | par value; shares authorized, issued and outstanding as of July 31, 2022 and shares issued and outstanding as of October 31, 202110,859 | 10,858 | ||||||||||||||
Common Stock, $ | par value; shares authorized, issued and outstanding as of January 31, 2023 and shares issued and outstanding as of October 31, 202210,943 | 10,918 | ||||||||||||||
Treasury Stock | (28,337 | ) | (28,337 | ) | ||||||||||||
Additional Paid-in Capital | 62,158,977 | 61,183,131 | 62,496,116 | 62,313,988 | ||||||||||||
Accumulated Other Comprehensive Loss | (4,497,817 | ) | (1,667,059 | ) | (3,129,474 | ) | (4,737,124 | ) | ||||||||
Accumulated Deficit | (14,880,649 | ) | (18,477,857 | ) | (12,778,779 | ) | (14,176,636 | ) | ||||||||
Total Stockholders�� Equity | 42,791,370 | 41,049,073 | ||||||||||||||
Total Stockholders’ Equity | 46,570,469 | 43,382,809 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 47,203,976 | $ | 45,465,419 | $ | 50,504,105 | $ | 46,927,458 |
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
2023 | 2022 | |||||||||||||||||||||||
Three Months Ended July 31, | Nine Months Ended July 31, | Three Months Ended January 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
| ||||||||||||||||||||||||
Net Revenues | $ | 6,267,409 | $ | 5,827,375 | $ | 17,090,455 | $ | 16,250,910 | $ | 5,596,284 | $ | 5,838,208 | ||||||||||||
Cost of Revenues | 1,704,765 | 1,614,966 | 5,336,171 | 4,973,975 | 1,843,279 | 1,678,274 | ||||||||||||||||||
Gross Profit | 4,562,644 | 4,212,409 | 11,754,284 | 11,276,935 | 3,753,005 | 4,159,934 | ||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||
Research & Development | 577,953 | 675,766 | 1,768,221 | 1,904,186 | 444,458 | 672,890 | ||||||||||||||||||
Selling, General & Administrative | 1,960,978 | 2,213,821 | 6,116,085 | 5,824,046 | 1,962,451 | 2,111,112 | ||||||||||||||||||
Total Operating Expenses | 2,538,931 | 2,889,587 | 7,884,306 | 7,728,232 | 2,406,909 | 2,784,002 | ||||||||||||||||||
INCOME FROM OPERATIONS | 2,023,713 | 1,322,822 | 3,869,978 | 3,548,703 | 1,346,096 | 1,375,932 | ||||||||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||
Other Income | 19,744 | 3,571 | 114,236 | 75,070 | 15,765 | 79,994 | ||||||||||||||||||
Funding from Paycheck Protection Program | - | - | - | 648,872 | ||||||||||||||||||||
Interest Expense | - | (6,145 | ) | (2,902 | ) | (17,442 | ) | - | (11,278 | ) | ||||||||||||||
Total Other Income (Expense) | 19,744 | (2,574 | ) | 111,334 | 706,500 | |||||||||||||||||||
Total Other Income | 15,765 | 68,716 | ||||||||||||||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 2,043,457 | 1,320,248 | 3,981,312 | 4,255,203 | 1,361,861 | 1,444,648 | ||||||||||||||||||
INCOME TAX (EXPENSE) BENEFIT | ||||||||||||||||||||||||
Current Tax (Expense) Benefit | (326,732 | ) | 418,329 | (503,191 | ) | 753,017 | ||||||||||||||||||
Deferred Tax Benefit (Expense) | 51,932 | (217,491 | ) | 119,087 | (150,357 | ) | ||||||||||||||||||
Current Tax Expense | (11 | ) | (285,609 | ) | ||||||||||||||||||||
Deferred Tax Benefit | 36,007 | 58,209 | ||||||||||||||||||||||
Total Income Tax (Expense) Benefit | (274,800 | ) | 200,838 | (384,104 | ) | 602,660 | ||||||||||||||||||
Total Income Tax Expense | 35,996 | (227,400 | ) | |||||||||||||||||||||
NET INCOME | $ | 1,768,657 | $ | 1,521,086 | $ | 3,597,208 | $ | 4,857,863 | $ | 1,397,857 | $ | 1,217,248 | ||||||||||||
NET INCOME PER SHARE: | ||||||||||||||||||||||||
Basic | $ | 0.16 | $ | 0.14 | $ | 0.33 | $ | 0.45 | $ | 0.13 | $ | 0.11 | ||||||||||||
Diluted | $ | 0.16 | $ | 0.13 | $ | 0.32 | $ | 0.43 | $ | 0.12 | $ | 0.11 | ||||||||||||
WEIGHTED AVERAGE SHARES: | ||||||||||||||||||||||||
Basic | 10,858,302 | 10,830,183 | 10,857,724 | 10,786,107 | 10,946,683 | 10,857,195 | ||||||||||||||||||
Diluted | 11,375,141 | 11,342,684 | 11,374,563 | 11,298,608 | 11,379,356 | 11,396,861 | ||||||||||||||||||
NET INCOME | $ | 1,768,657 | $ | 1,521,086 | $ | 3,597,208 | $ | 4,857,863 | $ | 1,397,857 | $ | 1,217,248 | ||||||||||||
Foreign Currency Translation Adjustment | (805,157 | ) | (260,681 | ) | (2,830,758 | ) | 963,644 | 1,607,650 | 241,150 | |||||||||||||||
Total Other Comprehensive Income (Loss) | $ | (805,157 | ) | $ | (260,681 | ) | $ | (2,830,758 | ) | $ | 963,644 | |||||||||||||
Total Other Comprehensive Income | $ | 1,607,650 | $ | 241,150 | ||||||||||||||||||||
COMPREHENSIVE INCOME | $ | 963,500 | $ | 1,260,405 | $ | 766,450 | $ | 5,821,507 | $ | 3,005,507 | $ | 1,458,398 |
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three and Nine Months Ended JulyJanuary 31, 20222023 and 20212022
((Unaudited)Unaudited)
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 | |||||||||||
Employee stock based compensation | - | - | 135,157 | - | - | 135,157 | ||||||||||||||||||
Stock issued for options exercised | 65,161 | 65 | (65 | ) | - | - | - | |||||||||||||||||
Foreign currency translation adjustment | - | - | - | 298,712 | - | 298,712 | ||||||||||||||||||
Net Loss | - | - | - | - | 2,207,933 | 2,207,933 | ||||||||||||||||||
Balance, April 30, 2021 | 10,817,042 | $ | 10,818 | $ | 60,441,954 | $ | (1,096,953 | ) | $ | (20,088,845 | ) | $ | 39,266,974 | |||||||||||
Employee stock based compensation | - | - | 230,879 | - | - | 230,879 | ||||||||||||||||||
Stock issued for options exercised | 15,153 | 15 | (15 | ) | - | - | - | |||||||||||||||||
Consultant stock based compensation | 25,000 | 25 | 220,725 | - | - | 220,750 | ||||||||||||||||||
Foreign currency translation adjustment | - | - | - | (260,681 | ) | - | (260,681 | ) | ||||||||||||||||
Net Income | - | - | - | - | 1,521,086 | 1,521,086 | ||||||||||||||||||
Balance, July 31, 2021 | 10,857,195 | $ | 10,858 | $ | 60,893,543 | $ | (1,357,634 | ) | $ | (18,567,759 | ) | $ | 40,979,008 |
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Treasury | ||||||||||||||||||||||||
Shares | Amount | Capital | Income (Loss) | Deficit | Stock | Total | ||||||||||||||||||||||
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 |
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||||||||
Shares | Amount | Capital | Income (Loss) | Deficit | Total | |||||||||||||||||||
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 | |||||||||||
Employee stock based compensation | - | - | 365,568 | - | - | 365,568 | ||||||||||||||||||
Stock issued for options exercised | 1,107 | 1 | (1 | ) | - | - | - | |||||||||||||||||
Foreign currency translation adjustment | - | - | - | (2,266,751 | ) | - | (2,266,751 | ) | ||||||||||||||||
Net Income | - | - | - | - | 611,303 | 611,303 | ||||||||||||||||||
Balance, April 30, 2022 | 10,858,302 | $ | 10,859 | $ | 61,873,873 | $ | (3,692,660 | ) | $ | (16,649,306 | ) | $ | 41,542,766 | |||||||||||
Employee stock based compensation | - | - | 285,104 | - | - | 285,104 | ||||||||||||||||||
Foreign currency translation adjustment | - | - | - | (805,157 | ) | - | (805,157 | ) | ||||||||||||||||
Net Income | - | - | - | - | 1,768,657 | 1,768,657 | ||||||||||||||||||
Net Income (loss) | - | - | - | - | 1,768,657 | 1,768,657 | ||||||||||||||||||
Balance, July 31, 2022 | 10,858,302 | $ | 10,859 | $ | 62,158,977 | $ | (4,497,817 | ) | $ | (14,880,649 | ) | $ | 42,791,370 |
Additional | Accumulated Other | |||||||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Treasury | ||||||||||||||||||||||||
Shares | Amount | Capital | Income (Loss) | Deficit | Stock | Total | ||||||||||||||||||||||
Balance, October 31, 2022 | 10,916,853 | $ | 10,918 | $ | 62,313,988 | $ | (4,737,124 | ) | $ | (14,176,636 | ) | $ | (28,337 | ) | $ | 43,382,809 | ||||||||||||
Beginning balance | 10,916,853 | $ | 10,918 | $ | 62,313,988 | $ | (4,737,124 | ) | $ | (14,176,636 | ) | $ | (28,337 | ) | $ | 43,382,809 | ||||||||||||
Employee stock-based compensation | - | - | 182,153 | - | - | - | 182,153 | |||||||||||||||||||||
Stock issued from options exercised | 25,500 | 25 | (25 | ) | - | - | - | - | ||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | 1,607,650 | - | - | 1,607,650 | |||||||||||||||||||||
Net Income | - | - | 1,397,857 | - | 1,397,857 | |||||||||||||||||||||||
Balance, January 31, 2023 | 10,942,353 | $ | 10,943 | $ | 62,496,116 | $ | (3,129,474 | ) | $ | (12,778,779 | ) | $ | (28,337 | ) | $ | 46,570,469 | ||||||||||||
Ending balance | 10,942,353 | $ | 10,943 | $ | 62,496,116 | $ | (3,129,474 | ) | $ | (12,778,779 | ) | $ | (28,337 | ) | $ | 46,570,469 |
The accompanying notes are an integral part of these unaudited consolidated financial statements
statements.
6 |
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
2022 | 2021 | 2023 | 2022 | |||||||||||||
Nine Months Ended July 31, | Three Months Ended January 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net income | $ | 3,597,208 | $ | 4,857,863 | $ | 1,397,857 | $ | 1,217,248 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 652,762 | 827,509 | 164,007 | 161,466 | ||||||||||||
Stock based compensation | 975,847 | 761,233 | ||||||||||||||
Stock-based compensation | 182,153 | 325,175 | ||||||||||||||
Deferred income taxes | (93,289 | ) | 150,357 | (36,007 | ) | (9,750 | ) | |||||||||
Funding from Paycheck Protection Program recognized as income | - | (648,872 | ) | |||||||||||||
(Increase) decrease in operating assets: | ||||||||||||||||
Accounts receivable | (303,370 | ) | (191,768 | ) | (161,980 | ) | 2,608,920 | |||||||||
Inventory | (415,752 | ) | (1,688,545 | ) | (602,467 | ) | (613,670 | ) | ||||||||
Unbilled receivables | 642,380 | (306,261 | ) | (37,958 | ) | 675,179 | ||||||||||
Prepaid expenses | 727,360 | 60,923 | (128,140 | ) | 863,618 | |||||||||||
Other current assets | 151,825 | (312,041 | ) | (84,586 | ) | (26,093 | ) | |||||||||
Increase (decrease) in operating liabilities: | ||||||||||||||||
Accounts payable and other current liabilities | 240,562 | (379,552 | ) | 446,526 | (1,047,139 | ) | ||||||||||
Deferred revenue | 106,990 | 500,643 | (154,519 | ) | (693,455 | ) | ||||||||||
Net Cash Provided by Operating Activities | 6,282,523 | 3,631,489 | 984,886 | 3,461,499 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
Purchases of property and equipment | (1,120,051 | ) | (759,733 | ) | (84,422 | ) | (987,093 | ) | ||||||||
Purchases of other intangible assets | (75,834 | ) | (78,893 | ) | (21,485 | ) | (14,871 | ) | ||||||||
Net Cash Used in Investing Activities | (1,195,885 | ) | (838,626 | ) | (105,907 | ) | (1,001,964 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Repayment of notes | (63,559 | ) | (379,763 | ) | - | (63,559 | ) | |||||||||
Proceeds from Paycheck Protection Program | - | 648,872 | ||||||||||||||
Net Cash (Used in) Provided by Financing Activities | (63,559 | ) | 269,109 | |||||||||||||
Net Cash Used in Financing Activities | - | (63,559 | ) | |||||||||||||
EFFECT OF CURRENCY TRANSLATION ON CHANGES IN CASH | (1,399,815 | ) | 963,644 | 716,033 | 567,596 | |||||||||||
NET INCREASE IN CASH | 3,623,264 | 4,025,616 | 1,595,012 | 2,963,572 | ||||||||||||
CASH AT THE BEGINNING OF THE PERIOD | 17,747,656 | 15,134,289 | 22,927,371 | 17,747,656 | ||||||||||||
CASH AT THE END OF THE PERIOD | $ | 21,370,920 | $ | 19,159,905 | $ | 24,522,383 | $ | 20,711,228 | ||||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||||||
Cash paid for interest | $ | 2,902 | $ | 17,442 | $ | - | $ | 11,278 | ||||||||
Cash paid for taxes | $ | 74,432 | $ | - | $ | - | $ | 51,264 |
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 20212022
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”,(also referred to in this Form 10-Q as “Products Operations”Business,” or “Products Segment”) and the Marine Engineering Business (“Services(also referred to in this Form 10-Q as “Services Business”, “Engineering Business”; or “Services Segment”). The Marine Technology Business sells technology solutions to the subsea and underwater markets. These solutions are designed, developed, manufactured and supported by the Company. Among the solutions which it offers to the market and currently itsIts main revenue generating product is its real time 3D volumetric imaging sonar which is a patented and leading product in the subsea/underwater market. This product is marketed under the name Echoscope®and Echoscope PIPE®, PIPE being an acronym for (Parallel Intelligent Processing Engine. We also recentlyEngine). In 2021, the Products Business launched a new diver management system (Diver Augmented Vision Display (DAVD)(“DAVD”)) for use in the global defense and commercial diving markets and which we believe is a significant part of our growth pillars.plans for the Company. The requirements for the DAVD system emanated from the Office of Naval Research.Research as part of its Future Naval Requirements Program. The DAVD usesembeds inside of the diver Head up Display (HUD) a pair of transparent glasses inwhich is used as the diver’s head up display (HUD) on whichdata hub for displaying real time data is rendered.to the diver. The concept of using a pair of transparent glasses in the Head up Display (HUD) underwater for this purpose is patentedprotected by patent and licensed to the Company by the United States Department of the Navy at Naval Surface Warfare Center Panama City Division. The Marine Engineering Business is aan established sub-contractor to prime defense contractors and generally supplies proprietary sub-assemblies for incorporation into broader mission critical defense systems. These partssub-assemblies typically are supplied for the life of the program. The Marine Engineering Business scope typically includes concept, design, prototype and manufacture. The manufacturing contracts for these sub-
assemblies can run over many years.
The consolidated financial statements include the accounts of Coda Octopus Group, Inc. and its wholly-owned domestic and foreign subsidiaries based outside of the US.subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.
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 2 – REVENUE RECOGNITION
The Company recognizes revenue in accordance with 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 the transaction price; | |
● | Allocate the transaction price to | |
● |
Our revenues are earned under formal contracts with our customers andcustomers. These are derived from both sales and rental of underwater technologies and equipment for real time 3D imaging, mapping, defense and survey applications by the Marine Technology Business and from engineering services which wethe Company’s Services Business provide via sub-contracts primarily towith 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.
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 20212022
NOTE 2 – REVENUE RECOGNITION (Continued)
Regarding 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, customization of our technology for bespoke application, 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 performed 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 thea relative fair value of each deliverablestandalone selling price basis and recognize revenue when performance obligations are met including when equipment is delivered, and for rental of equipment, when installation, training and other services prescribed by the contract are performed.
Our contracts sometimes require customer payments in advance of revenue recognition. These are recognized as revenue when the Company has fulfilled its obligations under the respective contracts. Until such time, we recognize this prepaymentthese prepayments 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 by the provision of the activation codes to 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-completionpercentage 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.
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 20212022
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 July 31, 2022 and October 31, 2021, we had deferred commissions of $66,946 and $0, respectively. Amortization expense related to deferred commissions was $16,186 and $3,884 in the nine months years ended July 31, 2022, and 2021, respectively.
Other Revenue Disclosures
See NoteNotes 14 and 15 – Segment Analysis and Disaggregation of Revenue providing a breakdownRevenue. These Notes provide disclosure of our revenue by segment (Products Business versus Services Business); revenues from external customers and cost of those revenues between our Product Segmentrevenues; and Services Segment including information on the split of revenuesrevenue by geography.geography including within and outside the USA.
NOTE 3 – COST OF GOODS SOLD
Our Cost of goods sold includes the cost of materials and related direct costs. With respect to sales made through the Company’s sales agents distribution network, we include in our costs of goods sold commissions paid to agents for the specific sales they make. Without using agents, we would not be eligible to participate in the Request for Proposals (“RFP”) for these sales on which we incur commission costs. All other sales-related expenses, including those related to unsuccessful bids, are included in selling, general and administrative costs. As a component of Cost of Goods Sold, commission in the 3 months period ended January 31, 2023 was $505,376 compared to $138,372 for the 3 months period ended January 31, 2022.
NOTE 34 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments include cash, accounts receivable, accounts payable, and accrued expenses and notes payable.expenses. 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.
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 20212022
NOTE 45 – 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 is 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.
NOTE 56 – INVENTORY
Inventory is stated at the lower of cost (First in, First Out method) or net realizable value. Inventory consisted of the following components:components as of:
SCHEDULE OF COMPONENTS OF INVENTORY
July 31, | October 31, | January 31, | October 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Raw materials and parts | $ | 6,847,710 | $ | 7,525,419 | $ | 8,072,400 | $ | 7,219,344 | ||||||||
Work in progress | 660,890 | 919,619 | 527,401 | 383,427 | ||||||||||||
Finished goods | 2,674,613 | 2,246,139 | 2,577,585 | 2,424,340 | ||||||||||||
Total Inventory | $ | 10,183,213 | $ | 10,691,177 | $ | 11,177,386 | $ | 10,027,111 |
NOTE 67 – FIXED ASSETSPROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
SCHEDULE OF PROPERTY AND EQUIPMENT
July 31, | October 31, | |||||||
2022 | 2021 | |||||||
Buildings | $ | 5,618,650 | $ | 5,298,028 | ||||
Land | 200,000 | 200,000 | ||||||
Office machinery and equipment | 1,687,417 | 1,622,871 | ||||||
Rental assets | 2,345,544 | 2,326,486 | ||||||
Furniture, fixtures and improvements | 1,146,145 | 1,218,217 | ||||||
Totals | 10,997,756 | 10,665,602 | ||||||
Less: accumulated depreciation | (4,874,208 | ) | (4,628,501 | ) | ||||
Total Property and Equipment, net | $ | 6,123,548 | $ | 6,037,101 |
January 31, | October 31, | |||||||
2023 | 2022 | |||||||
Buildings | $ | 5,701,653 | $ | 5,419,946 | ||||
Land | 200,000 | 200,000 | ||||||
Office machinery and equipment | 1,676,401 | 1,556,030 | ||||||
Rental assets | 2,396,579 | 2,252,292 | ||||||
Furniture, fixtures and improvements | 1,164,560 | 1,108,787 | ||||||
Total | 11,139,193 | 10,537,055 | ||||||
Less: accumulated depreciation | (5,067,582 | ) | (4,704,523 | ) | ||||
Total Property and Equipment, net | $ | 6,071,611 | $ | 5,832,532 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 20212022
NOTE 78 – OTHER CURRENT ASSETS
Other current assets consisted of the following as of:
SUMMARY OF OTHER CURRENT ASSETS
July 31, | October 31, | |||||||
2022 | 2021 | |||||||
Deposits | $ | 94,547 | $ | 63,992 | ||||
Other Tax Receivables | 136,633 | - | ||||||
Employee Retention Credit Receivables | 237,995 | 563,627 | ||||||
Total Other Current Assets | $ | 469,175 | $ | 627,619 |
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.
January 31, | October 31, | |||||||
2023 | 2022 | |||||||
Deposits | $ | 11,015 | $ | 18,631 | ||||
Other Tax Receivables | 267,579 | 151,217 | ||||||
Employee Retention Credit Receivables | 153,213 | 173,213 | ||||||
Total Other Current Assets | $ | 431,807 | $ | 343,061 |
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.sheet date. These amounts are stated on the consolidated balance sheets as Unbilled Receivables of $416,394650,774 and $1,080,384602,115 as of JulyJanuary 31, 2022,2023, and October 31, 2021,2022, respectively.
Our Deferred Revenue of $1,905,834673,158 and $1,879,790790,458 as of JulyJanuary 31, 2022,2023, and October 31, 2021,2022, 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.Note.
Sales of equipment include a separate performance obligation for warranty, which is treated as deferred revenue, along with sales for which the customer may purchase extended warranty option.options which may be optionally purchased by the customer. These amounts are amortized over the relevant obligation period (12 months is our standard warranty or 24, 36 or 60 months for our extended warranty, sold as our Through Life Support (TLS) Package) from the date of delivery. These amounts are stated on the consolidated balance sheets as a component of Deferred Revenue and were $253,468233,700 and $277,937229,238 as of JulyJanuary 31, 2022,2023, and October 31, 2021,2022, respectively.
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 20212022
NOTE 10 – CONCENTRATIONS
Significant Customers
During the three months ended JulyJanuary 31, 2022,2023, the Company had one customertwo customers from whom it generated sales greater than 10% of net revenues. Revenue from this customerthese customers was $660,7501,575,724, or 10.5%28% of net revenues during the three months ended JulyJanuary 31, 2022.2023. Receivables from this customerthese customers were $246,100836,315, or 5.8%27% of net receivables as of JulyJanuary 31, 2022.2023.
During the three months ended JulyJanuary 31, 2021,2022, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues from these customers were $1,474,4641,855,731, or 25%32% of net revenues during the three months ended JulyJanuary 31, 2021.2022. Receivables from these customers were $72,449 or 3.2% of net receivable as of July 31, 2021.
During the nine months ended July 31, 2022, the Company had one customer from whom it generated sales of less than 10%or more of net revenues. Revenues from this customer were $1,709,791, or 10% of net revenues during the nine months ended July 31, 2022. Receivables from this customer were $542,515 or 12.75% of net receivables as of JulyJanuary 31, 20222022.
During the nine months ended July 31, 2021, the Company had one customer from whom it generated sales of $1,588,172, or 10% of net revenues. Receivables from this customer were $72,449 or 3.2% of net receivables as of July 31, 2021.
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
July 31, 2022, and October 31, 2021
NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS
There have been no new accounting pronouncements not yet effective that have significant or potential significance, to our Consolidated Financial Statements.
Three Months | Three Months | |||||||
Ended | Ended | |||||||
January 31, | January 31, | |||||||
Fiscal Period | 2023 | 2022 | ||||||
Numerator: | ||||||||
Net Income | $ | 1,397,857 | $ | 1,217,248 | ||||
Denominator: | ||||||||
Basic weighted average common shares outstanding | 10,946,683 | 10,857,195 | ||||||
Unused portion of options and restricted stock awards | 432,673 | 539,666 | ||||||
Diluted outstanding shares | 11,379,356 | 11,396,861 | ||||||
Net income per share | ||||||||
Basic | $ | 0.13 | $ | 0.11 | ||||
Diluted | $ | 0.12 | $ | 0.11 |
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
July 31 | July 31 | July 31 | July 31 | |||||||||||||
Fiscal Period | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Numerator: | ||||||||||||||||
Net Income | $ | 1,768,657 | $ | 1,521,086 | $ | 3,597,208 | $ | 4,857,863 | ||||||||
Denominator: | ||||||||||||||||
Basic weighted average common shares outstanding | 10,858,302 | 10,830,183 | 10,857,724 | 10,786,107 | ||||||||||||
Unused portion of options and restricted stock awards | 516,839 | 512,501 | 516,839 | 512,501 | ||||||||||||
Diluted outstanding shares | 11,375,141 | 11,342,684 | 11,374,563 | 11,298,608 | ||||||||||||
Net income per share | ||||||||||||||||
Basic | $ | 0.16 | $ | 0.14 | $ | 0.33 | $ | 0.45 | ||||||||
Diluted | $ | 0.16 | $ | 0.13 | $ | 0.32 | $ | 0.43 |
13 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
January 31, 2023 and October 31, 2022
NOTE 13 – 2017 STOCK INCENTIVE PLAN
2017 Stock Incentive Plan
On December 6, 2017, the Board of Directors adopted the 2017 Stock Incentive Plan (the “2017 Plan”) with . The purpose of the Plan is to advance the interests of the Company and its stockholders by enabling the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company, and to reward those individuals who contribute to the Company’s achievement of its economic objectives. The Plan was adopted subject to stockholders’ approval and was approved by Stockholders at the Company’s Annual General Meeting held on July 24, 2018.
913,612
The maximum number of shares of Common Stock available for issuance under the 2017 Plan is issuance. Thisissuance under the 2017 Plan may, at the election of the Compensation Committee, be either treasury shares or shares authorized but unissued, and, if treasury shares are used, all references in the 2017 Plan to the issuance of shares will, for corporate law purposes, be deemed to mean the transfer of shares from treasury. . The shares available for
During the three months ended January 31, 2023, the Company granted to various eligible individuals restricted stock awards of there were shares available for future issuance under the 2017 Plan. The total stock compensation expense during the three months ended January 31, 2023 was approved by Stockholders at its meeting held on July 24, 2018.$ .
2021 Stock Incentive Plan
On July 12, 2021, the Board of Directors adopted the 2021 Stock Incentive Plan (the “2021 Plan”). The 2021 Plan was approved by the Company’s stockholders at its Annual General Meeting held on September 14, 2021. The 2021 Plan is identical to the 2017 Plan in all material respects, except that the number of shares available for issuance thereunder is . This Plan was approved by Stockholders at its meeting held on September 14, 2021.
During the nine months ended July 31, 2022, the Company granted to various eligible individuals Restricted Stock Awards
The total number of shares of common stock pursuant to the terms of the Plan. During the nine months ended July 31, 2021, options or Restricted Stock Grants were forfeited. During the nine months ended July 31, 2022, options vested and remained unexercised. In addition, options were exercised on a cashless basis resulting in the issuance of shares. As of July 31, 2022, there were shares available for future issueissuance under boththe 2017 Plan and 2021 Plans. The total stock compensation expense during the nine months ended July 31, 2022, was $Plan is .
During the nine months ended July 31, 2021, the Company granted to various eligible individuals Restricted Stock Awards to purchase an aggregate of shares of common stock pursuant to the terms of the Plan. During the nine months ended July 31, 2021, options were forfeited. As of July 31, 2021, shares of common stock were issued pursuant to the cashless exercise of options. In March 2021, options vested but remained unexercised as of July 31, 2021. As of July 31, 2021, there were shares of common stock available for future issue under the Plan. The total stock compensation expense during the nine months ended July 31, 2021, was $.
NOTE 14 -– SEGMENT ANALYSIS
Based on the fundamental difference in the types of offering, products and solutions versus services, we operate two distinct reportable segments which are managed separately. Coda Octopus Products (“Marine Technology Business” or “Products Business” or “Products Segment”) operations are comprised primarily of sale and/or rental of underwater technology sonar solutions, products for underwater operations including hardware and software and support services and our diver management system and rental of solutions and products to the underwater market.system. Coda Octopus Martech and Coda Octopus Colmek (“Marine Engineering Business” or “Services Segment”) providesprovide 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. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies.
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 tables summarize segment asset and operating balances by reportable segment as of and for the three and nine months ended JulyJanuary 31, 20222023 and 2021,2022, respectively.
The Company’s reportable business segments sell their goods and services in four geographic locations:
● | Americas | |
● | Europe | |
● | Australia/Asia | |
● | Middle East/Africa |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
July 31, 2022, and October 31, 2021
NOTE 14 -SEGMENT ANALYSIS (Continued)
SCHEDULE OF SEGMENT REPORTING INFORMATION
Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
Three Months Ended July 31, 2022 | ||||||||||||||||
Net Revenues | $ | 4,004,557 | $ | 2,262,852 | $ | - | $ | 6,267,409 | ||||||||
Cost of Revenues | 532,248 | 1,172,517 | - | 1,704,765 | ||||||||||||
Gross Profit | 3,472,309 | 1,090,335 | - | 4,562,644 | ||||||||||||
Research & Development | 605,857 | (27,904 | ) | - | 577,953 | |||||||||||
Selling, General & Administrative | 731,200 | 700,820 | 528,958 | 1,960,978 | ||||||||||||
Total Operating Expenses | 1,337,057 | 672,916 | 528,958 | 2,538,931 | ||||||||||||
Income (Loss) from Operations | 2,135,252 | 417,419 | (528,958 | ) | 2,023,713 | |||||||||||
Other Income (Expense) | ||||||||||||||||
Other Income | 14,472 | 4,212 | 1,060 | 19,744 | ||||||||||||
Funding from Paycheck Protection Program | ||||||||||||||||
Interest Expense | - | - | - | - | ||||||||||||
Total Other Income (Expense) | 14,472 | 4,212 | 1,060 | 19,744 | ||||||||||||
Income (Loss) before Income Taxes | 2,149,724 | 421,631 | (527,898 | ) | 2,043,457 | |||||||||||
Income Tax (Expense) Benefit | ||||||||||||||||
Current Tax Expense | (226,264 | ) | (23,148 | ) | (77,320 | ) | (326,732 | ) | ||||||||
Deferred Tax Benefit | 378 | 2,141 | 49,413 | 51,932 | ||||||||||||
Total Income Tax (Expense) Benefit | (225,886 | ) | (21,007 | ) | (27,907 | ) | (274,800 | ) | ||||||||
Net Income (Loss) | $ | 1,923,838 | $ | 400,624 | $ | (555,805 | ) | $ | 1,768,657 | |||||||
Supplemental Disclosures | ||||||||||||||||
Total Assets | $ | 33,015,110 | $ | 13,354,167 | $ | 834,699 | $ | 47,203,976 | ||||||||
Total Liabilities | $ | 3,246,151 | $ | 774,497 | $ | 391,958 | $ | 4,412,606 | ||||||||
Revenues from Intercompany Sales - eliminated from sales above | $ | 966,316 | $ | 62,757 | $ | 607,500 | $ | 1,636,573 | ||||||||
Depreciation and Amortization | $ | 174,739 | $ | 24,209 | $ | 9,873 | $ | 208,821 | ||||||||
Purchases of Long-lived Assets | $ | 14,815 | $ | 22,125 | $ | 17,469 | $ | 54,409 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
July 31, 2022, and October 31, 2021
NOTE 14 -SEGMENT ANALYSIS (Continued)
Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
Three Months Ended July 31, 2021 | ||||||||||||||||
Net Revenues | $ | 3,845,051 | $ | 1,982,324 | $ | - | $ | 5,827,375 | ||||||||
Cost of Revenues | 545,243 | 1,069,723 | - | 1,614,966 | ||||||||||||
Gross Profit | 3,299,808 | 912,601 | - | 4,212,409 | ||||||||||||
Research & Development | 540,553 | 135,213 | - | 675,766 | ||||||||||||
Selling, General & Administrative | 862,673 | 621,876 | 729,272 | 2,213,821 | ||||||||||||
Total Operating Expenses | 1,403,226 | 757,089 | 729,272 | 2,889,587 | ||||||||||||
Income (Loss) from Operations | 1,896,582 | 155,512 | (729,272 | ) | 1,322,822 | |||||||||||
Other Income (Expense) | ||||||||||||||||
Other Income | 3,554 | 17 | - | 3,571 | ||||||||||||
Interest Expense | (584 | ) | (365 | ) | (5,196 | ) | (6,145 | ) | ||||||||
Total Other Income (Expense) | 2,970 | (348 | ) | (5,196 | ) | (2,574 | ) | |||||||||
Income (Loss) before Income Taxes | 1,899,552 | 155,164 | (734,468 | ) | 1,320,248 | |||||||||||
Income Tax (Expense) Benefit | ||||||||||||||||
Current Tax Benefit (Expense) | 157,333 | 260,996 | - | 418,329 | ||||||||||||
Deferred Tax (Expense) Benefit | (338,098 | ) | 108,141 | 12,466 | (217,491 | ) | ||||||||||
Total Income Tax (Expense) Benefit | (180,765 | ) | 369,137 | 12,466 | 200,838 | |||||||||||
Net Income (Loss) | $ | 1,718,787 | $ | 524,301 | $ | (722,002 | ) | $ | 1,521,086 | |||||||
Supplemental Disclosures | ||||||||||||||||
Total Assets | $ | 28,820,472 | $ | 14,608,555 | $ | 934,192 | $ | 44,363,219 | ||||||||
Total Liabilities | $ | 2,159,921 | $ | 844,816 | $ | 379,474 | $ | 3,384,211 | ||||||||
Revenues from Intercompany Sales - eliminated from sales above | $ | 492,579 | $ | 44,372 | $ | 675,000 | $ | 1,211,951 | ||||||||
Depreciation and Amortization | $ | 195,103 | $ | 24,590 | $ | 7,952 | $ | 227,645 | ||||||||
Purchases of Long-lived Assets | $ | 201,198 | $ | 7,655 | $ | 30,584 | $ | 239,437 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
July 31, 2022, and October 31, 2021
NOTE 14 -SEGMENT ANALYSIS (Continued)
Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
Nine Months Ended July 31, 2022 | ||||||||||||||||
Net Revenues | $ | 11,319,314 | $ | 5,771,141 | $ | - | $ | 17,090,455 | ||||||||
Cost of Revenues | 1,920,573 | 3,415,598 | - | 5,336,171 | ||||||||||||
Gross Profit | 9,398,741 | 2,355,543 | - | 11,754,284 | ||||||||||||
Research & Development | 1,752,478 | 15,743 | - | 1,768,221 | ||||||||||||
Selling, General & Administrative | 2,059,147 | 2,040,608 | 2,016,330 | 6,116,085 | ||||||||||||
Total Operating Expenses | 3,811,625 | 2,056,351 | 2,016,330 | 7,884,306 | ||||||||||||
Income (Loss) from Operations | 5,587,116 | 299,192 | (2,016,330 | ) | 3,869,978 | |||||||||||
Other Income (Expense) | ||||||||||||||||
Other Income | 32,576 | 79,256 | 2,404 | 114,236 | ||||||||||||
Interest Expense | (2,502 | ) | - | (400 | ) | (2,902 | ) | |||||||||
Total Other Income (Expense) | 30,074 | 79,256 | 2,004 | 111,334 | ||||||||||||
Income (Loss) before Income Taxes | 5,617,190 | 378,448 | (2,014,326 | ) | 3,981,312 | |||||||||||
Income Tax (Expense) Benefit | ||||||||||||||||
Current Tax Benefit (Expense) | (492,505 | ) | 147,778 | (158,464 | ) | (503,191 | ) | |||||||||
Deferred Tax (Expense) Benefit | 5,159 | (42,839 | ) | 156,767 | 119,087 | |||||||||||
Total Income Tax (Expense) Benefit | (487,346 | ) | 104,939 | (1,697 | ) | (384,104 | ) | |||||||||
Net Income (Loss) | $ | 5,129,844 | $ | 483,387 | $ | (2,016,023 | ) | $ | 3,597,208 | |||||||
Supplemental Disclosures | ||||||||||||||||
Total Assets | $ | 33,015,110 | $ | 13,354,167 | $ | 834,699 | $ | 47,203,976 | ||||||||
Total Liabilities | $ | 3,246,151 | $ | 774,497 | $ | 391,958 | $ | 4,412,606 | ||||||||
Revenues from Intercompany Sales - eliminated from sales above | $ | 1,769,365 | $ | 305,450 | $ | 1,815,000 | $ | 3,889,815 | ||||||||
Depreciation and Amortization | $ | 551,866 | $ | 72,056 | $ | 28,840 | $ | 652,762 | ||||||||
Purchases of Long-lived Assets | $ | 1,085,877 | $ | 34,174 | $ | 75,834 | $ | 1,195,885 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 20212022
NOTE 14 -SEGMENT ANALYSIS (Continued)
SCHEDULE OF SEGMENT REPORTING INFORMATION
Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||||||||||||||
Nine Months Ended July 31, 2021 | ||||||||||||||||||||||||||||||||
Three Months Ended January 31, 2023 | ||||||||||||||||||||||||||||||||
Net Revenues | $ | 11,777,739 | $ | 4,473,171 | $ | - | $ | 16,250,910 | $ | 3,824,159 | $ | 1,772,125 | $ | - | $ | 5,596,284 | ||||||||||||||||
Cost of Revenues | 2,462,219 | 2,511,756 | - | 4,973,975 | 1,064,244 | 779,035 | - | 1,843,279 | ||||||||||||||||||||||||
Gross Profit | 9,315,520 | 1,961,415 | - | 11,276,935 | 2,759,915 | 993,090 | - | 3,753,005 | ||||||||||||||||||||||||
Research & Development | 1,521,175 | 383,011 | - | 1,904,186 | 438,308 | 6,150 | - | 444,458 | ||||||||||||||||||||||||
Selling, General & Administrative | 2,402,406 | 1,751,197 | 1,670,443 | 5,824,046 | 661,759 | 646,310 | 654,382 | 1,962,451 | ||||||||||||||||||||||||
Total Operating Expenses | 3,923,581 | 2,134,208 | 1,670,443 | 7,728,232 | 1,100,067 | 652,460 | 654,382 | 2,406,909 | ||||||||||||||||||||||||
Income (Loss) from Operations | 5,391,939 | (172,793 | ) | (1,670,443 | ) | 3,548,703 | 1,659,848 | 340,630 | (654,382 | ) | 1,346,096 | |||||||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||||||||||
Other Income | 74,173 | 51 | 846 | 75,070 | ||||||||||||||||||||||||||||
Funding from Paycheck Protection Program | 122,327 | 526,545 | - | 648,872 | ||||||||||||||||||||||||||||
Interest Expense | (1,069 | ) | (365 | ) | (16,008 | ) | (17,442 | ) | ||||||||||||||||||||||||
Other Income | 15,020 | 745 | - | 15,765 | ||||||||||||||||||||||||||||
Total Other Income (Expense) | 195,431 | 526,231 | (15,162 | ) | 706,500 | |||||||||||||||||||||||||||
Total Other Income | 15,020 | 745 | - | 15,765 | ||||||||||||||||||||||||||||
Income (Loss) before Income Taxes | 5,587,370 | 353,438 | (1,685,605 | ) | 4,255,203 | 1,674,868 | 341,375 | (654,382 | ) | 1,361,861 | ||||||||||||||||||||||
Income Tax (Expense) Benefit | ||||||||||||||||||||||||||||||||
Current Tax (Expense) Benefit | 254,745 | 498,666 | (394 | ) | 753,017 | (18,873 | ) | (19,856 | ) | 38,718 | (11 | ) | ||||||||||||||||||||
Deferred Tax Benefit (Expense) | (356,164 | ) | 264,636 | (58,829 | ) | (150,357 | ) | |||||||||||||||||||||||||
Deferred Tax (Expense) Benefit | - | - | 36,007 | 36,007 | ||||||||||||||||||||||||||||
Total Income Tax (Expense) Benefit | (101,419 | ) | 763,302 | (59,223 | ) | 602,660 | (18,873 | ) | (19,856 | ) | 74,725 | 35,996 | ||||||||||||||||||||
Net Income (Loss) | $ | 5,485,951 | $ | 1,116,740 | $ | (1,744,828 | ) | $ | 4,857,863 | $ | 1,655,995 | $ | 321,519 | $ | (579,657 | ) | $ | 1,397,857 | ||||||||||||||
Supplemental Disclosures | ||||||||||||||||||||||||||||||||
Total Assets | $ | 28,820,472 | $ | 14,608,555 | $ | 934,192 | $ | 44,363,219 | $ | 36,176,835 | $ | 13,377,560 | $ | 949,710 | $ | 50,504,105 | ||||||||||||||||
Total Liabilities | $ | 2,159,921 | $ | 844,816 | $ | 379,474 | $ | 3,384,211 | $ | 2,694,766 | $ | 758,160 | $ | 480,710 | $ | 3,933,636 | ||||||||||||||||
Revenues from Intercompany Sales - eliminated from sales above | $ | 1,367,619 | $ | 184,016 | $ | 2,025,000 | $ | 3,576,635 | $ | 829,674 | $ | 45,707 | $ | 680,000 | $ | 1,555,381 | ||||||||||||||||
Depreciation and Amortization | $ | 707,761 | $ | 98,671 | $ | 21,077 | $ | 827,509 | $ | 128,838 | $ | 24,910 | $ | 10,259 | $ | 164,007 | ||||||||||||||||
Purchases of Long-lived Assets | $ | 745,405 | $ | 13,203 | $ | 80,018 | $ | 838,626 | $ | 79,642 | $ | 4,780 | $ | 21,485 | $ | 105,907 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 20212022
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 (Expense) 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 |
16 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
January 31, 2023 and October 31, 2022
NOTE 15 –DISAGGREGATION OF REVENUE
SCHEDULE OF DISAGGREGATE OF REVENUE FROM CONTRACTS FOR SALE WITH CUSTOMERS BY GEOGRAPHIC LOCATION
For the Three Months Ended July 31, 2022 | For the Three Months Ended January 31, 2023 | |||||||||||||||||||||||
Marine | Marine | Marine | Marine | |||||||||||||||||||||
Technology | Engineering | Grand | Technology | Engineering | Grand | |||||||||||||||||||
Business | Business | Total | Business | Business | Total | |||||||||||||||||||
Disaggregation of Total Net Sales | ||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Primary Geographical Markets | ||||||||||||||||||||||||
Americas | $ | 1,626,657 | $ | 1,468,483 | $ | 3,095,140 | $ | 486,293 | $ | 1,322,977 | $ | 1,809,270 | ||||||||||||
Europe | 278,973 | 794,369 | 1,073,342 | 696,410 | 449,148 | 1,145,558 | ||||||||||||||||||
Australia/Asia | 1,435,637 | - | 1,435,637 | 2,432,428 | - | 2,432,428 | ||||||||||||||||||
Middle East/Africa | 663,290 | - | 663,290 | 209,028 | - | 209,028 | ||||||||||||||||||
Total Revenues | $ | 4,004,557 | $ | 2,262,852 | $ | 6,267,409 | $ | 3,824,159 | $ | 1,772,125 | $ | 5,596,284 | ||||||||||||
Major Goods/Service Lines | ||||||||||||||||||||||||
Equipment Sales | $ | 2,928,019 | $ | 451,416 | $ | 3,379,435 | $ | 2,572,560 | $ | - | $ | 2,572,560 | ||||||||||||
Equipment Rentals | 380,984 | - | 380,984 | 265,903 | - | 265,903 | ||||||||||||||||||
Software Sales | 252,204 | - | 252,204 | 417,170 | - | 417,170 | ||||||||||||||||||
Engineering Parts | - | 999,228 | 999,228 | - | 1,149,079 | 1,149,079 | ||||||||||||||||||
Services | 443,350 | 812,208 | 1,255,558 | 568,526 | 623,046 | 1,191,572 | ||||||||||||||||||
Total Revenues | $ | 4,004,557 | $ | 2,262,852 | $ | 6,267,409 | $ | 3,824,159 | $ | 1,772,125 | $ | 5,596,284 | ||||||||||||
Goods transferred at a point in time | $ | 3,180,223 | $ | 451,416 | $ | 3,631,639 | $ | 2,989,730 | $ | - | $ | 2,989,730 | ||||||||||||
Services transferred over time | 824,334 | 1,811,436 | 2,635,770 | 834,429 | 1,772,125 | 2,606,554 | ||||||||||||||||||
Total Revenues | $ | 4,004,557 | $ | 2,262,852 | $ | 6,267,409 | $ | 3,824,159 | $ | 1,772,125 | $ | 5,596,284 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 20212022
NOTE 15 –DISAGGREGATION OF REVENUE (Continued)
For the Three Months Ended July 31, 2021 | For the Three Months Ended January 31, 2022 | |||||||||||||||||||||||
Marine | Marine | Marine | Marine | |||||||||||||||||||||
Technology | Engineering | Grand | Technology | Engineering | Grand | |||||||||||||||||||
Business | Business | Total | Business | Business | Total | |||||||||||||||||||
Disaggregation of Total Net Sales | ||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Primary Geographical Markets | ||||||||||||||||||||||||
Americas | $ | 962,043 | $ | 589,560 | $ | 1,551,603 | $ | 1,709,901 | $ | 1,204,282 | $ | 2,914,183 | ||||||||||||
Europe | 1,649,281 | 1,392,764 | 3,042,045 | 838,783 | 810,178 | 1,648,961 | ||||||||||||||||||
Australia/Asia | 971,563 | - | 971,563 | 815,084 | - | 815,084 | ||||||||||||||||||
Middle East/Africa | 262,164 | - | 262,164 | 459,980 | - | 459,980 | ||||||||||||||||||
Total Revenues | $ | 3,845,051 | $ | 1,982,324 | $ | 5,827,375 | $ | 3,823,748 | $ | 2,014,460 | $ | 5,838,208 | ||||||||||||
Major Goods/Service Lines | ||||||||||||||||||||||||
Equipment Sales | $ | 2,151,520 | $ | 782,255 | $ | 2,933,775 | $ | 1,958,845 | $ | 436,864 | $ | 2,395,709 | ||||||||||||
Equipment Rentals | 713,389 | - | 713,389 | 630,468 | - | 630,468 | ||||||||||||||||||
Software Sales | 153,150 | - | 153,150 | 304,796 | - | 304,796 | ||||||||||||||||||
Engineering Parts | - | 1,093,176 | 1,093,176 | - | 1,300,618 | 1,300,618 | ||||||||||||||||||
Services | 826,992 | 106,893 | 933,885 | 929,639 | 276,978 | 1,206,617 | ||||||||||||||||||
Total Revenues | $ | 3,845,051 | $ | 1,982,324 | $ | 5,827,375 | $ | 3,823,748 | $ | 2,014,460 | $ | 5,838,208 | ||||||||||||
Goods transferred at a point in time | $ | 2,298,962 | $ | 670,255 | $ | 2,969,217 | $ | 2,263,641 | $ | 436,866 | $ | 2,700,507 | ||||||||||||
Services transferred over time | 1,546,089 | 1,312,069 | 2,858,158 | 1,560,107 | 1,577,594 | 3,137,701 | ||||||||||||||||||
Total Revenues | $ | 3,845,051 | $ | 1,982,324 | $ | 5,827,375 | $ | 3,823,748 | $ | 2,014,460 | $ | 5,838,208 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
JulyJanuary 31, 2022,2023 and October 31, 2021
NOTE 15 –DISAGGREGATION OF REVENUE (Continued)
For the Nine Months Ended July 31, 2022 | ||||||||||||
Marine | Marine | |||||||||||
Technology | Engineering | Grand | ||||||||||
Business | Business | Total | ||||||||||
Disaggregation of Total Net Sales | ||||||||||||
Primary Geographical Markets | ||||||||||||
Americas | $ | 4,109,260 | $ | 3,251,009 | $ | 7,360,269 | ||||||
Europe | 991,323 | 2,520,132 | 3,511,455 | |||||||||
Australia/Asia | 4,477,178 | - | 4,477,178 | |||||||||
Middle East/Africa | 1,741,553 | - | 1,741,553 | |||||||||
Total Revenues | $ | 11,319,314 | $ | 5,771,141 | $ | 17,090,455 | ||||||
Major Goods/Service Lines | ||||||||||||
Equipment Sales | $ | 6,945,001 | $ | 1,431,414 | $ | 8,376,415 | ||||||
Equipment Rentals | 1,726,760 | - | 1,726,760 | |||||||||
Software Sales | 691,422 | - | 691,422 | |||||||||
Engineering Parts | - | 2,918,181 | 2,918,181 | |||||||||
Services | 1,956,131 | 1,421,546 | 3,377,677 | |||||||||
Total Revenues | $ | 11,319,314 | $ | 5,771,141 | $ | 17,090,455 | ||||||
Goods transferred at a point in time | $ | 7,618,774 | $ | 1,431,416 | $ | 9,050,190 | ||||||
Services transferred over time | 3,700,540 | 4,339,725 | 8,040,265 | |||||||||
Total Revenues | $ | 11,319,314 | $ | 5,771,141 | $ | 17,090,455 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
July 31, 2022 and October 31, 2021
NOTE 15 –DISAGGREGATION OF REVENUE (Continued)
For the Nine Months Ended July 31, 2021 | ||||||||||||
Marine | Marine | |||||||||||
Technology | Engineering | Grand | ||||||||||
Business | Business | Total | ||||||||||
Disaggregation of Total Net Sales | ||||||||||||
Primary Geographical Markets | ||||||||||||
Americas | $ | 2,425,850 | $ | 1,703,464 | $ | 4,129,314 | ||||||
Europe | 4,440,036 | 2,769,707 | 7,209,743 | |||||||||
Australia/Asia | 4,466,796 | - | 4,466,796 | |||||||||
Middle East/Africa | 445,057 | - | 445,057 | |||||||||
Total Revenues | $ | 11,777,739 | $ | 4,473,171 | $ | 16,250,910 | ||||||
Major Goods/Service Lines | ||||||||||||
Equipment Sales | $ | 8,035,469 | $ | 1,096,718 | $ | 9,132,187 | ||||||
Equipment Rentals | 1,645,942 | - | 1,645,942 | |||||||||
Software Sales | 599,425 | - | 599,425 | |||||||||
Engineering Parts | - | 2,727,892 | 2,941,848 | |||||||||
Services | 1,496,903 | 648,561 | 1,931,508 | |||||||||
Total Revenues | $ | 11,777,739 | $ | 4,473,171 | $ | 16,250,910 | ||||||
Goods transferred at a point in time | $ | 8,666,514 | $ | 984,717 | $ | 9,651,231 | ||||||
Services transferred over time | 3,111,225 | 3,488,454 | 6,599,679 | |||||||||
Total Revenues | $ | 11,777,739 | $ | 4,473,171 | $ | 16,250,910 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
July 31, 2022, and October 31, 2021
NOTE 16 – COVID-19
The Company is continuing to face various risks related to the global outbreak of coronavirus disease (“COVID-19”).
The Engineering Services Business is dependent on its workforce and supply chain to deliver its products and services primarily to the U.S. and U.K. Governments. COVID-19 outbreaks among the workforce affect our ability to complete our projects within specified timeline and also increase the costs of such projects. Furthermore, costs of increase in labor due to a general shortage of labor or supply chain issues, may not be fully recoverable either from our customers or under existing insurance policies.
The Marine Technology Business is dependent on its workforce and/or distributors/resellers to sell and deliver its products and services. Travel restrictions introduced by governments in the areas in which we sell our solutions have impacted the Marine Products Business’s ability to deploy its workforce effectively. 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.
Further, the Pandemic may continue to affect the Company’s results of operation, financial position, and liquidity.
NOTE 17 – INCOME TAXES
The Company’s effective tax rate for the three months ended JulyJanuary 31, 2022,2023, and 20212022, was 13.4(2.6) % % and (15.215.7 %) % respectively. The increase in the effective tax rate for the three months ended July 31, 2022, as compared to July 31, 2021, resulted from the US companies becoming tax paying entities having used up their net operating loss carryforwards. We have been recording the US tax rate of 21%25% for the US companies. We have been recording the UK tax rate at 0.0% as we believe our R&D tax credits will offset any tax liability incurred.
The Company’s effective tax rate for the nine months ended July 31, 2022, and 2021 was 9.6 % and (14.2) % respectively. The increase in the effective tax rate for the nine months ended July 31, 2022, as compared to July 31, 2021, resulted from the US companies becoming tax paying entities having used up their net operating loss carryforwards. We have been recording the US tax rate of 21% for the US companies. We have been recording the UK tax rate at 0.0%as we believe our R&D tax credits will offset any tax liability incurred.
NOTE 18 -17 – RECLASSIFICATION OF PRIOR YEAR PRESENTATIONSUBSEQUENT EVENTS
Certain prior yearOn February 1, 2023 (with HSBC NA) and February 15, 2023 (with Jyske Bank), respectively, the Company established certified deposit interest-bearing accounts with its current bankers. These interest-bearing accounts are for rolling fixed short-term periods not exceeding 3 months. The table below indicates the applicable interest rates and amounts have been reclassified for consistency withwhich are held in certified deposit interest bearing accounts at the current year presentation. These reclassifications have no effect on the previously reported consolidated financial statements.date hereof:
SCHEDULE OF INTEREST RATES AND AMOUNTS HELD IN CERTIFIED DEPOSIT INTEREST BEARING ACCOUNTS
Currency Denomination | Amount | HSBC NA | Jyske Bank (Denmark) | |||||||||
USD | $ | 12,441,445.25 | 4.5% | |||||||||
Euro | € | 665,000 | 1.3 | % | ||||||||
British Pound | £ | 414,000 | 2.65 | % | ||||||||
Danish Kroner | DKK | 2,850,000 | 0.91 | % | ||||||||
USD | $ | 819,000 | 3.41 | % |
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.January 30, 2023. 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 our management’sthe best present assessment.assessment of our management.
General Overview
Throughout these discussions “Current Quarter” means the following terminologies listed immediately below are usedThree-month period ended January 31, 2023 and have“Previous Quarter” means the meanings ascribed to them in the said table.Three-month period ended January 31, 2022.
We operateThe Company operates two distinct business operations.businesses. These are:
● | the Marine Technology Business (also referred to in this Form 10-Q as “Products Business”, | |
● | the Marine Engineering Business (also referred to in this Form 10-Q as “Engineering Business”, or “Services Business” or “Services Segment”). |
Our Marine Technology Business is an established technology solution provider to the subsea and underwater imaging, surveying and diving market. It has been operating as a supplier of solutions comprising both hardware and software products for over 25 years to this market and it owns key proprietary technology including real time volumetric 3D Imaging Sonarimaging sonar technology and cutting-edge diving technology, that are used in both 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), offshore oil and gas, forward looking obstacle avoidance, complex underwater mapping, salvage operations, dredging, bridge inspection, underwater hazard detection, port security, mining, fisheries, commercial and defense diving, and marine sciences sectors.
Our novel diving technology is distributed under the name “CodaOctopus® DAVD” (Diver Augmented Vision Display) to the global defense and commercial diving markets.markets and is new to the market. The DAVD embeds inside of the diver Head up Display (HUD) a pair of transparent glasses on which different types of information is rendered inused as the data hub for displaying real time.time data to the diver. We believe that the DAVD system has the potential to radically changetransform how diving operations are performed globally because it deliversprovides a fully integrated singular system for topside control and a fully connected HUD system for the diver allowing both the topside and diver to share a range of critical information including depth (pressure and temperature), compass and head tracking, real time dive timers and alerts, diver position and navigation, ultra-low light enhanced video system and enhanced digital voice communications. Limitations of current diving operations are that the diver only shares analog voice communications with the topside and there is no real time information platformincluding real time navigation, tracking and mapping of the dive area. The topside must also manage several independent systems for both diversvideo, communications, and dive supervisors, allowspositioning. The Company’s solution addresses these deficiencies. Importantly also, using our sonar technology, diving operations tocan be performed in zero visibility water conditions, provides real time mapping of the dive area and serves as an important evidential record of the dive operations completed.
a common problem which besets these operations.
Although we generate most of our revenues from our real time 3D sonar which includes both proprietary hardware and software, we have a number of other products inwhich we supply to the subseamarine offshore market such as our inertial navigation systems (F180 Series® and F280(F280 Series®) and our geophysical hardware (DA4G) and software solutions (GeoSurvey and Survey Engine®, which include artificial intelligence based automatic detection systems.systems). Our customers include offshore service providers to major oil and gas companies, renewable energy companies, underwater construction companies, law enforcement agencies, ports, mining companies, defense bodies, prime defense contractors, navies, research institutes and universities and diving companies.
Our Services Business acts primarily as a sub-contractor to prime defense contractors. It engineers sub-assemblies which are utilized in broader defense programs. The Services Business has operations in the USA and UK. Its central business model is theworking with Prime Defense Contractors to 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. Such status permits it to supply these sub-assemblies and upgrades in the event of obsolescence or advancement of technology for the life of the MCIS program. Clients include prime defense contractors such as Raytheon, Northrop Grumman, Thales Underwater and BAE Systems. The scope of services provided by the Services Business encompasses concept, design, prototype and manufacturing.
Key Pillars for our Growth Plans
Our volumetric real time imaging sonar technology and our DAVD are our most promising products for the Group’sCompany’s near-term growth.
Our real time 3D/4D/5D/6D imagingImaging sonars are the only underwater imaging sonars which are capable of providing not only complex seabed mapping, but inspectingreal time inspection and monitoring in real timeand providing 3D/4D/5D and 5D/6D data of moving underwater objects underwater irrespective of water conditions including in zero visibility water conditions (a perennial(which is a common and costly problem in underwater operations). Competing technologyproducts such as the multibeam sonar can perform mapping (but not complex mapping) without the ability to perform real time 3D inspection placement and monitoring of moving objects underwater. Furthermore, weWe also believe our Echoscope PIPE®is the only technology that can generate multiple real time 3D/4D/5D and 5D/6D acoustic images of moving objects underwater using different acoustic parameters such as frequency, field of view, pulse length, and acoustic filters. Our previous generation of Echoscope® sonars are capable of imaging one underwater object in real time 3D whereas Echoscope PIPE® is capable of imaging multiple underwater objects simultaneously in real time 3D using different acoustic parameters such as range, frequency, field of view, pulse length and acoustic filters. Echoscope PIPE® enables the consolidation of imaging sensors. This new technology can generate different types of 3D images for different parts of the surveying team simultaneously. This improves productivity gains and also reduces operation costs.
In the industry in which we operate, we are widely considered the leading solution providers for underwater real time 3D visualization.
We also believe that the DAVD system is poised to radically change the way diving operations are performed globally by advancing the methodsproviding a fully integrated suite of communication, ability to consume and use digital information andsensor data shared in real time imaging sonarby the dive supervisor on the surface and the diver. Current diving is done largely by voice command missions from the topside using disparate suite of systems for video data, thereby improving safetycommunications and reducing the costs of these operations. positioning.
The DAVD is now in early-stage adoption by different teams within the US Navy such as the underwater construction and salvage teams. teams and has been moved from R&D phase to operational phase. Operational phase means that this is now a standard item available for purchase and for which budget lines are established within the various user commands within the Navy.
The concept of utilizing a pair of transparent glasses in the Head Up Display (HUD) underwater, is protected by patent. The DAVD HUD is manufactured and distributed by the Company under exclusive license from the United States Department of the Navy at Naval Surface Warfare Center Panama City Division. The otherAll component parts of the DAVD system are proprietary to the Company and include software (4G USE®), Diver Processing Pack – telemetry system (DPP), Top Side Controller and real time 3D Sonar. Our most recent system,The Company benefits from the GEN 3exclusive license from the United States Department of the Navy at Naval Surface Warfare Center Panama City Division to exploit the utility patent covering the concept of using the pair of transparent glasses as a data hub underwater. The DAVD is an “Approved Navy Use” item. Barriers to the roll out of the DAVD and broader market adoption have been Pandemic-related. A pre-requisite of adoption is in person demonstration and training. Travel restrictions have hindered us since 2020. However, in the Current Quarter we have been getting more opportunities to travel and work with potential adopters of the technology.
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 in the Current Quarter
OurFollowing 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, covers factors affecting our business and are incorporated by reference herein. Set out immediately below are additional factors that affect our business in the Current Quarter:2022.
Cumulative Supply Chain Issues
The biggest challenge for the Company in the Current Quarter is the ongoing shortage of components in the market. We are experiencing a very high percentage of unavailability of routine items required for the manufacture of our products and solutions and crippling lead times being quoted from anywhere between six months to a year. Furthermore, we are experiencing significant price increases for all our raw materials and components. Price increases sometimes exceed 100%. The significant price increases may adversely impact on our margins and net income, unless these increased prices are fully absorbed by customers. The unavailability of components and raw materials may also affect the utilization of our production staff and increase our cost of operations. Unless we have raw materials for the manufacture of our products available, we cannot manufacture systems.
The general shortage of components in the market impacts our Services Business more acutely given the prototyping nature of its business which does not lend itself to pre-emptive forward buying. The very nature of prototyping means that any requisite components are unknown until the prototype requirements are finalized and an order is placed by the customer. Therefore, these components cannot be pre-emptively purchased until contract award or a letter of intent is received.
Additionally, our customers are also experiencing supply chain problems. This impacts on their ability to progress to the point of placing orders for the sub-assemblies that we typically design and manufacture for them. Consequently, this delays orders and impacts the level of order take by the Business.
Pandemic
Our operationsWe continue to be impacted by the ongoing Coronavirus outbreak with its various mutations (“Pandemic”), which in turn continues to impact the demand for our goods and services. The main impactsexperience shortage of the Pandemickey electronic components in the Current Quartermarket and suppliers are constraints on travel to key countriesstill quoting lead times as long as 12 months out for routine components, including FPGAs (Field Programmable Gate Arrays). The unavailability of components affects our business development and also an increase in thea number of employees off work due to the infection which also increases our operations costs. While some Asian countries, including Japan, have started to allow foreigners to visit, there are still many pre-visit compliance processes that result in significant travel constraints. For example, China still has a 10-day quarantine period which makes it very challenging to visit our customers for business development with this quarantine policy in place.ways, including:
Ø | Our ability to progress ongoing projects including customer projects, particularly on the Engineering Segment. | |
Ø | Significant increase in prices because demand exceeds supply for these components. | |
Ø | Our ability to manufacture systems in our Products Business. | |
Ø | Our ability to fully utilize our Production staff, as critical parts are unavailable. | |
Ø | Our ability to perform outstanding contractual obligations in the Engineering Business. |
Inflation
Inflation measured as the Consumer Price Index is significant in the countries in which we operate. For the group’s foreign subsidiaries operate. In the twelve months to July 2022, these were:12-month period preceding January 2023, this was:
Denmark | ||
UK 10.1% - source: Office of National Statistics; and | ||
USA |
Inflation affects our business in a number of areas including increasing our cost of operations and our bill of material costs for the costs of our operationsproducts we sell and therefore our overall financial results. See the section of the MD&A section which concerns “Inflation and Foreign Currency”.
Currency Fluctuations
The Company has operations in the UK, USA, Denmark, Australia and India. Our consolidated results include the Company’s foreign subsidiaries results which are translated into USD, our reporting currency. Revenue and expenses are translated using the weighted average exchange rates in effect during the reporting period. In the Current Quarter the USD has strengthened against major currencies including the British Pound, Euro, Danish Kroner and Indian Rupees (the functional currencies of the Company’s foreign subsidiaries). A significant part of our consolidated results is transacted in British Pounds and Danish Kroner and translated into USD ourfor reporting currency.purposes. In the Current Quarter, for the purposes of reporting revenues and expenses, the value of the Pound and Euro (the Danish Kroner is pegged to the Euro) respectively fell 11.8%9.5% and 12.6%5.8%, against the USD, when compared to the Previous Quarter. For the reporting of assets and liabilities, the Pound fell 12.4%8.3% when compared to the Previous Quarter.Quarter and the Danish Kroner fell 3.1% over the same period. The impact of currency fluctuations including the impact of the Pound falling, is discussed more fully below in the section which concernsunder “Inflation and Foreign Currency”. See also Note 45 (Foreign Currency Translation) to the Unaudited Consolidated Financial Statements and the section of this report which concerns “Inflation and Foreign Currency” and also Note 14 and 15 (Segment Analysis and Disaggregation) showing more detailed information on each Segment financial results and the disaggregation of our revenues by geography. .
Skills/Resource Shortages and Pressure on Salaries and Wages
We are experiencing skill shortages in areas that are critical to our growth strategy including experienced sales and marketing personnel, software developers and software developers. Due to theskilled electronic technicians. The inflationary conditions in the countries in which we operate (US, the UK, Denmark and India), there are significant pressures on wages making make it difficult for us to attract staffcompete for these skills as there is extreme pressure on wages.
Concentration of Business Opportunities Where the Sales Cycle is Long and Unpredictable
The Services Business revenues are highly concentrated and are generated from sub-contracts with Prime Defense Contractors. The sales cycle is generally protracted and this may affect quarterly revenues. It is also risking retentiondependent on the federal government appropriating budget for defense projects and where the federal government is unable to find consensus in the US Congress, this affects the timely award of skills.sub-contract from Prime Defense Contractors to our Services Business, which is reliant on these awards. Furthermore, the Products Business key opportunities which are critical to its growth strategy are in the Defense Market for both its imaging sonars and the DAVD both of which are key pillars of the Company’s growth strategy. Due to the protracted nature of the government procurement process and cycle for defense spending under federal and/or state budgets, the sales cycle can be long and unpredictable, thus affecting timing of orders and thus quarterly revenues.
Impact on Revenues and Earnings
We are uncertain as to the extent thatof the impact the factors reported immediatelydisclosed above and those onin our Form 10-K for thecovering fiscal year ended October 31, 20212022 will have on our future financial results. Inflation may increase the cost of operations including wages and salaries and the increase in raw materials and components may affect our gross profit margins negatively and our overall financial results. The unavailability of components may result in under-utilization of our resources or delay in converting orders into revenues, which in turn may increase the cost of operations. Overall, inflation, shortage of components and currency fluctuations may adversely impact on our financial results.
Impact on Liquidity, Balance Sheet and Assets
Failure to curb the Pandemic in the near future, or address inflation and the global supply chain issuesThese factors may adversely affect theimpact on our availability of our free cash flow, working capital earnings and business prospects. As of JulyJanuary 31, 2022,2023, we had cash and cash equivalents of approximately $21,370,920.$24,522,383 and in the Current Quarter we generated $984,886 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 StatementsAnnual Report on Form 10-K for the fiscal year ended October 31, 2021.2022.
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.
Regarding our Products Segment,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, 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 unaudited consolidated financial statements and Note 2 “Summary of Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.2022.
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-contractcontract 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.
Income Taxes
The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 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 US generally accepted accounting principles.GAAP.
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 consider events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. There were no impairment charges during the periods presented.
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.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.
Summary of Consolidated Results of Operations in the Current Quarter
Our consolidated financial results include the results of the Company’s foreign subsidiaries. Foreign subsidiaries results are translated from their functional currencies to USD for reporting purposes. Fluctuations in currency can therefore impact our translated revenue. One factor in the Current Quarter were up onis that the translated revenue of the Company’s foreign subsidiaries was impacted by currency fluctuations as a result of the strengthening of the USD against the Pound and the Danish Kroner. During the Current Quarter our consolidated revenue was $5,596,284 compared to $5,838,208 in the Previous Quarter. This is attributed toQuarter, representing a decrease of 4.1%. However, applying the same exchange rate as the Previous Quarter, revenue of our foreign subsidiaries would have increased by $342,146 resulting in an increase in our revenues by 7.6%. in conjunction with a fall in total operating expenses by 12.1%. Income from Operations increased by 53% and net income before tax increased by 54.8% and was $2,043,457consolidated revenue in the Current Quarter compared to $1,320,248 in the Previous Quarter. In the Current Quarter although we recorded a tax expense of $274,800 compared to a tax benefit of $200,838 in the Previous Quarter, net income increased by 16.3% and was $1,768,657 compared to $1,521,086. We also recorded a higher loss on foreign currency translation adjustments, which affect Comprehensive Income, of $805,157 compared to a loss of $260,681 in1.7% over the Previous Quarter. During the Current Quarter total operating expenses fell by 13.5% and Income from operations fell by 2.2%. This was affected by the USD, our reporting currency strengthened significantly against major currencies including the functional currencieshigh percentage of agents’ commissions incurred on sales of our foreign subsidiariestechnology in Asia in the Current Quarter – which make up a significant partwere $486,341 compared to $138,372 in the Previous Quarter, representing an increase on commission recorded of our consolidated results. See Note 4 (Foreign Currency Translation)251% over the Previous Quarter (see Notes 14 and 15 to the sectionUnaudited Consolidated Financial Statements for more information on Segment reporting and Disaggregation of the MD&A which concerns “InflationRevenue by Segment and Foreign Currency”geography). Net income before taxes fell by 5.7% and was $1,361,861 compared to $1,444,648 and net income after taxes was $1,397,857 compared to $1,217,248, representing an increase of 14.8%.
Segment Summary
Products Business
In the Current Quarter, the Products Business generated $4,004,557$3,824,159 or 63.9%68.3% of our consolidated revenues compared to $3,845,051$3,823,748 or 66%65.5% in the Previous Quarter representing an increaseand was broadly in line with the Previous Quarter. Although in its native currency the foreign subsidiaries revenue increased over the Previous Quarter, the USD equivalent was reduced due to the sharp depreciation of 4.1%.the British Pound and Danish Kroner against the USD. Gross Profit Margin increasedfell by 15% and was 86.7%72% in the Current Quarter compared to 85.8%85% in Previous Quarter. InQuarter due to the significant agents’ commissions we incurred on sales. A significant proportion of the Products Business’ sales in the Current Quarter was conducted through sales agents due to geographic location of sales (Asia) and we sold less units through agents which resulted in a reduction in commissions on sales. We recorded $33,001 for commission of $486,341 in the Current Quarter compared to $61,540$138,372 in the Previous Quarter, representing a reduction of 46.4%251% increase in commission. This modestly improved our margins in the Current Quarter.this area. In the Current Quarter Total Operating Expenses fell in the Products Business by 4.7%14.3% and was $1,337,057$1,100,067 compared to $1,403,226$1,282,989 in the Previous Quarter. Net income before taxes increased by 13.2% and was $2,149,724 compared to $1,899,552 in the Previous Quarter.
Services Business
In the Current Quarter, the Services Business generated $2,262,852$1,772,125 or 36.1%31.7% of our consolidated revenues compared to $1,982,324$2,014,460 or 34%34.5% in the Previous Quarter, representing an increasea fall in sales of 14.2%12%. The main factor in the fall in sales in the Services Business is that it is experiencing delays in both closing contracts and progressing existing contracts with its prime defense contractor customers due to supply chain issues. A number of projects have stalled due to component shortage and also several of its key opportunities have stalled in the Current Quarter due to ongoing supply chain issues. This has resulted in a fall in the revenues of this segment in the Current Quarter. Gross Profit Margin was 48.2%56% compared to 46.0%45%, representing an increasereflecting the types of 2.2%.engineering projects performed during the reporting period. Total Operating Expenses fell by 11.1%17.9% and was $672,916$652,460 compared to $757,089. In the Current Quarter the Services Business realized net income before taxes of $421,631 compared to $155,164 in the Previous Quarter, representing an increase of 171.7%.$794,664.
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 $6,267,409$5,596,284 and $5,827,375$5,838,208 respectively, representing an increasea decrease of 7.6%4.1%. The ProductsThis is caused by the Services Business revenue decreasing by 12.0% due to order take slowing because of supply chain issues on broader defense programs. This has resulted in delays in our customers placing orders. Additionally, the Company’s foreign subsidiaries revenues increasedwere impacted by 4.1% overcurrency fluctuations caused by the sharp depreciation of the Pound, Euro and Danish Kroner against the USD. A significant part of our revenues is derived from our foreign subsidiaries in the UK and Denmark and therefore for the purpose of our financial reporting, the functional currencies of these subsidiaries are translated into USD. Applying the same exchange rate as the Previous Quarter, and the Services Business revenuesrevenue of our foreign subsidiaries would have increased by 14.2% over$342,146 and be largely in line with the Previous Quarter.Quarter
Gross Profit Margins: Margin percentage was slightly strongerweaker in the Current Quarter at 72.8%67.1% (gross profit of $4,562,644$3,753,005) compared to 72.3%71.3% (gross profit of $4,212,409)$4,159,934) in the Previous Quarter. The main factor which affected Gross Profit Margins in the Current Quarter was the level of sales commission incurred. A significant percentage of recorded sales generated by the Products Business emanated from Asia and these were conducted through sales agents, resulting in increased commission level. For the Products Business we recorded $486,341 in commission in the Current Quarter compared to $138,372 in the Previous Quarter, representing an increase of 251%.
Gross Profit Marginsprofit margins reported in the reporting periodour financial results may vary according to a number ofseveral factors. These include:
● | The percentage of consolidated sales attributed to the | |||
● | 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 | |||
● | The mix of sales |
● | Outright | |||
● | Hardware | |||
● | ||||
● | Level of commissions on | |
● | Level of | |
● | The mix of |
Services Business
In the Current Quarter, Gross Profit Marginsgross profit margins for the Products Business were 72.2% compared to 85.0% in the Previous Quarter. For the Services Business these were 48.2% compared to 46.0% in the Previous Quarter reflecting more units of manufacturing than engineering design work packages in the Current Quarter.
Products Business
In the Current Quarter Gross Profit Margins for the Products operations were stronger56.0% in the Current Quarter at 86.7% compared to 85.8%45.1% in the Previous Quarter.
Since there are more variable factors affecting Gross Profit Marginsgross profit margins in the ProductsMarine Technology Business (Products Business), a table showing a summary of break-out of sales generated by the Products Businessthis business in the Current Quarter compared to the Previous Quarter is set out below:
Current Quarter Products | Previous Quarter Products | Percentage Change | Current Quarter Products | Previous Quarter Products | Percentage Change | |||||||||||||||||
Equipment Sales | $ | 2,928,019 | $ | 2,151,520 | Increase 36.1% | $ | 2,572,560 | $ | 1,958,845 | 31.3 | % | |||||||||||
Equipment Rentals | 380,984 | 713,389 | Decrease 46.6% | 265,903 | 630,468 | (57.8 | )% | |||||||||||||||
Software Sales | 252,204 | 153,150 | Increase 64.7% | 417,170 | 304,796 | 36.9 | % | |||||||||||||||
Services | 443,350 | 826,992 | Decrease 46.4% | 568,526 | 929,639 | (38.8 | )% | |||||||||||||||
Total Net Sales | $ | 4,004,557 | $ | 3,845,051 | Increase 4.1% | $ | 3,824,159 | $ | 3,823,748 | 0.0 | % |
In the Current Quarter the ProductsMarine Technology Business incurred commission costs of $33,001$486,341 compared to $61,540$138,372 in the Previous Quarter, representing a 46.4% fall, which improved Gross Profit Marginsan increase of 251%, resulting in the Current Quarter.gross profit margins being lower. A significant percentage of our sales in foreign territories such as South Korea, Japan and China are conducted through our sales agents and distributors.
Further information on the performance in the Current Quarter compared to the Previous Quarter of each Segmentbusiness segment including revenues by producttype and geography in the Current Quarter can be found in Notes 14 and Note 15 to the unauditedUnaudited Consolidated Financial Statements.
Research and Development (R&D): Total consolidated Research and DevelopmentR&D expenditures forin the Current Quarter were $577,953$444,458 compared to $675,766,$672,890 in the Previous Quarter, representing a decrease of 14.5%33.9%. The decrease is largely due to a decrease in these expenditures in the Services Segment. This is discussed more fully below.
Segment | January 31, 2023 | January 31, 2022 | Percentage Change | |||||||
Services Segment R&D Expenditures | $ | 6,150 | $ | 143,515 | Decrease of 95.7% | |||||
Products Segment R&D Expenditures | $ | 438,308 | $ | 529,375 | Decrease of 17.2% |
During the Current Quarter the Services BusinessThe decrease in R&D expenditures were ($27,904) compared to $135,213 in the Previous Quarter. This amount attributed tois a reflection that we had less R&D projects ongoing in the Current Quarter concerns an initial investment made by the Company in R&D that can now be attributed to subsequently awarded customer contract. In general, the fall in R&D expenditures in this business unit reflects a reduction in expenditures relating to the Thermite® product line development which had slowed due to the Pandemic. We are now re-engaging our customers who had the Thermite® on trial. One such trial which had stalled due to the Pandemic has re-started and we have received the order for a small quantity of prototypes. This is an important opportunity for the success of the Thermite® range since it is for a US Navy shipboard application and if we are successful would lead to downstream follow-on production order for multiple units. This would also be a new program and customer for the Services Segment. As we gain momentum on the Thermite and start to realize orders, we anticipate that R&D expenditures in this area will gradually increase.Quarter.
During the Current Quarter the Products Business R&D expenditures increased by 12.1% and were $605,857 as compared to $540,553 in the Previous Quarter. R&D expenditures are incurred by this business in connection with investments it makes in developing its products and solutions. These expenditures are an essential part of our business, as we need to continue to innovate around our solutions on an ongoing basis. Furthermore, in the Current Quarter the Product’s Segment R&D expenditures include an exceptional item of expenditure of $104,000 which represents accruals for sub-contractor’s costs for development of a new generation of an ASIC (Application-Specific Integrated Circuit) device for our sonar technology.
Segment | July 31, 2022 | July 31, 2021 | Percentage Change | |||||||
Services Segment R&D Expenditures | $ | (27,904 | ) | $ | 135,213 | Decrease 120.6% | ||||
Products Segment R&D Expenditures | $ | 605,857 | $ | 540,553 | Increase 12.1% |
Selling, General and Administrative Expenses (SG&A): SG&A expenses for the Current Quarter fell by 11.4% and was $1,960,978 compared7.0% to $2,213,821$1,962,451 from $2,111,112 in the Previous Quarter.
The fall in SG&A in the Current Quarter is largely due to a reduction in the Legal and Professional Fees by 22.5% and the recording of a significantly lower non-cash charge relating to stock compensation, which was $285,104$182,153 as compared to $451,629$325,175 in the Previous Quarter, representing a 36.9%44.0% reduction.
Within the category of SG&A we have transactions which are cash charges and non-cash charges. The non-cash charges comprise Depreciation, Amortization and Stock-based compensation charges. In the Current Quarter non-cash items as a percentage of SGASG&A expenses was 21.2%14.5% compared to 26.9%22.0% in the Previous Quarter.
Key Areas of SG&A Expenditure across the GroupCompany for the Current Quarter compared to the Previous Quarter are:
Expenditure | January 31, 2023 | January 31, 2022 | Percentage Change | |||||||
Wages and Salaries | $ | 847,514 | $ | 903,162 | Decrease of 6.2% | |||||
Legal and Professional Fees (including accounting and audit) | $ | 405,088 | $ | 359,018 | Increase of 12.8% | |||||
Rent for our various locations | $ | 12,712 | $ | 15,745 | Decrease of 19.3% | |||||
Marketing | $ | 20,442 | $ | 13,766 | Increase of 48.5% |
Expenditure | July 31, 2022 | July 31, 2021 | Percentage Change | |||||||
Wages and Salaries | $ | 983,029 | $ | 871,571 | Increase of 12.8% | |||||
Legal and Professional Fees (including accounting and audit) | $ | 200,268 | $ | 258,309 | Decrease of 22.5% | |||||
Rent for our various locations | $ | 15,389 | $ | 13,006 | Increase of 18.3% | |||||
Marketing | $ | 58,684 | $ | 23,879 | Increase of 145.8% |
The increaseAlthough in the Current Quarter “Wages and Salaries” reflectshave fallen, we believe on the increased costs associated withfull year basis this category will increase due to inflation and potential new hires to fill open positions. Our revision of salaries for the market conditions for employment. With inflationary pressures currently at unprecedented levelsFiscal Year 2023 will start to be recorded in our second quarter, due to the countries in which we operate including the USA and UK, we expect this area is likely to continue to increase to remain competitive in retaining and attracting staff.date when these increases became effective.
The decreaseincrease in the Current Quarter of “Legal and Professional” category of expenditures results fromreflects an adjustmentincrease in audit fees by $125,000 in the Current Quarter reflecting adjustment in our UK auditors’ fees.
In general, the categoryThe increase in marketing is anticipated within our plans. This is an area of “Rent” is not material for the Company asexpenditures which we own most of our premises and facilities. The current category of rent largely reflects our premises in Copenhagen which has been established to mitigate, as far as possible, the impact of the United Kingdom withdrawing from the European Union.
The Marketing Expenditures in both the Current Quarter and Previous Quarter are atypical of our projected Marketing Expenditures. Typically, our Marketing Expenditures reflect a range of marketing events such as participation in trade shows in different parts of the world, particularly in Europe, North America, Asia and the Middle East. Since the onset of the Pandemic in 2020, our marketing activities have been severely constrained due to the prevailing Pandemic-related travel restrictions on these countries resulting in decreased expendituresanticipate will increase materially in this area. However,fiscal year and subsequent years. As we are beginning to participate in more marketing events, and this has resulted in an increase of Marketing expenditures in the Current Quarter. We expect this area to materially increase as we have shifted a large part ofshift our focus from R&D to business development and brand building.
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 increasedmarginally fell by 53%2.2% and was $2,023,713$1,346,096 as compared to $1,322,822$1,375,932 in the Previous Quarter. The increaseslight decrease in Operating Income is a result of an increasedue to the fall in our consolidated revenues and gross profit margins realized in the Current Quarter by 7.6% compared to the Previous Quarter along with a reduction in Total Operating Expenses of 12.1% compared to the Previous Quarter.
Interest Expense: The Company paid no interest in the Current Quarter compared to interest expense of $6,145 in the Previous Quarter, representing a 100% reduction in this area of expenditure. In the Previous Quarter, the HSBC NA loan was still outstanding. We have since repaid these amounts in full and as such we do not expect this category to be material.
Other Income: In the Current Quarter, we had $19,744 as “Other Income”Other Income of $15,765 compared to $3,571 in$68,716, representing a decrease of 77.1% from the Previous Quarter. In the Current Quarter $12,861 of this amount represents interest earned on our deposits. We have established certified deposit accounts with our bankers and would expect that interest earned will be material in the amounts in Other Income reflect payments received for renting a surplus car parking space and also use of the Company’s apartment when not used by staff members.future. See Note 17 (“Subsequent Events”) where we discuss this further.
Net Income before income taxes: In the Current Quarter, we realized Net Incomehad income before income taxes of $2,043,457$1,361,861 as compared to $1,320,248$1,444,648 in the Previous Quarter, representing a decrease of 5.7%. Net income before income taxes fell due to the decrease in our consolidated revenues compounded by the decrease in Gross Profit Margins in the Current Quarter.
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Net Income: In the Current Quarter we had Net Income of $1,397,857 compared to $1,217,248 in the Previous Quarter, representing an increase of 54.8%14.8%. The increase in net income before taxes is due to an increase in our consolidated revenuesIn the Previous Quarter we recorded Current Tax Expense of $285,609 and in the Current Quarter we recorded Current Tax Benefit of 7.6% with Gross Profit Margins being stronger,$35,996. The Company has utilized all its net operating losses carryforwards. Our tax liability included in conjunction with a decrease in Total Operating Expenses by 12.1% overour consolidated financial results will depend on the Previous Quarter.
Net Income: composition of our consolidated income, whether they relate to the Company’s foreign subsidiaries or US subsidiaries and similarly the percentage of consolidated income from US and Foreign subsidiaries. In the Current Quarter, the Company realized netand its US subsidiaries had no taxable income. The UK companies have carryforward losses which will be applied to defray income of $1,768,657 as compared to $1,521,086 intax liability and therefore no provision has been made for tax liability for the Previous Quarter, representing an increase of 16.3%, even though the Company recorded an Income Tax Expense of $274,800 compared to an Income Tax Benefit of $200,838 in the Previous Quarter. The increase in net income is a result of an increaseforeign subsidiaries in our consolidated revenues by 7.6% in conjunction with a decrease in Total Operating Expenses by 12.1% inresults for the Current Quarter compared to the Previous Quarter.
Comprehensive Income (loss). In the Current Quarter, Comprehensive Income was $963,500 compared to $1,260,405 for the Previous Quarter reflecting significant adjustments resulting from foreign currency translations. This category is affected by fluctuations in foreign currency exchange transactions both relating to our profit and loss expenses and valuation of our assets and liabilities comprised within our balance sheet. In the Previous Quarter we realized a loss on foreign currency translation adjustments relating to these transactions of $260,681 compared to a loss on these transactions in the Current Quarter of $805,157. In the Current Quarter the USD has strengthened against major currencies including the British Pound, Euro, Danish Kroner and Indian Rupees (the functional currencies of our foreign operations). A substantial part of these losses are paper losses associated with re-valuation of our foreign subsidiaries balance sheet. A significant part of the Company’s operations is based in the UK, and therefore a significant part of our financial transactions is performed in Pounds which are translated into USD for reporting purposes. In the Current Quarter, the Pound has fallen significantly against the USD. This is a key factor in the loss relating to foreign currency translations transactions in the Current Quarter. See Table 1 under the section which concerns “Inflation & Foreign Currency” which shows the impact of the currency adjustments on the Income Statement and the Balance Sheet in the Current Quarter compared to the Previous Quarter.
Results of Operations for the Current Nine Month Period compared to the Previous Nine Month Period
Revenue: Total consolidated revenues for the Current Nine Month Period and the Previous Nine Month Period were $17,090,455 and $16,250,910 respectively, representing an increase of 5.2%. In the Current Nine Month Period, the Products Business revenues were $11,319,314 compared to $11,777,739, representing a 3.9% reduction over the Previous Nine Month Period. The Services Business revenues in the Current Nine Month Period and the Previous Nine Month Period were 5,771,141 and $4,473,171, representing an increase of 29%.
Gross Profit Margins: Consolidated Margin percentage was lower in the Current Nine Month Period at 68.8% (gross profit of $11,754,284) compared to 69.4% (gross profit of $11,276,935). This is largely because Gross Profit Margins for the Services Business for the Current Nine Month Period was lower at 40.8% compared to 43.8% in the Previous Nine Month Period. This is discussed more fully below.
Gross Profit Margins in the reporting period vary according to several factors, including:
Services Business
Gross Profit Margins for the Services Business were lower at 40.8% in the Current Nine Month Period compared to 43.8% in the Previous Nine Month Period. In the Current Nine Month Period 24.8% of the Services Business revenues ($1,431,414) is attributable to an engineering project which carries a lower than typical Gross Profit Margin. This project has afforded the Company an opportunity to serve a new market sector (motor racing) with a prestigious customer which we believe will open other opportunities with this customer and in this sector. This mix has impacted on the overall Gross Profit Margins of the Services Business
Products Business
Gross Profit Margins for the Products Business were higher in the Current Nine Month Period at 83.0% compared to 79.1% in the Previous Nine Month Period. In the Current Nine Month Period more units of sales were made via our agents’ network which resulted in an increase in commissions which were 3.5% higher at $434,005 in the Current Nine Month Period compared to $419,276 in the Previous Nine Month Period, which marginally impacted margins in the Products Business.
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 Nine Month Period compared to the Previous Nine Month Period is set out below:
Nine Month Period 2022 | Nine Month Period 2021 | Percentage Change | ||||||||
Equipment Sales | $ | 6,945,001 | $ | 8,035,469 | Decrease 13.6% | |||||
Equipment Rentals | 1,726,760 | 1,645,942 | Increase 4.9% | |||||||
Software Sales | 691,422 | 599,425 | Increase 15.3% | |||||||
Services | 1,956,131 | 1,496,903 | Increase 30.7% | |||||||
Total Net Sales | $ | 11,319,314 | $ | 11,777,739 | Decrease 3.9% |
In the Current Nine Month Period, the Products Business incurred commission costs of $434,005 compared to $419,276, representing a 3.5% increase.
Further information on the performance of each Segment including revenues by product and geography can be found in Notes 14 and 15 to the unaudited Consolidated Financial Statements.
Research and Development (R&D): R&D expenditures in the Current Nine Month Period were $1,768,221 compared to the $1,904,186 in the Previous Nine Month Period, representing a decrease of 7.1%.
During the Current Nine Month Period, the Services Business R&D expenditures decreased by 95.9%. In general, the fall in R&D expenditures in this business unit is a reflection of reduction in expenditures relating to the Thermite® product line development which had slowed due to the Pandemic. We are now re-engaging our customers who had the Thermite® on trial. One such trial which had stalled due to the Pandemic has re-started and we have received the order for a small quantity of prototypes. This is an important opportunity for the success of the Thermite® range since it is for a US Navy shipboard application and if we are successful would lead to downstream follow-on production order for multiple units. This would also be a new program and customer for the Services Segment. As we gain momentum on the Thermite and start to realize orders, we anticipate that R&D expenditures in this area will gradually increase.
During the Current Nine Month Period R&D expenditures in the Products Segment increased by 15.2% from $1,521,175 in the Previous Nine Month Period to $1,752,478. R&D expenditures are incurred by this business in connection with investments it makes in developing its products and solutions. These expenditures are an essential part of our business, as on an ongoing basis we need to continue to innovate around our solutions. In the Current Nine Month Period, Products Business R&D expenditures include an exceptional item of expenditure of $170,000 which represents accruals for sub-contractor’s costs for development of a new generation of an ASIC (Application-Specific Integrated Circuit) device for our sonar technology.
Segment | July 31, 2022 | July 31, 2021 | Percentage Change | |||||||
Services Segment R&D Expenditures | $ | 15,743 | $ | 383,011 | Decrease of 95.9% | |||||
Products Segment R&D Expenditures | $ | 1,752,478 | $ | 1,521,175 | Increase of 15.2% |
Selling, General and Administrative Expenses (SG&A): SG&A expenses for the Current Nine Month Period increased to $6,116,085 from $5,824,046 in the Previous Nine Month Period, representing an increase of 5.0%.
The increase in SG&A in the Current Nine Month Period is due to several factors. These include increase in wages and salaries and increase in Legal and Professional Fees. In addition, in the Previous Nine Month Period we recorded contributions of $131,788 under the UK Government’s Pandemic Relief Program, the Coronavirus Job Retention Scheme (CJRS) which reduced payroll expenditures in the Previous Nine Month Period and therefore SG&A. In the Current Nine Month Period, we recorded no such contributions.
SG&A includes transactions which are cash charges and non-cash charges. The non-cash charges comprise Depreciation, Amortization and Stock-based compensation charges. In the Current Nine Month Period non-cash items as a percentage of SGA was 26.6% compared to 27.4% in the Previous Nine Month Period.
In the Current Nine-Month Period, stock compensation expenditures (a non-cash charge) increased by 28.2% and were $975,847 compared to $761,233 in the Previous Nine Month Period.
Key Areas of SG&A Expenditure across the Group for the Current Quarter compared to the Previous Quarter are:
Expenditure | July 31, 2022 | July 31, 2021 | Percentage Change | |||||||
Wages and Salaries | $ | 2,826,651 | $ | 2,501,636 | Increase 13.0% | |||||
Legal and Professional Fees (including accounting and audit) | $ | 949,504 | $ | 853,154 | Increase 11.3% | |||||
Rent for our various locations | $ | 45,876 | $ | 31,289 | Increase 46.6% | |||||
Marketing | $ | 210,057 | $ | 67,325 | Increase 212.0% |
In the Previous Nine Month Period, “Wages and Salaries” included $131,788 which reflected the contributions under the UK Government’s CJRS scheme. In real terms therefore this category of expenditures has increased by 7.34% in the Current Nine Month Period when compared to the Previous Nine Month Period. In the Current Nine Month Period our management head count has increased to reflect that we now have a divisional CEO of our Services Business in Utah and also a new CFO. In the Previous Nine Month Period, these roles were consolidated and performed by our Previous CFO. Going forward therefore wages and salaries will reflect this increase in Management salaries.
The increase in the “Legal and Professional” category of expenditures in the Current Nine Month Period reflects an increase in the costs of our accounting and audit services fees as we have added additional resources to this area of our business.
In general, the category of “Rent” is not material for the Company as we own most of premises and facilities. The current category of rent largely reflects our premises in Copenhagen and storage facility that we maintain for our business operations.
Our marketing comprises a raft of activities which include trade shows in different parts of the world, particularly in Europe, North America, Asia and the Middle East. In the Previous Nine Month Period our marketing activities had been severely constrained due to the Pandemic which prevented activities such as travel to customer or attending trade shows. We are now participating in more marketing related events. However, we are still significantly constrained and not back to pre-Pandemic levels of marketing activities due to the ongoing Pandemic-related constraints as they pertain to travel to key countries such as those in Asia where there are still significant restrictions on foreigners entering these countries. The nature of our offerings, particularly our technology solutions require us to be in close proximity with our customers including being able to physically demonstrate the performance of our solutions. Therefore, virtual meetings cannot substitute for the key requirements to be physically able to demonstrate our capabilities on water in the customer’s place of operation. As these barriers are removed including entry restrictions into these countries, we anticipate that this area of expenditures will materially increase and be more in line with our pre-Pandemic expenditures.
Operating Income: Our income from our operating activities in the Current Nine Month Period was $3,869,978 as compared to $3,548,703 in the Previous Nine Month Period which represents an increase of 9.1%. This reflects an increase in our revenues by 5.2% in the Current Nine Month Period over the Previous Nine Month Period.
Interest Expense: Interest expense in the Current Nine Month Period was $2,902 compared to $17,442 in the Previous Nine Month Period, representing a reduction of 83.4%. In the Previous Nine Month Period, we had a loan outstanding to HSBC NA which attracted interest expense. This has now been repaid in full and therefore we do not expect Interest Expense to be material for our business as we do not have any significant loans. Going forward, this category will typically reflect charges on our banking facilities such as Business credit cards.
Other Income: In the Current Nine Month Period, we had Other Income of $114,236 as compared to $723,942 in the Previous Nine Month Period. In the Previous Nine Month Period Other Income included $648,872 reflecting Pandemic-related contributions under the PPP. In the Current Nine Month Period, there are no such contributions. Without such contributions, this category is generally not material.
Net Income before income taxes: In the Current Nine Month Period, we had a net income before income taxes of $3,981,312 as compared to $4,255,203 in the Previous Nine Month Period, representing a fall of 6.4%. This fall is largely because in the Previous Nine Month Period net income before income taxes increased by the inclusion of $648,872 in “Other Income” which represented assistance received under the PPP. Without this PPP contribution in the Previous Nine Month Period, net income before income taxes in the Current Nine Month Period increased by 10.4%.
Net Income: In the Current Nine Month Period net income fell by 26.0 % to $3,597,208 from $4,857,863 in the Previous Nine Month Period. There are two factors which account for this reduction. In the Previous Nine Month Period net income increased by the inclusion of $648,872 in “Other Income” which represented assistance received under the PPP and in the Previous Nine Month Period we had a tax benefit of $602,660 compared to a tax expense of $384,104 in the Current Nine Month Period.
Comprehensive Income (loss). In the Current Nine Month PeriodQuarter Comprehensive income was $766,450$3,005,507 compared to Comprehensive Income of $5,821,507$1,458,398 for the Previous Nine Month PeriodQuarter reflecting significant adjustments resulting from foreign currency translations. This category is affected by fluctuations in foreign currency exchange transactions both relating to our profit and loss expenses and valuation of our assets and liabilities on our balance sheet. In the Previous Nine Month PeriodQuarter we had a gain of $963,644$241,150 on foreign currency translation adjustment transactions compared to a loss on these transactionsgain of $2,830,758$1,607,650 in the Current Nine Month Period. In the Current Nine Month Period, the USD has strengthened against most major currencies including the British Pound, Euro, Danish Kroner and Indian Rupees (the functional currencies of our foreign subsidiaries). A substantial part of these losses are paper losses associated with re-valuation of our foreign subsidiaries balance sheet.Quarter. A significant part of the Company’s operations is based in the UK and Denmark, and therefore a significantmajor part of our assets and liabilities recorded in our consolidated balance sheet and financial transactions is performed in Pounds which are translated from the functional currencies of these subsidiaries into USD for reporting purposes. In the Current Nine Month Period, the Pound has fallen significantly against the USD. This is a key factor in the reduction relating to foreign currency translations transactions in the Current Nine Month Period. See Table 2 under the section which concerns “Inflation & Foreign Currency” which shows the impact of the currency adjustments on our Income Statement and Balance Sheet in the Current Nine Month PeriodQuarter compared to the Previous Nine Month Period.Quarter.
Liquidity and Capital Resources
At JulyAs of January 31, 2022,2023, the Company had an accumulated deficit of $14,880,649,$12,778,779, working capital of $32,781,206$36,474,417, cash of $24,522,383 and stockholders’ equity of $42,791,370.$46,570,469. For the Nine Months Ended July 31, 2022,Current Quarter, the Company’s operating activities provided cash of $6,337,905.$984,866.
Financing Activities
Secured Promissory Note
On April 28, 2017, the Company and its wholly-owned US based subsidiaries, Coda Octopus Products, Inc. and Coda Octopus Colmek, Inc. (together, the “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 Loan was satisfied in full on December 28, 2021.
Revolving Credit Line
The Company entered into a $4,000,000 revolving line of credit with HSBC Bank NA on November 27, 2019, (renewed up to November 2022), with interest at the prime rate.prime. The outstanding balance on the line of credit was $0 as of JulyJanuary 31, 2022.2023. This revolving credit line will expire on November 26, 2023, unless renewed.
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Inflation and Foreign Currency
The Company maintains its books in functional currency. In this connection these are:currency, as follows:
● | US Dollars for US | |
● | British Pound for United Kingdom | |
● | Danish Kroner for our Danish | |
● | Australian Dollars for our Australian | |
● | Indian Rupees for our Indian |
See Note 5 (Foreign Currency Translation) of our Unaudited Consolidated Financial Statements for more information on the applicable rates used for our Balance Sheet transactions and Statement of Income and Comprehensive Income.
Fluctuations in currency exchange rates can affect the Company’s sales, profitability balance sheet valuation and financial position when the foreign currencies of its international operations are translated into US.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.
TheApplying the Constant Rate, the impact of currency fluctuations on the three months and nine months ended JulyJanuary 31, 2022,2023, is shown in Table 1 and Table 2 below. In this context “Constant Rates” is defined as:
For the purpose of Table 1 “Constant Rates” is defined as the prevailing exchange rate for balance sheet transactions in the Previous Quarter and weighted average exchange rate prevailing in the Previous Quarter for related revenues and expenses.
For Revenue and Expenses (Income Statement Transactions) | The Prevailing weighted average exchange rate in the Previous Quarter | |
For balance sheet transactions | The Prevailing exchange rate as of October 31, 2022 (the Balance Sheet Date”) |
Table 1: Three Months ended July 31, 2022Information is not specified for INR and AUD as there is limited scope of operations in these jurisdictions and therefore contributions are immaterial. However, the information for INR and AUD is included in the totals.
British Pounds based | Danish Kroner based | US Dollar | ||||||||||||||||||||||||||
Actual | Constant | Actual | Constant | Actual | Constant | Total | ||||||||||||||||||||||
Results $ | Rates $ | Results $ | Rates $ | Results $ | Rates $ | Effect $ | ||||||||||||||||||||||
Revenues | 2,431,323 | 2,687,865 | 1,371,456 | 1,457,060 | 3,802,779 | 4,144,925 | (342,146 | ) | ||||||||||||||||||||
Costs | 1,907,019 | 2,108,239 | 296,109 | 314,592 | 2,210,184 | 2,430,592 | (220,408 | ) | ||||||||||||||||||||
Net profit (losses) | 524,304 | 579,626 | 1,075,347 | 1,142,468 | 1,592,595 | 1,714,333 | (121,738 | ) | ||||||||||||||||||||
Assets | 22,847,165 | 21,350,036 | 4,146,903 | 3,771,741 | 27,025,529 | 25,150,688 | 1,875,056 | |||||||||||||||||||||
Liabilities | (1,800,852 | ) | (1,682,846 | ) | (71,667 | ) | (65,183 | ) | (1,871,399 | ) | (1,746,803 | ) | (124,475 | ) | ||||||||||||||
Net assets | 21,046,313 | 19,667,190 | 4,075,236 | 3,706,558 | 25,154,130 | 23,403,885 | 1,750,580 |
British Pounds | Australian Dollar | Danish Kroner | Indian Rupee | US Dollar | ||||||||||||||||||||||||||||||||||||||||
Actual | Constant | Actual | Constant | Actual | Constant | Actual | Constant | Actual | Constant | Total | ||||||||||||||||||||||||||||||||||
Results | Rates | Results | Rates | Results | Rates | Results | Rates | Results | Rates | Effect | ||||||||||||||||||||||||||||||||||
Revenues | 2,779,524 | 3,005,172 | - | - | 392,743 | 431,641 | - | - | 3,172,267 | 3,436,814 | (264,547 | ) | ||||||||||||||||||||||||||||||||
Costs | 2,116,993 | 2,288,856 | (123 | ) | (130 | ) | (9,993 | ) | (10,983 | ) | 32,751 | 22,505 | 2,139,628 | 2,300,348 | (160,720 | ) | ||||||||||||||||||||||||||||
Net profit (losses) | 662,531 | 716,317 | 123 | 130 | 402,736 | 442,624 | (32,751 | ) | (22,605 | ) | 1,032,639 | 1,136,465 | (103,826 | ) | ||||||||||||||||||||||||||||||
Assets | 21,542,823 | 24,597,369 | 31,814 | 33,412 | 3,003,536 | 3,488,577 | 13,785 | 14,597 | 24,591,958 | 28,133,955 | (3,541,997 | ) | ||||||||||||||||||||||||||||||||
Liabilities | (1,552,446 | ) | (1,772,567 | ) | (2,392 | ) | (2,512 | ) | (51,832 | ) | (60,202 | ) | (89,270 | ) | (94,525 | ) | (1,695,940 | ) | (1,929,806 | ) | 233,866 | |||||||||||||||||||||||
Net assets | 19,990,377 | 22,824,802 | 29,422 | 30,900 | 2,951,704 | 3,428,375 | (75,485 | ) | (79,928 | ) | 22,896,018 | 26,204,149 | (3,308,131 | ) |
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 $103,826$121,738 and decreasedincreased net assets by $3,308,131.
Table 2: Nine Months ended July 31, 2022
The impact of currency fluctuations on$1,750,580. In addition, the nine months ended July 31, 2022, is shown below. In this context “Constant Rates” is defined as the prevailingCompany recorded a transactional exchange rate for balance sheet transactions in the Previous Nine Month Period and weighted average exchange rate prevailing in the Previous Nine Month Period for related revenues and expenses.
British Pounds | Australian Dollar | Danish Kroner | Indian Rupee | USD | ||||||||||||||||||||||||||||||||||||||||
Actual | Constant | Actual | Constant | Actual | Constant | Actual | Constant | Actual | Constant | Total | ||||||||||||||||||||||||||||||||||
Results | Rates | Results | Rates | Results | Rates | Results | Rates | Results | Rates | Effect | ||||||||||||||||||||||||||||||||||
Revenues | 8,595,643 | 9,177,322 | - | - | 1,482,305 | 1,632,822 | - | - | 10,077,948 | 10,810,144 | (732,196 | ) | ||||||||||||||||||||||||||||||||
Costs | 6,908,773 | 7,376,297 | 24,450 | 25,970 | 99,033 | 109,089 | 7,673 | 7,916 | 7,039,929 | 7,519,272 | (479,343 | ) | ||||||||||||||||||||||||||||||||
Net profit (losses) | 1,686,870 | 1,801,025 | (24,450 | ) | (25,970 | ) | 1,383,272 | 1,523,733 | (7,673 | ) | (7,916 | ) | 3,038,019 | 3,290,872 | (252,853 | ) | ||||||||||||||||||||||||||||
Assets | 21,542,823 | 24,597,369 | 31,814 | 33,412 | 3,003,536 | 3,488,577 | 13,785 | 14,597 | 24,591,958 | 28,133,955 | (3,541,997 | ) | ||||||||||||||||||||||||||||||||
Liabilities | (1,552,446 | ) | (1,772,567 | ) | (2,392 | ) | (2,512 | ) | (51,832 | ) | (60,202 | ) | (89,270 | ) | (94,525 | ) | (1,695,940 | ) | (1,929,806 | ) | 233,866 | |||||||||||||||||||||||
Net assets | 19,990,377 | 22,824,802 | 29,422 | 30,900 | 2,951,704 | 3,428,375 | (75,485 | ) | (79,928 | ) | 22,896,018 | 26,204,149 | (3,308,131 | ) |
This table shows that the effectloss of constant exchange rates, versus the actual exchange rate fluctuations, decreased our net income in$72,649 during the Current Nine Months Period by $252,853 and decreased net assets by $3,308,131.Quarter.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. QualitativeQuantitative and QuantitativeQualitative 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 JulyJanuary 31, 2022.2023. Based upon that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effectiveineffective as of the end of the period covered by this report.report due to the material weakness previously identified in our Annual Report on Form 10-K filed on with the SEC on January 30, 2023.
The material weakness concerned a lack of adequate processes and procedures regarding the review of the elimination entries pertaining to the consolidation process.
We have implemented new controls and procedures that we believe will address the material weakness described above and will carefully monitor the effectiveness of these controls and procedures over the next several quarterly consolidations to determine their effectiveness in addressing the material weakness.
We have implemented additional qualitative and quantitative controls over eliminations including implementing metrics that will be compared to each quarter’s results and deviations from those metrics will be investigated before the consolidation is considered complete. We have also expanded the review of the quarterly and annual consolidation process.
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(b) Changes in Internal Controls.
There wasDuring the period covered by this report, except as disclosed above, there were no changechanges in our internal controls over financial reporting that has materially affected, or is reasonable likely to materially affect, ourthe Company’s internal control over financial reporting during(as defined in Rule 13a-15(f) and 15d–15(f) under the reporting period covered by this report.Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Item 6. Exhibits
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) |
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: | /s/ Annmarie Gayle |
Annmarie Gayle | |
Chief Executive Officer | |
Date: | /s/ Nathan Parker |
Nathan Parker | |
Chief Financial Officer |