UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended April 30, 2019

 

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   34-200-8348
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   Identification Number)

 

3300 S Hiawassee Rd., Suite 104-105, Orlando, Florida   32835
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code:   (863) 937 8985

 

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 [X] 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 [X]

 

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

 

The number of shares outstanding of issuer’s common stock, $0.001 par value as of June 13, 2019 is 10,415,416.

 

 

 

   
 

 

INDEX

 

  Page
PART I - Financial Information  
   
Item 1: Financial Statements 3
   
Consolidated Balance Sheets as of April 30, 2019 (Unaudited) and October 31, 2018 4
   
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Six Months Ended April 30, 2019 and 2018 (Unaudited) 6
   
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended April 30, 2019 and 2018 (Unaudited) 7
   
Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2019 and 2018 (Unaudited) 8
   
Notes to Unaudited Consolidated Financial Statements 9
   
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
   
Item 3: Quantitative and Qualitative Disclosures about Market Risks 38
   
Item 4: Controls and Procedures 38
   
PART II - Other Information  
   
Item 1: Legal Proceedings 39
   
Item 1A: Risk Factors 39
   
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 39
   
Item 3: Default Upon Senior Securities 39
   
Item 4: Mine Safety Disclosures 39
   
Item 5: Other Information 39
   
Item 6: Exhibits 39
   
Signatures 40

 

2
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

Unaudited Consolidated Financial Statements

For the Three and Six Months Ended April 30, 2019 and 2018

 

Contents

 

Consolidated Balance Sheets as of April 30, 2019 (Unaudited) and October 31, 2018 4-5
   
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Six Months Ended April 30, 2019 and 2018 (Unaudited) 6
   
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended April 30, 2019 and 2018 (Unaudited) 7
   
Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2019 and 2018 (Unaudited) 8
   
Notes to Unaudited Consolidated Financial Statements 9-28

 

3
 

 

CODA OCTOPUS GROUP, INC.

Consolidated Balance Sheets

April 30, 2019 and October 31, 2018

 

   2019   2018 
   Unaudited     
ASSETS          
CURRENT ASSETS          
           
Cash  $9,257,932   $7,512,422 
Accounts Receivable, Net   3,196,903    3,326,623 
Inventory   4,165,089    3,823,243 
Unbilled Receivables   3,782,785    3,013,116 
Other Current Assets   279,848    219,424 
Prepaid Expenses   282,608    227,479 
           
Total Current Assets   20,965,165    18,122,307 
           
FIXED ASSETS          
Property and Equipment, net   6,121,877    5,246,183 
           
OTHER ASSETS          
Goodwill and Other Intangibles, net   3,608,091    3,613,952 
Deferred Tax Asset   1,253,799    1,754,169 
           
Total Other Assets   4,861,890    5,368,121 
           
Total Assets  $31,948,932   $28,736,611 

 

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

 

4
 

 

CODA OCTOPUS GROUP, INC.

Consolidated Balance Sheets (Continued)

April 30, 2019 and October 31, 2018

 

   2019   2018 
   Unaudited     
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
           
Accounts Payable  $1,195,653   $988,148 
Accrued Expenses and Other Current Liabilities   556,170    685,454 
Loans and Note Payable, current   476,241    964,695 
Deferred Revenue, current   619,519    602,914 
           
Total Current Liabilities   2,847,583    3,241,211 
           
LONG TERM LIABILITIES          
           
Deferred Revenue, long term   143,587    48,906 
Loans and Note Payable, long term   817,735    1,059,544 
           
Total Long Term Liabilities   961,322    1,108,450 
           
Total Liabilities   3,808,905    4,349,661 
           
STOCKHOLDERS’ EQUITY          
           
Common Stock, $.001 par value; 150,000,000 shares authorized, 10,671,524 and 10,640,416 shares issued and outstanding as of April 30, 2019 and October 31, 2018, respectively   10,672    10,641 
Additional Paid-in Capital   58,747,081    58,599,378 
Accumulated Other Comprehensive Loss   (1,835,827)   (2,228,663)
Accumulated Deficit   (28,781,899)   (31,994,406)
           
Total Stockholders’ Equity   28,140,027    24,386,950 
           
Total Liabilities and Stockholders’ Equity  $31,948,932   $28,736,611 

 

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

 

5
 

 

CODA OCTOPUS GROUP, INC.

Unaudited Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

For the Periods Indicated

 

   Three Months Ended April 30,   Six Months Ended April 30, 
   2019   2018   2019   2018 
                 
Net Revenues  $6,783,272   $3,526,396   $12,541,780   $6,576,953 
                     
Cost of Revenues   2,058,610    940,858    4,284,046    1,886,965 
                     
Gross Profit   4,724,662    2,585,538    8,257,734    4,689,988 
                     
OPERATING EXPENSES                    
                     
Research & Development   745,227    640,477    1,316,553    1,311,016 
Selling, General & Administrative   1,696,682    2,025,630    3,315,957    3,531,387 
                     
Total Operating Expenses   2,441,909    2,666,107    4,632,510    4,842,403 
                     
INCOME (LOSS) FROM OPERATIONS   2,282,753    (80,569)   3,625,224    (152,415)
                     
OTHER INCOME (EXPENSE)                    
Other Income   26,228    84,015    59,069    90,670 
Interest Expense   (24,347)   (80,741)   (49,408)   (183,489)
                     
Total Other Income (Expense)   1,881    3,274    9,661    (92,819)
                     
NET INCOME (LOSS) BEFORE INCOME TAXES   2,284,634    (77,295)   3,634,885    (245,234)
                     
INCOME TAX BENEFIT (EXPENSE)                    
Current Tax Benefit (Expense)   24    (30)   77,991    (30)
Deferred Tax (Expense)   (311,164)   -    (500,369)   - 
                     
Total Income Tax Expense   (311,140)   (30)   (422,378)   (30)
                     
NET INCOME (LOSS)  $1,973,494   $(77,325)  $3,212,507   $(245,264)
                     
NET INCOME (LOSS) PER SHARE:                    
Basic  $0.18   $(0.01)  $0.30   $(0.03)
Diluted  $0.18   $(0.01)  $0.30   $(0.03)
                     
WEIGHTED AVERAGE SHARES:                    
Basic   10,671,443    10,353,876    10,665,970    9,754,033 
Diluted   10,671,443    10,353,876    10,665,970    9,754,033 
                     
NET INCOME (LOSS)  $1,973,494   $(77,325)  $3,212,507   $(245,264)
Other Comprehensive Income (Loss)                    
                     
Foreign Currency Translation Adjustment   94,981    (381,001)   392,836    574,936 
                     
Total Other Comprehensive Income (Loss)   94,981    (381,001)   392,836    574,936 
                     
COMPREHENSIVE INCOME (LOSS)  $2,068,475   $(458,326)  $3,605,343   $329,672 

 

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

 

6
 

 

CODA OCTOPUS GROUP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For the Three and Six Months Ended April 30, 2019 and 2018

 

                       Accumulated         
   Preferred Stock           Additional   Other         
   Series C   Common Stock   Paid-in   Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Income (Loss)   Deficit   Total 
                                 
Balance, October 31, 2017 (Audited)   1,000   $1    9,136,121   $9,136   $52,839,651   $(2,038,431)  $(36,982,937)  $13,827,420 
                                         
Stock Issued to  Investors   -    -    1,125,950    1,126    4,953,054    -    -    4,954,180 
Foreign currency translation adjustment   -    -    -    -    -    955,937    -    955,937 
Net Loss   -    -    -    -    -    -    (167,939)   (167,939)
Balance, January 31, 2018   1,000    1    10,262,071    10,262    57,792,705    (1,082,494)   (37,150,876)   19,569,598 
Stock Issued to  Investors   -    -    77,777    78    358,474    -    -    358,552 
Stock Issued to Consultants   -    -    12,500    12    57,238    -    -    57,250 
Stock Issued to Former Officer   -    -    63,068    63    277,436              277,499 
Foreign currency translation adjustment   -    -    -    -    -    (381,001)   -    (381,001) 
Net Loss   -    -    -    -    -    -    (77,325)   (77,325)
                                         
Balance, April 30, 2018 (Unaudited)   1,000   $1   $10,415,416   $10,415   $58,485,853   $(1,463,495)  $(37,228,201)  $19,804,573 

 

                       Accumulated         
   Preferred Stock           Additional   Other         
   Series C   Common Stock   Paid-in   Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Income (Loss)   Deficit   Total 
                                 
Balance, October 31, 2018   -   $-    10,640,416   $10,641   $58,599,378   $(2,228,663)  $(31,994,406)  $24,386,950 
                                         
Stock Issued to  Investors             23,965    23    105,422    -    -    105,445 
Foreign currency translation adjustment             -    -    -    297,855    -    297,855 
Net Income             -    -    -    -    1,239,013    1,239,013 
Balance, January 31, 2019   -   $-    10,664,381   $10,664   $58,704,800   $(1,930,808)  $(30,755,393)  $26,029,263 
                                         
Stock Issued to  Director             7,143    8    42,281    -    -    42,289 
Foreign currency translation adjustment             -    -    -    94,981    -    94,981 
Net Income             -    -    -    -    1,973,494    1,973,494 
Balance, April 30, 2019   -   $-    10,671,524   $10,672   $58,747,081   $(1,835,827)  $(28,781,899)  $28,140,027 

 

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

 

7
 

 

CODA OCTOPUS GROUP, INC.

Unaudited Consolidated Statements of Cash Flows

For the Periods Indicated

Unaudited

 

   Six Months Ended April 30, 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income (loss)  $3,212,507   $(245,264)
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   394,412    396,056 
Stock compensation   42,289    334,749 
Realized gain on the sale of property and equipment   (33,118)   - 
(Increase) decrease in operating assets:          
Accounts receivable   129,720    (701,896)
Inventory   (341,846)   (347,914)
Unbilled receivables   (769,669)   1,137,266 
Other current assets   (60,424)   213,085 
Prepaid expenses   (55,129)   27,925 
Deferred tax assets   500,370    - 
Increase (decrease) in operating liabilities:          
Accounts payable and other current liabilities   78,221    (468,259)
Deferred revenue   111,286    (103,033)
Net Cash provided by Operating Activities   3,208,619    242,715 
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property and equipment   (2,099,714)   (521,594)
Proceeds from the sale of property and equipment   725,000    - 
Net Cash used in Investing Activities   (1,374,714)   (521,594)
CASH FLOWS FROM FINANCING ACTIVITIES          
Repayments - loans and notes payable   (586,676)    (5,523,762)
Issuance of stock for cash   105,445    5,312,733 
Net Cash used in Financing Activities   (481,231)   (211,029)
EFFECT OF CURRENCY EXCHANGE RATE ON CHANGES IN CASH   392,836    574,936 
           
NET INCREASE IN CASH   1,745,510    85,028 
           
CASH AT THE BEGINNING OF THE PERIOD   7,512,422    6,851,539 
           
CASH AT THE END OF THE PERIOD  $9,257,932   $6,936,567 
SUPPLEMENTAL CASH FLOW INFORMATION          
Cash paid for interest  $40,807   $160,861 
Cash paid for taxes  $7,840   $- 

 

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

 

8
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited interim consolidated financial statements have been prepared based upon U.S. Securities and Exchange Commission rules that permit reduced disclosure for interim periods. Therefore, they do not include all information and footnote disclosures necessary for a complete presentation of Coda Octopus Group, Inc.’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. Coda Octopus Group, Inc. (the “Company”, Coda Octopus,” “we,” or “us”) filed audited consolidated financial statements as of and for the fiscal years ended October 31, 2018 and 2017 which included all information and notes necessary for such complete presentation in conjunction with its annual report on Form 10-K filed on February 1, 2019 (as amended on February 7, 2019 and April 23, 2019, the Form (“10-K”). The results of operations for the interim period ended April 30, 2019 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2018, which are contained in the Form 10-K. The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring items) which are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of April 30, 2019 and the results of operations, comprehensive income and cash flows for the interim periods ended April 30, 2019 and 2018. The unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company uses the US dollar as the reporting currency for financial reporting. The financial position and results of operations of the Company’s UK-based operations are measured using the British Pound Sterling, Australian-based operations are measured using Australian Dollars and Danish-based operations are measured using Danish Kroner as the functional currencies. Foreign currency translation, gains and losses, are recorded as a change in other comprehensive income. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are also included in other comprehensive income.

 

NOTE 2 – REVENUE RECOGNITION

 

Beginning on November 1, 2018, the Company adopted the Financial Accounting Standards Board’s Topic 606, Revenue from Contracts with Customers (Topic 606). Previously, we had recognized revenue in accordance with FASB Topic 605, Revenue Recognition. After carefully comparing the old and the new revenue standards, we believe that our previous revenue recognition policy is substantially consistent with our new revenue recognition policy and that revenues are consistently stated between periods and there will not be a cumulative effect adjustment.

 

9
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 2 – REVENUE RECOGNITION (Continued)

 

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

 

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

 

All of our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater technologies and equipment for imaging, mapping, defense and survey applications and from the engineering services that we provide. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential variable additional consideration. Our product sales do not include a right of return by the customer.

 

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

 

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

 

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

 

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

 

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

 

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

 

10
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 2 – REVENUE RECOGNITION (Continued)

 

Quarterly, 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 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. 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.

 

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 ratably over the term of the contract, costs are 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.

 

Other Revenue Disclosures

 

See Note 14 – Segment Analysis - for a breakdown of revenues from external customers and cost of those revenues between our Products Segment and Services Segment including information on the split of revenues by geography.

 

NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s short term financial instruments consist of cash, receivables, accounts payable and the line of credit. The Company adjusts the carrying value of financial assets and liabilities denominated in other currencies such as cash, receivables, accounts payable and the lines of credit using the appropriate exchange rates at the balance sheet date. The Company believes that the carrying values of these short term financial instruments approximate their estimated fair values.

 

NOTE 4 – FOREIGN CURRENCY TRANSLATION

 

The financial position and results of operations of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into US dollars at exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted average exchange rates during the period. The resulting translation gains and losses on assets and liabilities are recorded in accumulated other comprehensive income (loss), and are excluded from net income until realized through a sale or liquidation of the investment.

 

11
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 5 - INVENTORY

 

Inventory is stated at the lower of cost (weighted average method) or market. Inventory consisted of the following components:

 

   April 30, 2019   October 31, 2018 
         
Raw materials and parts  $3,168,020   $2,887,505 
Work in progress   603,701    472,204 
Finished goods   393,368    463,534 
Total Inventory  $4,165,089   $3,823,243 

 

NOTE 6 – FIXED ASSETS

 

Fixed assets consists of the following components:

 

   October 31,  October 31, 2018 
   2017   Acquisitions   Disposals   Balance 
                 
Buildings  $4,082,346   $-    (85,486)  $3,996,860 
Land   200,000    -    -    200,000 
Office machinery and equipment   2,064,449    853,796    (42,802)   2,875,443 
Furniture, fixtures and improvements   1,165,897    38,344    (95,016)   1,109,225 
Totals   7,512,692    892,140    (223,304)   8,181,528 
Less: accumulated depreciation   (2,299,411)   (758,408)   122,474    (2,935,345)
                     
Property and Equipment - Net  $5,213,281   $133,732   $(100,830)  $5,246,183 

 

   October 31,   April 30, 2019 
   2018   Acquisitions   Disposals   Balance 
                 
Buildings  $3,996,860   $1,463,535    (730,000)  $4,730,395 
Land   200,000    -    -    200,000 
Office machinery and equipment   2,875,443    509,706    (33,278)   3,351,871 
Furniture, fixtures and improvements   1,109,225    55,862    -    1,165,087 
Totals   8,181,528    2,029,103    (763,278)   9,447,353 
Less: accumulated depreciation   (2,935,345)   (467,450)   77,319    (3,325,476)
                     
Property and Equipment - Net  $5,246,183   $1,561,653   $(685,959)  $6,121,877 

 

NOTE 7– OTHER CURRENT ASSETS

 

Other current assets consisted of the following components:

 

   April 30, 2019   October 31, 2018 
         
Deposits  $114,684   $21,007 
Other receivables   138,377    141,294 
Value added tax (VAT) receivable   26,787    57,123 
           
Total Other Current Assets  $279,848   $219,424 

 

NOTE 8 – ESTIMATES

 

The preparation of consolidated financial statements in conformity with US Generally Accepted Accounting Principles (US 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 costs and earnings in excess of billings, billings in excess of costs, estimated earnings, valuation of accounts receivable, valuation of fixed assets, valuation of inventory, valuation of deferred tax assets (DTA’s) and the valuation of goodwill.

 

NOTE 9 – CONTRACTS IN PROGRESS

 

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 consolidated balance sheets. These amounts are stated on the consolidated balance sheets as unbilled receivables of $3,782,785 and $3,013,116 as of April 30, 2019 and October 31, 2018, respectively.

 

Our deferred revenue of $763,106 and $651,820 as of April 30, 2019 and October 31, 2018, respectively, consists of billings in excess of costs, estimated earnings and revenues received as part of our warranty obligations upon completing a sale – elaborated further in the last paragraph of this note.

 

12
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

Billings in excess of costs and estimated earnings on uncompleted contracts represent project invoices billed to customers that have not been earned as of the date of the consolidated balance sheets. These amounts are stated on the consolidated balance sheets as a component of deferred revenue of $25,607 and $0 as of April 30, 2019 and October 31, 2018, respectively.

 

Revenue received as part of sales of products via our Products Segment includes a provision for warranty and Through Life Support (TLS). TLS offers the customer extended post-sales technical support along with software and hardware assurances. These post-sales obligations (warranty and TLS) are treated as deferred revenue and are amortized over the period when the contractual obligations subsist, which for warranty is 12 months and TLS varies between 36 and 60 months depending on the package purchased by the customer. These amounts are stated on the consolidated balance sheets as a component of deferred revenue of $737,499 and $651,820 as of April 30, 2019 and October 31, 2018, respectively.

 

NOTE 10 - CONCENTRATIONS

 

Significant Customers

 

During the three months ended April 30, 2019, the Company had a customer from whom it generated sales greater than 10% of net revenues. Revenue from this customer was $1,460,260 or 22% of net revenues during the period.

 

During the three months ended April 30, 2018, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues from these customers were $1,325,531 or 38% of net revenues during the period. Total accounts receivable from these customers at April 30, 2018 were $998,606 or 47% of accounts receivable.

 

During the six months ended April 30, 2019, the Company had a customer from whom it generated sales greater than 10% of net revenues. Revenue from this customer was $3,209,220 or 26% of net revenues during the period.

 

During the six months ended April 30, 2018, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues from these customers were $1,612,490 or 25% of net revenues during the period. Total accounts receivable from these customers at April 30, 2018 were $998,606 or 47% of accounts receivable.

 

13
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 11– LOANS AND NOTES PAYABLE

 

   April 30, 2019   October 31, 2018 
         
Secured note payable to HSBC NA with interest payable on the 28th day of each month at 4.56% per annum. Our repayment obligation under this loan is $43,777 (comprising both principal and interest repayment).  $1,293,976   $1,524,239 
One of the subsidiaries had an unsecured working capital loan from the CEO of the Group. The note, which carried an interest rate of 4.5% was repaid in full in December, 2018.   -    500,000 
           
Total   1,293,976    2,024,239 
Less: current portion   (476,241)   (964,695)
Total Long Term Loans and Notes Payable  $817,735   $1,059,544 

 

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

 

On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the balance sheet. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We own substantially all of our facilities and believe that the effect of adopting this standard will be immaterial.

 

With the exception of the updated standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our consolidated financial statements.

 

14
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 13 – EARNINGS PER COMMON SHARE

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
   April 30,   April 30,   April 30,   April 30, 
Fiscal Period  2019   2018   2019   2018 
Numerator:                
Net Income (Loss)  $1,973,494   $(77,325)  $3,212,507   $(245,264)
                     
Denominator:                    
Basic weighted average common shares outstanding   10,671,443    10,353,876    10,665,970    9,754,033 
Conversion of Series C Preferred Stock   -    -    -    - 
Diluted outstanding shares   10,671,443    10,353,876    10,665,970    9,754,033 
Earnings from continuing operations                    
                     
Basic  $0.18   $(0.01)  $0.30   $(0.03)
Diluted  $0.18   $(0.01)  $0.30   $(0.03)

 

Common stock equivalents of 200,000 shares were excluded from the April 30, 2018, computations as their effect would be anti-dilutive.

 

15
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 14 – SEGMENT ANALYSIS

 

We are operating in two reportable segments, which are managed separately based upon fundamental differences in their operations. Coda Octopus Martech and Coda Octopus Colmek (together “Marine Engineering Business” or “Service Segments”) operate as contractors and Coda Octopus Products operations are comprised primarily of product sales, rentals and associated services (“Marine Technology Business” or “Products Segment”).

 

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

 

The Company evaluates performance and allocates resources based upon operating income. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies in our Consolidated Financial Statements of October 31, 2018.

 

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

 

The following table summarizes segment asset and operating balances by reportable segment as of and for the three and six months ended April 30, 2019 and 2018, respectively.

 

The Company’s reportable business segments operate in four geographic locations:

 

  Americas
  Europe
  Australia/Asia
  Middle East/Africa

 

Information concerning principal geographic areas is presented below according to the area where the activity has taken place for the three and six months ended April 30, 2019 and 2018 respectively:

 

16
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   Marine Technology Business (Products)   Marine Engineering Business (Services)   Overhead   Total 
                 
Three Months Ended April 30, 2019                    
                     
Revenues from External Customers  $3,420,183   $3,363,089   $-   $6,783,272 
                     
Cost of Revenues   488,909    1,569,701    -    2,058,610 
                     
Gross Profit   2,931,274    1,793,388    -    4,724,662 
                     
Research & Development   558,579    64,665    121,983    745,227 
Selling, General & Administrative   743,801    611,059    341,822    1,696,682 
                     
Total Operating Expenses   1,302,380    675,724    463,805    2,441,909 
                     
Income (Loss) from Operations   1,628,894    1,117,664    (463,805)   2,282,753 
                     
Other Income (Expense)                    
                     
Other Income   26,228    -    -    26,228 
Interest Expense   (3,392)   (5,118)   (15,837)   (24,347)
                     
Total Other Income (Expense)   22,836    (5,118)   (15,837)   1,881 
                     
Net Income (Loss) before Income Taxes   1,651,730    1,112,546    (479,642)   2,284,634 
                     
Income Tax Benefit (Expense)                    
Current Tax Benefit (Expense)   18,375    (9,939)   (8,412)   24 
Deferred Tax (Expense)   (144,381)   (117,529)   (49,254)   (311,164)
                     
Income (Expense)   (126,006)   (127,468)   (57,666)   (311,140)
                     
Net Income (Loss)  $1,525,724   $985,078   $(537,308)  $1,973,494 
                     
Supplemental Disclosures                    
                     
Total Assets  $17,403,981   $12,980,885   $1,564,066   $31,948,932 
                     
Total Liabilities  $1,357,163   $923,248   $1,528,494   $3,808,905 
                     
Revenues from Intercompany Sales - eliminated from sales above  $361,604   $173,723   $675,000   $1,210,327 
                     
Depreciation and Amortization  $134,516   $61,388   $3,790   $199,694 
                     
Purchases of Long-lived Assets  $1,149,245   $31,334   $-   $1,180,579 

 

17
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   Marine Technology Business (Products)   Marine Engineering Business (Services)   Overhead   Total 
                 
Three Months Ended April 30, 2018                    
                     
Revenues from External Customers  $2,173,291   $1,353,105   $-   $3,526,396 
                     
Cost of Revenues   217,222    723,636    -    940,858 
                     
Gross Profit   1,956,069    629,469    -    2,585,538 
                     
Research & Development   503,518    136,959    -    640,477 
Selling, General & Administrative   850,521    614,718    560,391    2,025,630 
                     
Total Operating Expenses   1,354,039    751,677    560,391    2,666,107 
                     
Income (Loss) from Operations   602,030    (122,208)   (560,391)   (80,569)
                     
Other Income (Expense)                    
                     
Other Income   81,918    2,097    -    84,015 
Interest Expense   (2,385)   (14,752)   (63,604)   (80,741)
                     
Total Other Income (Expense)   79,533    (12,655)   (63,604)   3,274 
                     
Net Income (Loss) before income taxes   681,563    (134,863)   (623,995)   (77,295)
                     
Current Tax Benefit (Expense)   (6,431)   -    6,401    (30)
                     
Net Income (Loss)  $675,132   $(134,863)  $(617,594)  $(77,325)
                     
Supplemental Disclosures                    
                     
Total Assets  $12,655,196   $10,944,045   $342,932   $23,942,173 
                     
Total Liabilities  $763,339   $1,435,771   $1,938,490   $4,137,600 
                     
Revenues from Intercompany Sales - eliminated from sales above  $315,954   $132,837   $675,000   $1,123,791 
                     
Depreciation and Amortization  $113,923   $72,499   $4,255   $190,677 
                     
Purchases of Long-lived Assets  $52,112   $6,056   $24,785   $82,953 

 

18
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   Marine Technology Business (Products)   Marine Engineering Business (Services)   Overhead   Total 
                 
Six Months Ended April 31, 2019                    
                     
Revenues from External Customers  $6,249,719   $6,292,061   $-   $12,541,780 
                     
Cost of Revenues   1,206,215    3,077,831    -    4,284,046 
                     
Gross Profit   5,043,504    3,214,230    -    8,257,734 
                     
Research & Development   1,030,004    97,214    189,335    1,316,553 
Selling, General & Administrative   1,498,461    1,205,105    612,391    3,315,957 
                     
Total Operating Expenses   2,528,465    1,302,319    801,726    4,632,510 
                     
Income (Loss) from Operations   2,515,039    1,911,911    (801,726)   3,625,224 
                     
Other Income (Expense)                    
                     
Other Income   59,069    -    -    59,069 
Interest Expense   (5,866)   (9,699)   (33,843)   (49,408)
                     
Total Other Income (Expense)   53,203    (9,699)   (33,843)   9,661 
                     
Net Income (Loss) before Income Taxes   2,568,242    1,902,212    (835,569)   3,634,885 
                     
Income Tax Benefit (Expense)                    
Current Tax Benefit   25,668    34,985    17,338    77,991 
Deferred Tax Expense   (151,305)   (233,396)   (115,668)   (500,369)
                     
Income (expense)   (125,637)   (198,411)   (98,330)   (422,378)
                     
Net Income (Loss)  $2,442,605   $1,703,801   $(933,899)  $3,212,507 
                     
Supplemental Disclosures                    
                     
Total Assets  $17,403,981   $12,980,885   $1,564,066   $31,948,932 
                     
Total Liabilities  $1,357,163   $923,248   $1,528,494   $3,808,905 
                     
Revenues from Intercompany Sales - eliminated from sales above  $908,467   $228,929   $1,350,000   $2,487,396 
                     
Depreciation and Amortization  $259,124   $127,678   $7,610   $394,412 
                     
Purchases of Long-lived Assets  $2,065,268   $34,446   $-   $2,099,714 

 

19
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   Marine Technology Business (Products)   Marine Engineering Business (Services)   Overhead   Total 
                 
Six Months Ended April 31, 2018                    
                     
Revenues from External Customers  $4,216,233   $2,360,720   $-   $6,576,953 
                     
Cost of Revenues   647,353    1,239,612    -    1,886,965 
                     
Gross Profit   3,568,880    1,121,108    -    4,689,988 
                     
Research & Development   945,792    365,224    -    1,311,016 
Selling, General & Administrative   1,428,086    1,245,592    857,709    3,531,387 
                     
Total Operating Expenses   2,373,878    1,610,816    857,709    4,842,403 
                     
Income (Loss) from Operations   1,195,002    (489,708)   (857,709)   (152,415)
                     
Other Income (Expense)                    
                     
Other Income   88,573    2,097    -    90,670 
Interest Expense   (6,804)   (29,701)   (146,984)   (183,489)
                     
Total Other Income (Expense)   81,769    (27,604)   (146,984)   (92,819)
                     
Net Income (Loss) before income taxes   1,276,771    (517,312)   (1,004,693)   (245,234)
                     
Current Tax Benefit (Expense)   (6,596)   -    6,566    (30)
                     
Net Income  $1,270,175   $(517,312)  $(998,127)  $(245,264)
                     
Supplemental Disclosures                    
                     
Total Assets  $12,655,196   $10,944,045   $342,932   $23,942,173 
                     
Total Liabilities  $760,320   $1,438,790   $1,938,490   $4,137,600 
                     
Revenues from Intercompany Sales - eliminated from sales above  $471,218   $10,189   $675,000   $1,156,407 
                     
Depreciation and Amortization  $236,650   $152,214   $7,192   $396,056 
                     
Purchases of Long-lived Assets  $254,029   $49,961   $24,785   $328,775 

 

20
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   For the Three Months Ended April 30, 2019 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business
(Products)
   Business
(Services)
   Total 
Disaggregation of Total Net Sales            
             
Americas               
Equipment Sales  $19,528   $54,536   $74,064 
Equipment Rentals   171,544    -    171,544 
Software Sales   7,250    -    7,250 
Engineering Parts   -    2,377,313    2,377,313 
Services   736,612    563,518    1,300,130 
Europe               
Equipment Sales   446,896    13,302    460,198 
Equipment Rentals   491,118    -    491,118 
Software Sales   59,069    -    59,069 
Engineering Parts   -    354,421    354,421 
Services   337,467    -    337,467 
                
Australia/Asia               
Equipment Sales   867,019    -    867,019 
Equipment Rentals   -    -    - 
Software Sales   58,289    -    58,289 
Services   115,666    -    115,666 
                
Middle East & Africa               
Equipment Sales   -    -    - 
Equipment Rentals   -    -    - 
Software Sales   16,578    -    16,578 
Services   93,147    -    93,147 
                
Total Net Sales  $3,420,183   $3,363,089   $6,783,272 

 

   For the Three Months Ended April 30, 2019 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business
(Products)
   Business
(Services)
   Total 
Total Net Sales by Geographic Area               
Americas  $934,934   $2,995,366   $3,930,300 
Europe   1,334,551    367,723    1,702,273 
Australia/Asia   1,040,974    -    1,040,974 
Middle East & Africa   109,724    -    109,724 
                
Total Net Sales  $3,420,183   $3,363,089   $6,783,272 

 

21
 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2019 and 2018

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   For the Three Months Ended April 30, 2019 
   Marine   Marine     
   Technology   Engineering   Grand 
  

Business

(Products)

  

Business

(Services)

   Total 
Total Net Sales by Product Line               
Equipment Sales  $1,333,444   $67,838   $1,401,281 
Equipment Rentals   662,662    -    662,662 
Software Sales   141,185    -    141,185