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, 2020

 

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

Incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

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

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [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 15, 2020 is 10,751,881.

 

 

 

 

 

 

INDEX

 

  Page
PART I - Financial Information  
   
Item 1: Financial Statements 3
   
Consolidated Balance Sheets as of April 30, 2020 (Unaudited) and October 31, 2019 3
   
Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended April 30, 2020 and 2019 (Unaudited) 6
   
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended April 30, 2020 and 2019 (Unaudited) 7
   
Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2020 and 2019 (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 41
   
Item 4: Controls and Procedures 41
   
PART II - Other Information 42
   
Item 1: Legal Proceedings 42
   
Item 1A: Risk Factors 42
   
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 42
   
Item 3: Default Upon Senior Securities 42
   
Item 4: Mine Safety Disclosures 42
   
Item 5: Other Information 42
   
Item 6: Exhibits 42
   
Signatures 43

 

 2 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

Unaudited Consolidated Financial Statements

For the Three Months Ended April 30, 2020 and 2019

 

Contents

 

Consolidated Balance Sheets as of April 30, 2020 (Unaudited) and October 31, 2019 4
   
Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended April 30, 2020 (Unaudited) and 2019 (Unaudited) 6
   
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months ended April 30, 2020 (Unaudited) and 2019 (Unaudited) 7
   
Consolidated Statements of Cash Flows for the Six Months ended April 30, 2020 (Unaudited) and 2019 (Unaudited) 8
   
Notes to Unaudited Consolidated Financial Statements 9

 

 3 

 

 

CODA OCTOPUS GROUP, INC.

Consolidated Balance Sheets

April 30, 2020 and October 31, 2019

 

   2020   2019 
   Unaudited     
ASSETS          
           
CURRENT ASSETS          
           
Cash  $12,808,662   $11,721,683 
Accounts Receivable, net   3,150,117    4,431,971 
Inventory   7,511,958    5,350,514 
Unbilled Receivables   2,021,496    2,279,362 
Other Current Assets   277,892    298,187 
Prepaid Expenses   417,466    198,140 
           
Total Current Assets   26,187,591    24,279,857 
           
FIXED ASSETS          
Property and Equipment, net   6,115,862    5,986,812 
           
OTHER ASSETS          
Goodwill and Other Intangibles, net   3,640,819    3,612,891 
Deferred Tax Asset   594,395    631,684 
           
Total Other Assets   4,235,214    4,244,575 
           
Total Assets  $36,538,667   $34,511,244 

 

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

 

 4 

 

 

CODA OCTOPUS GROUP, INC.

Consolidated Balance Sheets (Continued)

April 30, 2020 and October 31, 2019

 

 

   2020   2019 
   Unaudited     
LIABILITIES AND STOCKHOLDERS’ EQUITY        
CURRENT LIABILITIES         
           
Accounts Payable  $1,085,297   $1,273,490 
Accrued Expenses and Other Current Liabilities   512,095    576,672 
Notes Payable, current   673,835    487,140 
Deferred Revenue, current   2,036,612    830,148 
           
Total Current Liabilities   4,307,839    3,167,450 
           
LONG TERM LIABILITIES          
           
Deferred Revenue, long term   230,425    143,587 
Notes Payable, long term   671,872    572,434 
           
Total Long Term Liabilities   902,297    716,021 
           
Total Liabilities   5,210,136    3,883,471 
           
STOCKHOLDERS’ EQUITY          
          
Common Stock, $.001 par value; 150,000,000 shares authorized, 10,721,881 shares issued and outstanding as of April 30, 2020 and October 31, 2019   10,723    10,723 
Additional Paid-in Capital   59,609,964    59,521,665 
Accumulated Other Comprehensive Loss   (2,604,642)   (2,135,408)
Accumulated Deficit   (25,687,514)   (26,769,207)
           
Total Stockholders’ Equity   31,328,531    30,627,773 
           
Total Liabilities and Stockholders’ Equity  $36,538,667   $34,511,244 

 

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

 

 5 

 

 

CODA OCTOPUS GROUP, INC.

Unaudited Consolidated Statements of Income and Comprehensive Income

For the Periods Indicated

 

    Three Months Ended April 30,     Six Months Ended April 30,  
    2020     2019     2020     2019  
                         
Net Revenues   $ 3,289,218     $ 6,783,272     $ 9,970,197     $ 12,541,780  
Cost of Revenues     1,363,804       2,058,610       3,770,343       4,284,046  
                                 
Gross Profit     1,925,414       4,724,662       6,199,854       8,257,734  
                                 
OPERATING EXPENSES                                
Research & Development     713,641       745,227       1,641,906       1,316,553  
Selling, General & Administrative     1,533,210       1,696,682       3,424,888       3,315,957  
                                 
Total Operating Expenses     2,246,851       2,441,909       5,066,794       4,632,510  
                                 
(LOSS) INCOME FROM OPERATIONS     (321,437 )     2,282,753       1,133,060       3,625,224  
                                 
OTHER INCOME (EXPENSE)                                
Other (Expense) Income     (311 )     26,228       12,513       59,069  
Interest Expense     (18,456 )     (24,347 )     (38,070 )     (49,408 )
                                 
Total Other (Expense) Income     (18,767 )     1,881       (25,557 )     9,661  
                                 
NET (LOSS) INCOME BEFORE INCOME TAXES     (340,204 )     2,284,634       1,107,503       3,634,885  
                                 
INCOME TAX BENEFIT (EXPENSE)                                
Current Tax Benefit     34,826       24       11,479       77,991  
Deferred Tax Benefit (Expense)     40,298       (311,164 )     (37,289 )     (500,369 )
                                 
Total Income Tax Benefit (Expense)     75,124       (311,140 )     (25,810 )     (422,378 )
                                 
                                 
NET (LOSS) INCOME   $ (265,080 )   $ 1,973,494     $ 1,081,693     $ 3,212,507  
                                 
NET (LOSS) INCOME PER SHARE:                                
Basic   $ (0.02 )   $ 0.18     $ 0.10     $ 0.30  
Diluted   $ (0.02 )   $ 0.18     $ 0.10     $ 0.30  
                                 
WEIGHTED AVERAGE SHARES:                                
Basic     10,721,881       10,671,443       10,721,881       10,665,970  
Diluted     11,276,881       10,671,443       11,276,881       10,665,970  
                                 
NET (LOSS) INCOME   $ (265,080 )   $ 1,973,494     $ 1,081,693     $ 3,212,507  
Foreign Currency Translation Adjustment     (553,985 )     94,981       (469,234 )     392,836  
                                 
Total Other Comprehensive (Loss) Income     (553,985 )     94,981       (469,234 )     392,836  
                                 
COMPREHENSIVE (LOSS) INCOME   $ (819,065 )   $ 2,068,475     $ 612,459     $ 3,605,343  

 

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, 2020 and 2019

 

               Accumulated         
           Additional   Other         
   Common Stock   Paid-in   Comprehensive   Accumulated     
   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 

 

               Accumulated         
           Additional   Other         
   Common Stock   Paid-in   Comprehensive   Accumulated     
   Shares   Amount   Capital   Income (Loss)   Deficit   Total 
                         
Balance, October 31, 2019   10,721,881   $10,723   $59,521,665   $(2,135,408)  $(26,769,207)  $30,627,773 
                               
Foreign currency translation adjustment   -    -    -    84,751    -    84,751 
Net Income   -    -    -    -    1,346,773    1,346,773 
Balance, January 31, 2020   10,721,881    10,723    59,521,665    (2,050,657)   (25,422,434)   32,059,297 
                               
Stock based compensation   -    -    88,299    -    -    88,299 
Foreign currency translation adjustment   -    -    -    (553,985)   -    (553,985)
Net Loss   -    -    -    -    (265,080)   (265,080)
Balance, April 30, 2020   10,721,881   $10,723   $59,609,964   $(2,604,642)  $(25,687,514)  $31,328,531 

 

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,  
    2020     2019  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net income   $ 1,081,693     $ 3,212,507  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     333,420       394,412  
Stock based compensation     88,299       42,289  
Gain on the sale of property and equipment     -       (33,118 )
(Increase) decrease in operating assets:                
Accounts receivable     1,281,854       129,720  
Inventory     (2,161,444 )     (341,846 )
Unbilled receivables     257,866       (769,669 )
Other current assets     20,295     (60,424 )
Prepaid expenses     (219,326 )     (55,129 )
Deferred tax asset     37,289       500,370  
Increase (decrease) in operating liabilities:                
Accounts payable and other current liabilities     (252,770 )     78,221  
Deferred revenue     1,293,302       111,286  
Net Cash Provided by Operating Activities     1,760,478       3,208,619  
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of property and equipment     (445,160 )     (2,099,714 )
Proceeds from sales of property and equipment    

-

     

725,000

 
Purchases of patents     (45,238 )     -  
Net Cash Used in Investing Activities     (490,398 )     (1,374,714 )
CASH FLOWS FROM FINANCING ACTIVITIES                
Repayment of loans     (240,411 )     (586,676 )
Proceeds from loan    

526,544

     

-

 
Issuance of common stock for cash     -       105,445  
Net Cash Provided by (Used in) Financing Activities     286,133       (481,231 )
EFFECT OF CURRENCY EXCHANGE RATE ON CHANGES IN CASH     (469,234 )     392,836  
                 
NET INCREASE IN CASH     1,086,979       1,745,510  
                 
CASH AT THE BEGINNING OF THE PERIOD     11,721,683       7,512,422  
                 
CASH AT THE END OF THE PERIOD   $ 12,808,662     $ 9,257,932  
SUPPLEMENTAL CASH FLOW INFORMATION                
Cash paid for interest   $ 37,853     $ 40,807  
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, 2020 and 2019

 

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, 2019 and 2018 which included all information and notes necessary for such complete presentation as part of its annual report on Form 10-K filed on January 28, 2020, (“the “Form 10-K”). The results of operations for the interim period ended April 30, 2020 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, 2019, 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, 2020 and the results of operations, comprehensive income and cash flows for the interim periods ended April 30, 2020 and 2019. 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 was not a cumulative effect adjustment.

 

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.

 

 9 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 2 – REVENUE RECOGNITION (Continued)

 

Our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater technologies and equipment for real time 3D imaging, mapping, defense and survey applications and from the engineering services that we provide broadly to prime defense contractors. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential additional variable consideration. Our sales do not include a right of return by the customer.

 

With regard to our Marine Technology Business (“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, post-sales technical support etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been provided to the customer and evidence of the provision of those services exist.

 

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

 

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

 

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

 

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

 

With respect to revenues related to our Services Segment, 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 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.

 

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.

 

 10 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 2 – REVENUE RECOGNITION (Continued)

 

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 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. At April 30, 2020 and October 31, 2019, we had deferred commissions of $1,913 and $0, respectively. Amortization expense related to deferred commissions was $80,973 and $0 in the first quarters of 2020 and 2019, respectively.

 

Other Revenue Disclosures

 

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

 

NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s short term financial instruments consist of cash, receivables, accounts payable, accrued expenses and a revolving 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.

 

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CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 4 – FOREIGN CURRENCY TRANSLATION

 

The financial position and results of operations of the Company’s foreign subsidiaries are measured using the local currency in the jurisdiction in which the subsidiary operates 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 reporting period. The resulting translation gains and/or losses on assets and liabilities are recorded in accumulated other comprehensive income (loss), and are excluded from net income (loss) until realized through a sale or liquidation of the investment.

 

NOTE 5 - INVENTORY

 

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

 

   April 30,   October 31, 
Inventory  2020   2019 
         
Raw materials and parts  $5,866,227   $4,379,260 
Work in progress   931,125    517,354 
Finished goods   714,606    453,900 
Total Inventory  $7,511,958   $5,350,514 

 

 12 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 6 – FIXED ASSETS

 

Fixed assets consist of the following components:

 

   April 30,   October 31, 
   2020   2019 
         
Buildings  $5,012,099   $4,654,029 
Land   200,000    200,000 
Office machinery and equipment   1,976,556    1,954,938 
Rental assets   

1,476,977

    

1,468,124

 
Furniture, fixtures and improvements   1,145,720    1,158,033 
Totals   9,811,352    9,435,124 
Less: accumulated depreciation   (3,695,490)   (3,448,312)
           
Property and Equipment - Net  $6,115,862   $5,986,812 

 

NOTE 7 – OTHER CURRENT ASSETS

 

Other current assets consisted of the following components:

 

   April 30,   October 31, 
Other Current Assets  2020   2019 
         
Deposits  $219,614   $42,932 
Tax receivables   58,278    255,255 
Total Other Current Assets  $277,892   $298,187 

 

 13 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

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 estimated earnings in excess of billings, billings in excess of costs and estimated earnings, and valuation of accounts receivable, valuation of fixed assets, valuation of inventory, valuation of deferred tax assets 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 $2,021,496 and $2,279,362 as of April 30, 2020 and October 31, 2019, respectively.

 

Our deferred revenue of $2,267,037 and $973,735 as of April 30, 2020 and October 31, 2019, respectively, consists of billings in excess of costs and estimated earnings and revenues received as part of our subscription package offering, warranty or Through Life Support (“TLS”) obligations upon completing a sale.

 

Revenue received as part of sales of products via our Products Segment includes a provision for subscription package offering, warranty or TLS. Subscription package offering is essentially a rental agreement for a fixed period of twelve months under which we supply full equipment suite including hardware, software and technical support during the subscription period. TLS offers the customer extended post-sales technical support along with software and hardware assurances. These post-sales obligations (subscription package offering, warranty and TLS) are treated as deferred revenue and are amortized over the period when the contractual obligations subsist, which for subscription package offering and 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 $503,210 and $497,819 as of April 30, 2020 and October 31, 2019, respectively.

 

 14 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 10 – CONCENTRATIONS

 

Significant Customers

 

During the three months ended April 30, 2020, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues from these customers was $1,085,570, or 33% of net revenues during the period.

 

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 six months ended April 30, 2020, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues from these customers was $3,458,537, or 35% of net revenues during the period.

 

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.

 

NOTE 11 – NOTES PAYABLE

 

   April 30,   October 31, 
Loans and Notes Payable  2020   2019 
         
Secured note payable to HSBC NA with interest payable on the 28th day of each month at 4.56% per annum. Our monthly repayment obligation under this loan is $43,777 (comprising both principal and interest repayment).
  $819,163   $1,059,574 
Unsecured Payroll Protection Program loan from the SBA that carries an interest rate of 1%. Principal payments begin on October 1, 2020 in the amount of $29,252.   526,544    - 
           
Total   1,345,707    1,059,574 
Less: current portion   (673,835)   (487,140)
Total Long Term Loan and Note Payable  $671,872   $572,434 

 

The Company entered into a $4,000,000 revolving line of credit with HSBC NA on November 27, 2019, at prime. The outstanding balance on the line of credit was $0 as of April 30, 2020. The credit line expires on November 26, 2020.

 

 15 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

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 Company adopted ASU No. 2016-02 effective November 1, 2019. We own substantially all of our facilities. Accordingly, the adoption of ASU No. 2016-02 did not have a material impact on our interim consolidated financial statements.

 

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.

 

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  2020   2019   2020   2019 
Numerator:                    
Net (Loss) Income  $(265,080)  $1,973,494   $1,081,693   $3,212,507 
                     
Denominator:                    
Basic weighted average common shares outstanding   10,721,881    10,671,443    10,721,881    10,665,970 
Options issued   555,000    -    555,000    - 
Diluted outstanding shares   11,276,881    10,671,443    11,276,881    10,665,970 
                     
Basic  $(0.02)  $0.18   $0.10   $0.30 
Diluted  $(0.02)  $0.18   $0.10   $0.30 

 

 16 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS

 

We operate 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, rental of equipment and/or software 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 (“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 in our Consolidated Financial Statements of October 31, 2019.

 

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, 2020 and 2019, 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, 2020 and 2019 respectively:

 

 17 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

    Marine Technology Business (Products)     Marine Engineering Business (Services)     Overhead     Total  
                         
Three Months Ended April 30, 2020                                
                                 
Revenues from External Customers   $ 1,691,199     $ 1,598,019     $ -     $ 3,289,218  
                                 
Cost of Revenues     406,853       956,951       -       1,363,804  
                                 
Gross Profit     1,284,346       641,068       -       1,925,414  
                                 
Research & Development     442,696       270,945       -       713,641  
Selling, General & Administrative     692,177       527,039       313,994       1,533,210  
                                 
Total Operating Expenses     1,134,873       797,984       313,994       2,246,851  
                                 
Income (Loss) from Operations     149,473       (156,916 )     (313,994 )     (321,437 )
                                 
Other Expense (Income)                                
                                 
Other (Expense) Income     (327 )     16       -       (311 )
Interest Expense     (2,395 )     (3,959 )     (12,102 )     (18,456 )
                                 
Total Other Income (Expense)     (2,722 )     (3,943 )     (12,102 )     (18,767 )
                                 
Net Income (Loss) before Income Taxes     146,751       (160,859 )     (326,096 )     (340,204 )
                                 
Income Tax Benefit (Expense)                                
Current Tax Benefit (Expense)     (6,397 )     (4,045 )     45,268      

34,826

 
Deferred Tax (Expense)     (1,354 )     142,793       (101,141 )     40,298  
                                 
Total Income Tax (Expense)     (7,751 )     138,748       (55,873 )     75,124  
                                 
Net Income (Loss)   $ 139,000     $ (22,111 )   $ (381,969 )   $ (265,080 )
                                 
Supplemental Disclosures                                
                                 
Total Assets   $ 21,256,131     $ 14,231,702     $ 1,050,834     $ 36,538,667  
                                 
Total Liabilities   $ 2,907,719     $ 1,380,925     $ 921,492     $ 5,210,136  
                                 
Revenues from Intercompany Sales - eliminated from sales above   $ 277,658     $ 4,687     $ 675,000     $ 957,345  
                                 
Depreciation and Amortization   $ 94,599     $ 2,745     $ 4,112     $ 101,456  
                                 
(Sales) Purchases of Long-lived Assets   $ (158,874 )   $ (8,441 )   $ 14,554     $ (152,761 )

 

 18 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

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 
                     
Current Tax Benefit   18,375    (9,939)   (8,412)   24 
Deferred tax (Expense)   (144,381)   (117,529)   (49,254)   (311,164)
                     
Income benefit (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 

 

 19 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

    Marine Technology Business (Products)     Marine Engineering Business (Services)     Overhead     Total  
                         
Six Months Ended April 30, 2020                                
                                 
Revenues from External Customers   $ 5,324,011     $ 4,646,186     $ -     $ 9,970,197  
                                 
Cost of Revenues     1,062,530       2,707,813       -       3,770,343  
                                 
Gross Profit     4,261,481       1,938,373       -       6,199,854  
                                 
Research & Development     999,425       477,383       165,098       1,641,906  
Selling, General & Administrative     1,560,175       1,163,335       701,378       3,424,888  
                                 
Total Operating Expenses     2,559,600       1,640,718       866,476       5,066,794  
                                 
Income (Loss) from Operations     1,701,881       297,655       (866,476 )     1,133,060  
                                 
Other Income (Expense)                                
                                 
Other Income     12,497       16       -       12,513  
Interest (Expense)     (5,627 )     (7,641 )     (24,802 )     (38,070 )
                                 
Total Other Income (Expense)     6,870       (7,625 )     (24,802 )     (25,557 )
                                 
Net Income (Loss) before Income Taxes     1,708,751       290,030       (891,278 )     1,107,503  
                                 
Income Tax Benefit (Expense)                                
Current Tax Benefit (Expense)     19,436       -       (7,957 )     11,479  
Deferred Tax (Expense)     (79,493 )     130,558       (88,354 )     (37,289 )
                                 
Total Income Tax (Expense)     (60,057 )     130,558       (96,311 )     (25,810 )
                                 
Net Income (Loss)   $ 1,648,694     $ 420,588     $ (987,589 )   $ 1,081,693  
                                 
Supplemental Disclosures                                
                                 
Total Assets   $ 21,256,131     $ 14,231,702     $ 1,050,834     $ 36,538,667  
                                 
Total Liabilities   $ 2,907,719     $ 1,380,925     $ 921,492     $ 5,210,136  
                                 
Revenues from Intercompany Sales - eliminated from sales above   $ 580,480     $ 105,216     $ 1,350,000     $ 2,035,696  
                                 
Depreciation and Amortization   $ 277,592     $ 46,425     $ 9,403     $ 333,420  
                                 
Purchases of Long-lived Assets   $ 440,727     $ 1,152     $ 48,519     $ 490,398  

 

 20 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   Marine Technology Business (Products)   Marine Engineering Business (Services)   Overhead   Total 
                 
Six Months Ended April 30, 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 
                     
Current Tax Benefit   25,668    34,985    17,338    77,991 
Deferred tax (Expense)   (151,305)   (233,396)   (115,668)   (500,369)
                     
Income benefit (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 

 

 21 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   For the Three Months Ended April 30, 2020 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Disaggregation of Total Net Sales               
                
Americas               
Equipment Sales  $86,787   $-   $86,787 
Equipment Rentals   36,269    -    36,269 
Software Sales   -    -    - 
Engineering Parts   -    847,224    847,224 
Services   390,582    162,885    553,467 
Europe               
Equipment Sales   69,563    -    69,563 
Equipment Rentals   292,839    -    292,839 
Software Sales   7,155    -    7,155 
Engineering Parts   -    587,910    587,910 
Services   150,433    -    150,433 
Australia/Asia               
Equipment Sales   310,338    -    310,338 
Equipment Rentals   175,219    -    175,219 
Software Sales   8,591    -    8,591 
Services   126,238    -    126,238 
Middle East & Africa               
Equipment Sales   16,170    -    16,170 
Equipment Rentals   592    -    592 
Software Sales   -    -    - 
Services   20,423    -    20,423 
                
Total Net Sales  $1,691,199   $1,598,019   $3,289,218 

 

   For the Three Months Ended April 30, 2020 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Total Net Sales by Geographic Area               
Americas  $513,638   $1,010,109   $1,523,747 
Europe   519,990    587,910    1,107,900 
Australia/Asia   620,386    -    620,386 
Middle East & Africa   37,185    -    37,185 
                
Total Net Sales  $1,691,199   $1,598,019   $3,289,218 

 

 22 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   For the Three Months Ended April 30, 2020 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Total Net Sales by Product Line               
Equipment Sales  $482,858   $-   $482,858 
Equipment Rentals   504,919    -    504,919 
Software Sales   15,746    -    15,746 
Engineering Parts   -    1,435,134    1,435,134 
Services   687,676    162,885    850,561 
                
Total Net Sales  $1,691,199   $1,598,019   $3,289,218 

 

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

 

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CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

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

 

   For the Three Months Ended April 30, 2019 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   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 
Engineering Parts   -    2,731,734    2,731,734 
Services   1,282,892    563,518    1,846,410 
                
Total Net Sales  $3,420,183   $3,363,089   $6,783,272 

 

 24 

 

 

CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   For the Six Months Ended April 30, 2020 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Disaggregation of Total Net Sales            
             
Americas               
Equipment Sales  $421,175   $-   $421,175 
Equipment Rentals   81,338    -    81,338 
Software Sales   7,250    -    7,250 
Engineering Parts   -    2,493,597    2,493,597 
Services   545,207    652,416    1,197,623 
Europe               
Equipment Sales   407,710    -    407,710 
Equipment Rentals   345,483    -    345,483 
Software Sales   109,681    -    109,681 
Engineering Parts   -    1,494,765    1,494,765 
Services   276,133    5,407    281,540 
Australia/Asia               
Equipment Sales   2,338,648    -    2,338,648 
Equipment Rentals   401,151    -    401,151 
Software Sales   128,590    -    128,590 
Services   173,357    -    173,357 
Middle East & Africa               
Equipment Sales   38,244    -    38,244 
Equipment Rentals   592    -    592 
Software Sales   -    -    - 
Services   49,452    -    49,452 
                
Total Net Sales  $5,324,011   $4,646,186   $9,970,197 

 

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CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   For the Six Months Ended April 30, 2020 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Total Net Sales by Geographic Area               
Americas  $1,054,970   $3,146,013   $4,200,983 
Europe   1,139,007    1,500,172    2,639,179 
Australia/Asia   3,041,746    -    3,041,746 
Middle East & Africa   88,288    -    88,288 
                
Total Net Sales  $5,324,011   $4,646,186   $9,970,197 

 

   For the Six Months Ended April 30, 2020 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Total Net Sales by Product Line               
Equipment Sales  $3,205,777   $-   $3,205,777 
Equipment Rentals   828,564    -    828,564 
Software Sales   245,521    -    245,521 
Engineering Parts   -    3,988,363    3,988,363 
Services   1,044,149    657,823    1,701,972 
                
Total Net Sales  $5,324,011   $4,646,186   $9,970,197 

 

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CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   For the Six Months Ended April 30, 2019 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Disaggregation of Total Net Sales               
                
Americas               
Equipment Sales  $67,078   $57,545   $124,623 
Equipment Rentals   225,027    -    225,027 
Software Sales   7,250    -    7,250 
Engineering Parts   -    4,567,505    4,567,505 
Services   820,139    879,670    1,699,809 
Europe               
Equipment Sales   770,605    110,979    881,584 
Equipment Rentals   651,507    -    651,507 
Software Sales   148,644    -    148,644 
Engineering Parts   -    676,363    676,363 
Services   478,019    -    478,019 
Australia/Asia               
Equipment Sales   2,059,338    -    2,059,338 
Equipment Rentals   257,918    -    257,918 
Software Sales   201,878    -    201,878 
Services   339,041    -    339,041 
Middle East & Africa               
Equipment Sales   10,473    -    10,473 
Equipment Rentals   36,130    -    36,130 
Software Sales   37,565    -    37,565 
Services   139,107    -    139,107 
                
Total Net Sales  $6,249,719   $6,292,061   $12,541,780 

 

   For the Six Months Ended April 30, 2019 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Total Net Sales by Geographic Area               
Americas  $1,119,494   $5,504,719   $6,624,213 
Europe   2,048,776    787,342    2,836,117 
Australia/Asia   2,858,175    -    2,858,175 
Middle East & Africa   223,274    -    223,274 
                
Total Net Sales  $6,249,719   $6,292,061   $12,541,780 

 

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CODA OCTOPUS GROUP, INC.

Notes to the Unaudited Consolidated Financial Statements

April 30, 2020 and 2019

 

NOTE 14 – SEGMENT ANALYSIS (continued)

 

   For the Six Months Ended April 30, 2019 
   Marine   Marine     
   Technology   Engineering   Grand 
   Business   Business   Total 
Total Net Sales by Product Line               
Equipment Sales  $2,907,495   $168,524   $3,076,018 
Equipment Rentals   1,170,582    -    1,170,582 
Software Sales   395,336    -    395,336 
Engineering Parts   -    5,243,868    5,243,868 
Services   1,776,306    879,670    2,655,976 
                
Total Net Sales  $6,249,719   $6,292,061   $12,541,780 

 

NOTE 15 – INCOME TAXES

 

The Company’s effective tax rate for the three months ended April 30, 2020 and 2019 was 12.6% and 17.8%, respectively. The decrease in the effective tax rate for the six months ended April, 2020, as compared to April 30, 2019 was an increase in our AMT tax refund percentage from 5.2% in 2019 to 8.4% in 2020.

 

As of April 30, 2020, we had U.S. federal net operating losses (NOL) carryforwards of $3,011,790, which expire at various dates as follows:

 

2029  $2,707,158 
2028   304,632 
      
Total  $3,011,790 

 

NOTE 16 – RECLASSIFICATION OF PRIOR YEAR PRESENTATION

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Consolidated Balance Sheet and Consolidated Statements of Cash Flows for the fiscal year ended October 31, 2019, to reclassify the Value Added Tax (VAT) receivable.

 

NOTE 17 – SUBSEQUENT EVENT

 

On May 5, 2020, one of the subsidiaries received an unsecured Payroll Protection Program loan from the SBA in the amount of $122,327, which carries an interest rate of 1%. That portion of the loan, which is not forgiven, will be paid back in eighteen equal installments starting in November 2020. Maturity date is May 5, 2022.

 

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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 January 28, 2020. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

General Overview

 

Throughout these discussions, the following terminologies listed immediately below are used and have the meanings ascribed to them below:

 

“Current Quarter” Three-month period ended April 30, 2020
“Previous Quarter” Three-month period ended April 30, 2019
“Current Six Month Period” The Six-month period ended April 30, 2020
“Previous Six Month Period” The Six-month period ended April 30, 2019
“2020 Second Quarter Period” Three month period ended April 30, 2020
“2019 Second Quarter Period” Three month period ended April 30, 2019

 

We have two distinct operating businesses within our Group.

 

Products Business:

 

Our Products Business, also referred to as “Marine Technology Business”, designs, manufactures and sells and/or rents products and services to the subsea commercial and defense markets. The Products Business has operations in USA, UK, Denmark and Australia. Included in its products portfolio is its real time 3D sonar technology which has unique capabilities for both the commercial and defense underwater imaging sonar markets. Our products are used primarily in the underwater construction market, offshore oil and gas, offshore wind energy industry, complex dredging, port security, defense, mining and marine sciences sectors. Our customers include service providers to major oil and gas companies, renewable energy companies, law enforcement agencies, ports, mining companies, defense bodies, research institutes and universities.

 

Services Business:

 

Our Services Business primarily act as a sub-contractor to Prime Defense Contracts that provides sub-assemblies into broader defense programs. The Services Business has operations in the USA and UK. The central business model for the Services Business is that it typically designs and manufactures proprietary parts into larger defense mission critical integrated systems (MCIS). An example of such MCIS is the Close-In-Weapons Support (CIWS) Program for the Phalanx. These proprietary parts, once approved within the program MCIS, affords the Services Business the status of “preferred supplier for these parts”. Such status permits it to supply these parts and upgrade in the event of obsolescence or advancement of technology for the life of the program. Clients include prime defense contractors such as Raytheon and Northrop Grumman.

 

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Factors Affecting our Business

 

Our business is affected by a number of factors. Of particular concern are (i) uncertainty regarding the United Kingdom’s ongoing trade relationship with the European Union, an important market for our products, since its withdrawal from the European Union; and (ii) the curtailment of our business operations resulting from the coronavirus outbreak. See our Form 10-K filed with the Securities and Exchange Commission on January 28, 2020 for a more complete discussion of factors that affect our business.

 

United Kingdom’s Withdrawal from the European Union (“Brexit”)

 

Following the United Kingdom’s withdrawal from the European Union, the two parties have been in trade talks regarding their ongoing relationship after the transitional period ends in December 2020. If the parties fail to reach agreement, the United Kingdom will leave the European Union without a trade deal resulting in the application of the World Trade Organization (WTO) trade rules.

 

Leaving the European Union (“EU”) without a trade agreement could affect our UK operations (and therefore our overall consolidated results) which represents a significant part of our revenues. Our R&D and manufacturing capability for our flagship product Echoscope® is within the United Kingdom and due to the institutional knowledge of our products and technology, it does not lend itself to easily being transferred from Scotland to, for example, another European Union member state (as some other companies in other sectors have chosen to do). Coda Octopus Products Limited (Scotland based) and Coda Octopus Martech Limited (England based) both operate from within the UK.

 

Since there is no precedent for a European Union member state leaving the Union, the full implications for the Company are not currently evident. The outcome is dependent on the type of future relationship that is struck between the United Kingdom and the European Union. However, we believe that operating under the WTO rules would have far-reaching implications for our Company particularly in the area of costs associated with import/export arrangements for our products including custom duties on purchases and sales and delays and increased compliance costs in the supply chain (both purchasing and selling). We currently benefit from mutual recognition rules in a number of areas including export control requirements and quality standards which allow us to distribute our products freely in the European Union and globally where there are agreements with the EU and these third countries which the UK currently benefits from. If these are removed, it is likely to involve new qualification requirements with the attendant costs and delays involved. Furthermore, restrictions on free movement will also introduce additional barriers by limiting our ability to utilize our trained engineers and experts on customer projects in the European Union. In addition, shipments of goods will likely be interrupted because of delays at border and ports. This will affect our relationships with customers and negatively impact on our revenues.

 

The uncertainty as to whether the UK and EU will reach a trade agreement is causing significant fluctuations between the British Pound and other major currencies including the US Dollar and the Euro, which affects our business since a significant part of our income and expenditures relate to our activities in the United Kingdom.

 

We have taken steps to mitigate some of its impact of the United Kingdom leaving the European Union by establishing a Danish based subsidiary, Coda Octopus Products A/S, to maintain a presence in the European Union. We have increased our planning around this entity which would give us access to Europe, by taking on new premises in Copenhagen for its activities. We intend to run a large part of our rental business from this office. In the 2020 Second Quarter planning has stalled due to the outbreak of the corona virus which resulted in restrictions on freedom of movement. Even with such mitigation steps, we can give no assurance that this in itself would be sufficient to reduce the impact of the United Kingdom leaving the EU without a trade deal allowing for access to the EU markets.

 

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Impact of the Coronavirus outbreak

 

The global outbreak of the Coronavirus has resulted in various governments throughout the world (including the USA, United Kingdom and the European Union where we have operations), implementing measures restricting the freedom of movement of people. These restrictions have severely curtailed our business activities in the 2020 Second Quarter Period.

 

Our Business started to be impacted by the Coronavirus outbreak in February 2020 when a number of significant industry events such as Trade Shows (example, Oceanology 2020 and Defense Procurement Research Technology and Exportability 2020) important for the promotion and marketing of our products were cancelled. In addition, a number of navy projects which had been scheduled for implementation in Singapore and South Korea were indefinitely postponed in February due to the outbreak. During March 2020, governments introduced “global restriction of movement” that impacted our ability to conduct much of our income generating business activities in the Current Quarter (example offshore engineering project work or visiting customer sites for the delivery and implementation of project deliverables) resulting in significant impact on our consolidated revenues in the Current Quarter, while at the same time leaving us with significant costs associated with the fixed overheads of our business such as salaries, benefits, rates and the like. These circumstances have had a deleterious impact on our business and have resulted in a significant decrease in Net Income which fell from $1,973,494 in 2019 Second Quarter Period compared to a net loss of ($265,080) in the 2020 Second Quarter Period.

 

Our customer base is global and to this extent were also affected by the prevailing restriction of movement imposed by various governments globally.

 

During the Current Quarter our operations were impacted as follows:

 

UK Products Business where we conduct research and development, manufacturing of hardware products, development of software products   Approximately 40% of staff involved in manufacturing, software development, sales and business development and technical support were furloughed.
USA Products Business where we conduct sales and defense research and development   This operation could more easily work from home and we had 100% of staff working from home on defense related research and development work.
USA Engineering Business where we manufacture sub-assemblies for primarily Prime Defense Contractors   Approximately 60% of this business was non-operational during the Current Quarter.
UK Engineering Business where we manufacture sub-assemblies for primarily Prime Defense Contractors   Approximately 40% of this business was non-operational during the Current Quarter.

 

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The curtailment of our business activities due to the circumstances described above resulted in the Products Business Revenue falling by 50.6% over the same period last year and the Services business falling by 52.5% over the same period last year.

 

Coronavirus Impact Outlook

 

Until business activities are consistently resumed, we are uncertain as to what the ongoing impact of the coronavirus related restrictions will have on the global economy and thus demand for our products and services.

 

Products Business Outlook

 

In the Current Quarter the Products Business revenues fell by 50.6% compared to the comparable period in 2019.

 

The Products Business operations are global and much of our income generating activities require us to attend customer sites, often on an offshore vessel somewhere. Due to the transmission rate of the coronavirus, offshore activities now require more planning to ensure personnel entering the offshore facility is virus-free. The new norm for this requires personnel to be quarantined for a 14-day period in the country where the job site is located, prior to entering the vessel. This has a number of implications including additional expenses for the business and puts pressure on the availability of our available resources (as project implementation time is likely to increase by the 14 days arrival quarantine and the additional 14 days upon return to home country).

 

We rely on sophisticated electronics for our products and we anticipate delay in the supply chain and also increase in price. This may affect, among other things, our gross margins and ability to fulfil customer orders in a timely manner along with revenues.

 

Approximately 15% of our revenues emanate from the Oil and Gas sector. With pressure on Oil prices due to reduction in demand, this may affect demand for our products and services in this sector.

 

Services Business Outlook

 

In the Current Quarter the Services Segment revenues fell by 52.5% compared to the comparable period in 2019.

 

We expect delays in securing some of our outstanding defense orders, due in large part to government organizations working remotely, thus slowing completion and signature processing and the deferral of projects until 2021. With the introduction of strict quarantine measures requiring staff to stay home if they believe they have symptoms, we expect productivity to be impacted. This is likely to impact on the delivery of projects in both businesses.

 

In order to ensure business continuity, we have started the process of adapting our work place based on current health guidance in place by local public health bodies where our operations are based. This has allowed our core manufacturing staff in all locations to resume work.

 

We are taking steps to certain expenditures such as those relating to payroll and research and development in order to ensure free cash flows.

 

Critical Accounting Policies

 

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

 

Below is a discussion of accounting policies that we consider critical to an understanding of our financial condition and operating results and that may require complex judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, “Summary of Accounting Policies” of our Consolidated Financial Statements for the year ended October 31, 2019.

 

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Revenue Recognition

 

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.

 

For further discussion of our revenue recognition accounting policies, refer to Note 2 – “Revenue Recognition” in these financial statements and in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019.

 

Recoverability of Deferred Costs

 

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

 

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

 

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Income Taxes

 

The Company accounts for income taxes in accordance with Accounting Standards Codification 740, Income Taxes (ASC 740). Under ASC 740, deferred income tax assets and liabilities are recorded for the income tax effects of differences between the bases of assets and liabilities for financial reporting purposes and their bases for income tax reporting. The Company’s differences arise principally from the use of various accelerated and modified accelerated cost recovery system for income tax purposes versus straight line depreciation used for book purposes and from the utilization of net operating loss carry-forwards.

 

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

 

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

 

Intangible Assets

 

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

 

The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, goodwill is reduced by the excess of the carrying amount of the reporting unit over that reporting unit’s fair value. Goodwill can never be reduced below zero, if any. At the end of each year, we evaluate goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. There were no impairment charges during the periods presented.

 

Summary of Consolidated Results of Operations

 

During the Current Quarter, our operations have been severely impacted by the effects of the Coronavirus, in particular, the restrictions on the freedom of movement resulting in the lockdown of businesses in the places that we and our global customer base operate. is the curtailment of our business activities is reflected in our financial results for the Current Quarter and in the 2020 Second Quarter Period, our consolidated revenues were down by 51.5% compared to the 2019 Second Quarter Period. The Products operations revenue in the 2020 Second Quarter Period fell by 50.6% compared to the 2019 Second Quarter Period and the Services operations revenues were down by 52.5%

 

The Products Segment generated approximately 51% and 50% of our consolidated revenues for the Current and Previous Quarter, respectively, and our Services Segment generated 49% and 50 % of our consolidated revenues for the Current and Previous Quarter, respectively.

 

As a result of the significant curtailment of business activities including those of our global customers, the Company’s consolidated financial results in the Current Quarter were significantly down compared to the Previous Quarter resulting in a net loss of ($265,080) as compared to a net income of $1,973,494 in the Previous Quarter.

 

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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 $3,289,218 and $6,783,272 respectively, representing a decrease of 51.5%. This decrease is due to the curtailment of business activities resulting from the Coronavirus lockdown. Both of our Business operations realized a fall in revenues during the Current Quarter. The Products Business generated revenues of $1,691,199 compared to $3,420,183 representing a fall in its revenues of 50.6% and, similarly, the Services Business in generated revenues of $1,598,019 compared to $3,363,089 representing a fall in its revenues of a 52.5% fall.

 

 

Gross Profit Margins: Margin percentage was weaker in the Current Quarter at 58.5% (gross profit of $1,925,414) compared to 69.7% (gross profit of $4,724,662) in the Previous Quarter.

 

Gross Profit Margins may vary according to a number of factors. These include:

 

  The percentage of consolidated sales attributed by Products Business. The Gross Profit Margin yielded by the Products Business is generally higher than that of the Services Business;
  The percentage of consolidated sales attributed by the Services Business. The Services Business yields a lower gross profit margin on generated sales which are largely based on time and materials contracts (except for its Thermite® products);
 

The mix of sales within the Products Business (outright sales versus rentals; hardware sales versus software and mix of services: offshore engineering services or customer paid for research and development work around our technology); and

 

Level of Discounts we may give on Products due to volume purchase by customer and Commissions on sales (both the Services and Products work with sales agents).

 

In the Current Quarter Gross Profit Margins for the Products operations were 75.9% compared to 85.7% in the Previous Quarter and for the Services operation these were 40.1% in the Current Quarter compared to 53% in the Previous Quarter. Furthermore, sales in all categories within our Products operations were down which has resulted in a weaker gross profit margin yield in this quarter compared to the previous period last year. The table below shows a summary of break-out of sales for the Products Business in the Current Quarter compared to the Previous Quarter:

 

   Current Quarter

Products Segments Sales

   Previous Quarter
Products Segment Sales
   Percentage Change 
Equipment Sales  $482,858   $1,333,444    (63.8)%
Equipment Rentals   504,919    662,662    (23.8)%
Software Sales   15,746    141,185    (88.8)%
Services   687,676    1,282,892    (46.4)%
                
Total Net Sales  $1,691,199   $3,420,183    (50.6)%

 

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

 

Research and Development (R&D): Total consolidated Research and Development expenditures in the Current Quarter were $713,641 compared to $745,227, representing a fall of 4.2%.

 

On an annualized basis, it is our expectation that this area of expenditure will be less in this financial year as compared to the previous. In light of the impact of the coronavirus outbreak, we continue to review expenditures in this area and it is our strategy to reduce these in areas where it is viable to do so without significant impact on our future growth prospects. In the previous financial year, we were funding the development of the Heads up Display prototype system under the Cooperative Research and Development Agreement (see below). We have now completed our investment in this program and are now being funded for the second-generation development work by Office of Naval Research (ONR). Further details of where each operating business is expending on research and development is set out below.

 

  Services Segment.

 

During the Current Quarter the Services Business R&D expenditures increased by 319% (from $64,665 in the Previous Quarter to $270,945 in the Current Quarter). Research and Development expenditures are incurred by this business in relation to an incubator embedded systems division which it has established. This division is investing in the development of the Thermite® range of mission computers for leveraging across our group of companies. In this regard, since the beginning of our fiscal year we have hired 4 new engineers for this division and increase in R&D expenditures in this Segment reflects this. Thermite is a ruggedized mission computer with various variants which are man worn, backpack worn and simultaneously integrated in the soldier’s helmet and in defense system such as air-borne drones. The next generation of Thermite® (now the Thermite® Octal) is in trials with a number of customers and we would expect to start manufacturing these for sale later in 2020. We continue to believe that the onward development of the Thermite® product is significant for the growth of our Services Segment.

 

  Products Segment

 

R&D expenditures in the Products Business fell from $558,579 in the Previous Quarter to $442,696 in the Current Quarter, representing a reduction of 20.7%. These expenditures are attributed to investments we are making in product development.

 

  CRADA – Heads Up Development Prototype Investment  

 

In the Previous Quarter we also had incurred Research and Development expenditures attributed to the Cooperative Research and Development Agreement (“CRADA”). Under the CRADA we collaborated in the development of the first-generation prototype Heads Up Display (HUD) Unit for Naval Sea Systems Command (NAVSEA) in conjunction with Naval Surface Warfare Center, Panama Division. The first-generation prototype has been signed off under the CRADA and, accordingly, we do not expect further expenditures under the CRADA since the next generation of the HUD is expected to be funded by ONR/NAVSEA.

 

Segment 

April 30,

2020

  

April 30,

2019

   Percentage
Change
Services Segment R&D Expenditures  $270,945   $64,665   Increase of 319%
Products Segment R&D Expenditures  $442,696   $558,579   Decrease of 20.7%
Coda Octopus Group, Inc. R&D Expenditures  $-   $121,983   Decrease of 100%

 

 35 

 

 

Selling, General and Administrative Expenses (SG&A): SG&A expenses for the Current Quarter was $1,533,210 compared to $1,696,682 in the Previous Quarter, representing a reduction in this area of expenditures of 10%.

 

Due to the uncertainty in the global economic outlook caused by the coronavirus, we are reducing costs in a number of areas including wages and salaries to. In the Current Quarter, we have taken a number of steps to reduce costs and this exercise is ongoing.

 

The reduction in our SG&A in the Current Quarter is largely a reflection of certain waivers of Professional Fees from the Board and CEO, some cost-cutting in the areas of wages and salaries, and certain UK government grants received in the Current Quarter to cover payroll costs for furloughed UK staff of approximately $129,465.

 

In addition, within our SG&A numbers, we have a number of non-cash items relating to transactional exchange rate variance within General Costs and stock based compensation. We booked expenditures of $88,299 for stock based compensation for certain stock options granted to management under the Company’s 2017 Stock Option Incentive Plan. In the Previous Quarter we booked $42,287 for stock based compensation. We also recorded bad debt of $52,365, in the Current Quarter.

 

We also suffered a significant increase in our insurance costs which increased by 21% from $118,389 in the Previous Quarter to $143,895 in the Current Quarter.

 

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

 

Expenditure 

April 30,

2020

  

April 30,

2019

   Percentage
Change
Wages and Salaries  $749,865   $764,442   Decrease of 1.9%
Legal and Professional Fees (including accounting and audit)  $210,864   $276,168   Decrease of 23.7%
Rent for our various locations  $22,384   $69,185   Decrease of 67.7%
Marketing  $20,212   $83,635   Decrease of 75.8%
General Costs  $(71,756)  $(20,602)  Increase of 248.3%

 

The reduction in the “Legal and Professional” category of expenditures is due certain waivers of fees we have received from our Board and CEO in the Current Quarter.

 

The decrease in the category of rent is a reflection we now own most of the properties which we use for our business operations. We expect this category to remain at the amount reflected in the Current Quarter. The only rental property we currently utilize in our Company is our facility in Copenhagen, Denmark where we have established an office to mitigate against some of the impact of the United Kingdom’s withdrawal from the European Union.

 

The increase in General Costs is due to increase of transactional foreign currency exchange expenses.

 

Operating Income (loss): In the Current Quarter we realized an operating loss of ($321,437) compared to an operating income of $2,282,753 in the Previous Quarter, representing a fall of 114%. This is due to the impact of the curtailment of our business activities due to the Coronavirus related-lockdown in the jurisdictions we and our customers operate, resulting in significant reduction in our revenues compounded by our fixed operating expenses and thus overall financial performance during the Current Quarter. Although we were able to cut some of our costs in the Current Quarter, most of our cost of operations including payroll associated payroll costs, and professional fees are reasonably fixed.

 

Interest Expense: Interest expense decreased by 24.27% in the Current Quarter to $18,456 from $24,347 in the Previous Quarter. In the Previous Period we had loan and debentures totaling $1,293,976 bearing interest of 4.56% whereas in the Current Period we have loan and debentures of $819,163 bearing interest of 4.56% and Payment Protection Program Loan of $526,544 bearing interest of 1%. Note 10 – Notes Payable to the Unaudited Consolidated Financial Statements contains further details pertaining to outstanding loans and debentures.

 

Other Income: We had $(311) in Other Expense as compared to $26,228 in Other income in the Previous Quarter. This category is subject to fluctuations as it usually reflects Value Added Tax rebates from purchases made outside of the European Union by our UK operations and therefore fluctuates according to the level of such purchases.

 

Net Income (loss) before income taxes: In the Current Quarter, we realized a loss of ($340,204) before income taxes as compared to profit of $2,284,634 in the Previous Quarter, representing a decrease of 115% in Net Income before taxes. This is due to the curtailment of our business activities which resulted in our generated consolidated revenues falling by 51.5%. Total operating expenditures decreased by 8% and was $2,246,851 in the Current Quarter as compared to $2,441,909 in the Previous Quarter and Interest Expense decreased by 22.9% and was $18,767 compared to $24,347.

 

 36 

 

 

Net Income: For the reasons discussed above, we realized a net loss of ($265,080) in the Current Quarter as compared to a net income of $1,973,494 in the Previous Quarter, representing a decrease of 113%.

 

Comprehensive Income (loss). In the Current Quarter Comprehensive loss was $819,065 compared to a comprehensive income of $2,068,475 for the Previous Quarter, representing a decrease of 140%. This category is affected by fluctuations in foreign currency exchange transactions. In the Previous Quarter we had a gain on foreign currency translation adjustment of $94,981 compared to a loss of $553,985 in the Current Quarter.

 

Results of Operations for the Current Six Month Period compared to the Previous Six Month Period

 

Revenue: Total consolidated revenues for the Current Six Month Period and the Previous Six Month Period were $9,970,197 and $12,541,780 respectively, representing a decrease of 20.5%. The significant fall in revenues in the Current Six Month Period, is due to the reduction of business activities in the 2020 Second Quarter Period caused by the curtailment of our business operations and that of our customers as a result of the Coronavirus outbreak and related lockdown.

 

Gross Profit Margins: Margin percentage was weaker in the Current Six Month Period at 62.2% (gross profit of $6,199,854) compared to 65.8% (gross profit of $8,257,734) in the Previous Six Month Period.

 

Gross Profit Margins vary according to a number of factors, including:

 

  The percentage of consolidated sales attributed by Products Business. The Gross Profit Margin yielded by the Products Business is generally higher than that of the Services Business;
  The percentage of consolidated sales attributed by the Services Business (this Business yields lower gross profit margin on sales which are largely based on time and materials contracts (except for its Thermite® products);
  The mix of sales within the Products Business (outright sales versus rentals; hardware sales versus software and mix of services: offshore engineering services or customer paid for research and development work around our technology); and
 

Level of Discounts we may give on Products due to volume purchase by customer and Commissions on sales (both the Services and Products work with sales agents).

 

In the Current Six Month Period Gross Profit Margins for the Products Business were 80.0% compared to 80.7% in the Previous Six Month Period; Gross Profit Margins for the Services Business were 41.7% in the Current Six Month Period compared to 51.1% in the Previous Six Month Period. Furthermore, sales in all categories within our Products operations were down which has resulted in a weaker gross profit margin yield in this quarter compared to the previous period last year. The table below shows a summary of break-out of sales for the Products Business in the Current Quarter compared to the Previous Quarter:

 

   Six Month Period 2020   Six Month Period 2019   Percentage Change
Equipment Sales  $3,205,777   $2,907,495   Increase of 10.3%
Equipment Rentals   828,564    1,170,582   Decrease of 29.2%
Software Sales   245,521    395,336   Decrease of 37.9%
Services   1,044,149    1,776,306   Decrease of 41.2%
              
Total Net Sales  $5,324,011   $6,249,719   Decrease of 14.8%

 

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

 

 37 

 

 

Research and Development (R&D): R&D expenditures in the Current Six Month Period were $1,641,906 compared to the $1,316,553 in the Previous Six Month Period, representing an increase of 24.7%. The increase in R&D expenditures is attributed to the Services Segment which saw an increase in this area of expenditures of 391%. The Products division saw a reduction in this area of expenditures by 3.0%.

 

In light of the impact of the coronavirus outbreak and the uncertainty around the global economic outlook which could affect the demand for our products and services, we continue to review expenditures in this area and it is our strategy to reduce these in areas where it is viable to do so without significant impact on our future growth prospects. On an annualized basis, it is our expectation that this area of expenditure will be less in this financial year as compared to the previous

 

In the previous financial year, the Company was funding the development of the Heads up Display prototype system under the Cooperative Research and Development Agreement (see below). We have now completed our investment in this program and are now being funded for the second-generation development work by Office of Naval Research (ONR). Further details of where each operating business is expending on research and development is set out below. We believe that this will result in a fall of R&D expenditures in this financial year.

 

  Services Segment.

 

During the Current Six Month Period the Services Business R&D expenditures increased by 391%. Research and Development expenditures are incurred by this business in relation to an incubator embedded systems division which it has established. This division is investing in the development of the Thermite® range of mission computers for leveraging across our group of companies. In this regard, since the beginning of our fiscal year we have hired 4 new engineers for this division and increase in R&D expenditures in this Segment reflects this. Thermite is a ruggedized mission computer with various variants which are man worn, backpack worn and simultaneously integrated in the soldier’s helmet and in defense system such as air-borne drones. The next generation of Thermite® (now the Thermite® Octal) is in trials with a number of customers and we would expect to start manufacturing these for sale later in 2020. We continue to believe that the onward development of the Thermite® product is significant for the growth of our Services Segment.

 

  Products Segment

 

During the Current Six Month Period R&D expenditures in the Products Segment decreased by 3.0% from $1,030,004 in the Previous Six Month Period to $999,425 in the Current Six Month Period. These expenditures are attributed to investments we are making in developing products.

 

  CRADA – Heads Up Development Prototype Investment

 

In the Previous Six Month Period we had costs of $189,335 compared to $165,098 in the Current Six Month Period, representing a fall of 14.68% on Research and Development expenditures attributed to the Cooperative Research and Development Agreement (“CRADA”). Under the CRADA we collaborated in the development of the first-generation prototype Heads Up Display (HUD) Unit for Naval Sea Systems Command (NAVSEA) in conjunction with Naval Surface Warfare Center, Panama Division. The first-generation prototype has been signed off under the CRADA and, accordingly, we do not expect further expenditures under the CRADA since the next generation of the HUD will be funded by ONR/NAVSEA. We have started to receive the first tranche of the second generation HUD development funding.

 

Segment  April 30, 2020   April 30, 2019   Percentage Change
Services Segment R&D Expenditures  $477,383    $ 97, 214   Increase of 391%
Products Segment R&D Expenditures  $999,425   $1,030,004   Decrease of 3.0%
Coda Octopus Group, Inc. R&D Expenditures  $165,098   $189,335   Decrease of 12.8%

 

 38 

 

 

Selling, General and Administrative Expenses (SG&A): SG&A expenses for the Current Six Month Period increased to $3,424,888 from $3, 315,957 in the Previous Six Month Period representing an increase of 3%.

 

Due to the uncertainty in the global economic outlook caused by the coronavirus, we are reducing costs in a number of areas including wages and salaries to ensure ongoing financial viability as a business.

 

The increase in SG&A in the Current Six Month Period compared to the Previous Six Month Period reflects increase in the areas of Wages and Salaries (4.27%), Legal and Professional (7.27%), Insurance Costs (11%) and General Costs (5254.66%).

 

We also booked expenses for stock based charges of $88,299 in the Current Six Month Period compared to $42,287 in the Previous Six Month Period, representing an increase of 197.22% and recorded bad debt of $52,365 in the Current Six Month Period compared to nil in the Previous Six Month Period.

 

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

 

Expenditure 

April 30,

2020

  

April 30,

2019

   Percentage
Change
Wages and Salaries  $1,555,595   $1,491,881   Increase of 4.3%
Legal and Professional Fees (including accounting and audit)  $588,072   $548,224   Increase of 7.3%
Rent for our various locations  $14,191   $153,331   Decrease of 90.7%
Marketing  $66,219   $89,655   Decrease of 26.1%
General Costs  $74,644   $1,394   Increase of 5254%

 

The increase in the “Wages and Salaries” category of expenditure in the Current Six Month Period, is a reflection of increase in the costs of labor in the UK where we have the highest head count of staff and the costs of additional staff in the area of sales and marketing. We have started to introduce some costs cutting measures and would expect on an annualized basis this area of expenditures will remain broadly in line with the annualized numbers in the previous financial year.

 

The increase in the “Legal and Professional” category of expenditures is due to increase in professional fees.

 

The decrease in the category of rent is a reflection we now own most of the properties which we use for our business operations across our group. We expect this category to remain at the amount reflected in the Current Quarter. The only rental property we currently utilize in our Company is our facility in Copenhagen, Denmark where we have established this office to mitigate against some of the impact of the United Kingdom’s withdrawal from the European Union.

 

The increase in General Costs is due to increase of transactional foreign currency exchange expenses.

 

Operating Income: Our income from our operating activities in the Current Six Month Period was $1,133,060 as compared to $3,625,224 in the Previous Six Month Period which represents a fall of 69%. This is due to the curtailment of our business activities in the 2020 Second Quarter Period as a result of the coronavirus government measures restricting movement, our revenues fell by 51.5% in the said 2020 Second Quarter Period compared to 2019 Second Quarter Period. This was compounded by the fact that our consolidated operating expenses remained materially the same during this period, resulting in an overall operating loss of ($265,080) in the 2020 Second Quarter period compared to a profit of $1,973,494 in the 2019 Second Quarter Period. The results of our 2020 Second Quarter Period has impacted our Current Six Month Period financial results.

 

Interest Expense: Interest expense in the Current Six Month Period was $38,070 compared to $49,408 in the Previous Six Month Period, representing a reduction of 22.9%. This is an area that is decreasing due to reduction in the level of secured debentures. Please refer to Note 11 – Notes Payable to the Unaudited Consolidated Financial Statements for further details pertaining to this HSBC Loan for more information on this.

 

Other Income: In the Current Six Month Period, we had Other Income of $12,513 as compared to $59,069 in the Previous Six Month Period representing a decrease of 78.8%. This category is subject to fluctuations as it usually reflects Value Added Tax rebates from purchases made outside of the European Union by our UK operations and therefore fluctuates according to the level of such purchases.

 

Net Income before income taxes: In the Current Six Month Period, we had a net income before income taxes of $1,107,503 as compared to $3,634,885 in the Previous Six Month Period, representing a fall of 70%. This is due to the reasons explained above.

 

 39 

 

 

Net Income: In the Current Six Month Period net income fell by 66% to $1,081,693 from $3,212,507 in the Previous Six Month Period due to the impact on our business activities resulting from the Coronavirus related curtailment of business activities.

 

Comprehensive Income. In the Current Six Month Period Comprehensive Income was $612,459 compared to $3,605,343 for the Previous Six Month Period. This category is affected by fluctuations in foreign currency exchange transactions. In the Previous Six Month Period we had a gain of $392,836 on foreign currency translation adjustment transactions compared to a loss on these transactions of $469,243 in the Current Six Month Period.

 

Liquidity and Capital Resources

 

At April 30, 2020, the Company had an accumulated deficit of $25,687,514, working capital of $21,528,723 and stockholders’ equity of $31,328,531. For the Six Months Ended April 30, 2020, the Company’s operating activities provided cash of $1,760,478.

 

Fin