UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
OR
For the transition period from ______________ to ______________
Commission
File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of Incorporation or organization) |
(I.R.S. Employer Identification Number) |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: | ( |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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.
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 ☐ | Smaller
reporting company |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares outstanding of issuer’s common stock, $0.001 par value as of September 14, 2021 is .
INDEX
2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
For the Three Months Ended July 31, 2021 and 2020
Contents
3 |
CODA OCTOPUS GROUP, INC.
Consolidated Balance Sheets
July 31, 2021 and October 31, 2020
2021 | 2020 | |||||||
Unaudited | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | $ | ||||||
Accounts Receivable, net | ||||||||
Inventory | ||||||||
Unbilled Receivables | ||||||||
Prepaid Expenses | ||||||||
Other Current Assets | ||||||||
Total Current Assets | ||||||||
FIXED ASSETS | ||||||||
Property and Equipment, net | ||||||||
OTHER ASSETS | ||||||||
Goodwill and Other Intangibles, net | ||||||||
Deferred Tax Asset | ||||||||
Total Other Assets | ||||||||
Total Assets | $ | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements
4 |
CODA OCTOPUS GROUP, INC.
Consolidated Balance Sheets (Continued)
July 31, 2021 and October 31, 2020
2021 | 2020 | |||||||
Unaudited | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts Payable | $ | $ | ||||||
Accrued Expenses and Other Current Liabilities | ||||||||
Note Payable | ||||||||
Deferred Revenue | ||||||||
Total Current Liabilities | ||||||||
LONG TERM LIABILITIES | ||||||||
Deferred Revenue, less current portion | ||||||||
Note Payable, less current portion | - | |||||||
Total Long Term Liabilities | ||||||||
Total Liabilities | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common Stock, $ | par value; shares authorized, shares issued and outstanding as of July 31, 2021 and shares issued and outstanding as of October 31, 2020, respectively||||||||
Additional Paid-in Capital | ||||||||
Accumulated Other Comprehensive Loss | ( | ) | ( | ) | ||||
Accumulated Deficit | ( | ) | ( | ) | ||||
Total Stockholders’ Equity | ||||||||
Total Liabilities and Stockholders’ Equity | $ | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements
5 |
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended July 31, | Nine Months Ended July 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Net Revenues | $ | $ | $ | $ | ||||||||||||
Cost of Revenues | ||||||||||||||||
Gross Profit | ||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Research & Development | ||||||||||||||||
Selling, General & Administrative | ||||||||||||||||
Total Operating Expenses | ||||||||||||||||
INCOME FROM OPERATIONS | ||||||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Other Income | ||||||||||||||||
Funding from Paycheck Protection Program | ||||||||||||||||
Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ||||||||||
INCOME BEFORE INCOME TAX EXPENSE | ||||||||||||||||
INCOME TAX BENEFIT (EXPENSE) | ||||||||||||||||
Current Tax Benefit | ||||||||||||||||
Deferred Tax Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total Income Tax Benefit (Expense) | ( | ) | ( | ) | ||||||||||||
NET INCOME | $ | $ | $ | $ | ||||||||||||
NET INCOME PER SHARE: | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||
WEIGHTED AVERAGE SHARES: | ||||||||||||||||
Basic | ||||||||||||||||
Diluted | ||||||||||||||||
NET INCOME | $ | $ | $ | $ | ||||||||||||
Other Comprehensive Income | ||||||||||||||||
Foreign Currency Translation Adjustment | ( | ) | ||||||||||||||
COMPREHENSIVE INCOME | $ | $ | $ | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements
6 |
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three, Six and Nine Months Ended July 31, 2021 and 2020
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||||||||
Shares | Amount | Capital | Income (Loss) | Deficit | Total | |||||||||||||||||||
Balance, October 31, 2019 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||
Net Income | - | - | - | - | ||||||||||||||||||||
Balance, January 31, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||
Stock based compensation | - | - | - | - | ||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | ( | - | ( | ||||||||||||||||||
Net Loss | - | - | - | - | ( | ( | ||||||||||||||||||
Balance, April 30, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||
Stock based compensation | - | - | - | - | ||||||||||||||||||||
Consultant stock based compensation | - | - | ||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||
Net Loss | - | - | - | - | ||||||||||||||||||||
Balance, July 31, 2020 | $ | ( | $ | ( |
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||||||||
Shares | Amount | Capital | Income (Loss) | Deficit | Total | |||||||||||||||||||
Balance, October 31, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||
Employee stock based compensation | - | - | - | - | ||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||
Net Income | - | - | - | - | ||||||||||||||||||||
Balance, January 31, 2021 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||
Employee stock based compensation | - | - | - | - | ||||||||||||||||||||
Stock issued for options exercised | ( | - | - | - | ||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||
Net Income | - | - | - | - | ||||||||||||||||||||
Balance, April 30, 2021 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||
Employee stock based compensation | - | - | ||||||||||||||||||||||
Stock issued for options exercised | ( | - | ||||||||||||||||||||||
Consultant stock based compensation | - | - | ||||||||||||||||||||||
Foreign currency translation adjustment | ( | - | ( | ) | ||||||||||||||||||||
Net Income | ||||||||||||||||||||||||
Balance, July 31, 2021 | $ | $ | $ | ( | $ | ( | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements
7 |
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended July 31, | ||||||||
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Stock based compensation | ||||||||
Deferred income taxes | ||||||||
Funding from Paycheck Protection Program recognized as income | ( | |||||||
(Increase) decrease in operating assets: | ||||||||
Accounts receivable | ( | |||||||
Inventory | ( | ( | ||||||
Unbilled receivables | ( | |||||||
Prepaid expenses | ( | |||||||
Other current assets | ( | |||||||
Increase (decrease) in operating liabilities: | ||||||||
Accounts payable and other current liabilities | ( | ( | ||||||
Deferred revenue | ||||||||
Net Cash Provided by Operating Activities | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | ( | ( | ||||||
Purchases of other intangible assets | ( | ( | ||||||
Net Cash Used in Investing Activities | ( | ( | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Repayment of notes | ( | ( | ||||||
Proceeds from Paycheck Protection Program | ||||||||
Net Cash Provided by Financing Activities | ||||||||
EFFECT OF CURRENCY TRANSLATION ON CHANGES IN CASH | ||||||||
NET INCREASE IN CASH | ||||||||
CASH AT THE BEGINNING OF THE PERIOD | ||||||||
CASH AT THE END OF THE PERIOD | $ | $ | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
Cash paid for interest | $ | $ | ||||||
Cash paid for taxes | $ | $ |
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
July 31, 2021 and 2020
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared based upon US 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, 2020 and 2019 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, 2021, (“the Form 10-K”). The results of operations for the interim period ended July 31, 2021 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, 2020, 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 July 31, 2021 and the results of operations, comprehensive income and cash flows for the interim periods ended July 31, 2021 and 2020. 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, and Danish based operations are measured using the 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
The Company recognizes revenue in accordance with Financial Accounting Standards Board’s Topic 606, Revenue from Contracts with Customers (“Topic 606”).
Topic 606 has established a five-step process to determine the amount of revenue to record from contracts with customers. The five steps are:
● | Determine if we have a contract with a customer; | |
● | Determine the performance obligations in that contract; | |
● | Determine the transaction price; | |
● | Allocate the transaction price to the performance obligations; and | |
● | Determine when to recognize revenue. |
9 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 2 – REVENUE RECOGNITION (Continued)
We have two distinct business operations (“Marine Technology Business” and “Engineering Business”). The Marine Technology Business 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 Business which provide engineering services primarily to prime defense contractors. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential additional variable consideration. Our sales do not include a right of return by the customer.
With regard to our Marine Technology Business, all of its products are sold on a stand-alone basis and those market prices are evidence of the value of the products. To the extent that we also provide services (e.g., installation, training, post-sales technical support etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been provided to the customer and evidence of the provision of those services exist.
Revenue derived from either our subscription package offerings or rental of our equipment is recognized when performance obligations are met, in particular, on a daily basis during the subscription or rental period.
For arrangements with multiple performance obligations, we recognize product revenue by allocating the transaction revenue to each performance obligation based on the relative fair value of each deliverable and recognize revenue when performance obligations are met including when equipment is delivered, and for rental of equipment, when installation and other services are performed.
Our contracts sometimes require customer payments in advance of revenue recognition. In such instances these advance payments are recognized as revenue when the Company has fulfilled its obligations under the respective contracts. Until such time, we recognize these prepayments as deferred revenue.
For software license sales for which any services rendered are not considered distinct to the functionality of the software, we recognize revenue upon delivery of the software. Delivery is deemed when we issue the software activation code.
With respect to revenues related to our Services Business, there are contracts in place that specify the fixed hourly rate and other reimbursable costs to be billed based on material and direct labor hours incurred. Revenue is recognized on these contracts based on material and the direct labor hours incurred. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred (materials and direct labor hours) to date to estimated total services (materials and direct labor hours) for each contract. This method is used as we consider expenditures for direct materials and labor hours to be the best available measure of progress on these contracts.
On a quarterly basis, we examine all of our fixed-price contracts to determine if there are any losses to be recognized during the period. Any such loss is recorded in the quarter in which the loss first becomes apparent based upon costs incurred to date and the estimated costs to complete as determined by experience from similar contracts. Variations from estimated contract performance could result in adjustments to operating results.
10 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
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 incremental direct costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties. The pricing of these service contracts is intended to provide for the recovery of these types of deferred costs over the life of the contract.
We recognize such costs in accordance with our revenue recognition policy by contract. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized over time, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each quarterly balance sheet date, we review deferred costs, to ensure they are ultimately recoverable.
Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.
Deferred Commissions
Our
incremental direct costs of obtaining a contract, which consists of sales commissions are deferred and amortized over the period of the
contract performance. We classify deferred commissions as current or noncurrent based on the timing of when we expect to recognize the
expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets, and other
assets, net, respectively, in our consolidated balance sheets. As of July 31, 2021 and October 31, 2020, we had deferred commissions
of $
Other Revenue Disclosures
See Note 15 – (“Segment Analysis”) for a breakdown of revenues from external customers and cost of those revenues between our two reporting segments: Product Segment and Services Segment including information on the split of revenues by geography and type.
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments include cash, accounts receivable, accounts payable, accrued expenses and notes payable. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair values because of the short-term nature of these instruments. The aggregate carrying amount of the notes payable approximates fair value as they bear interest at a market interest rate based on their term and maturity.
The fair value of the Company’s long-term debt approximates its carrying amount based on the fact that the Company believes it could obtain similar terms and conditions for similar debt.
11 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 4 – FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated at the prevailing exchange rates at the balance sheet dates. Related revenues and expenses are translated at weighted average exchange rates in effect during the reporting period. Stockholders’ equity, fixed assets and long-term investments are recorded at historical exchange rates. Resulting translation adjustments are recorded as a separate component in stockholders’ equity as part of accumulated other comprehensive income or (loss) as may be appropriate. Foreign currency transaction gains and losses are included in the consolidated statements of income and comprehensive income.
NOTE 5 – INVENTORY
Inventory is stated at the lower of cost (weighted average method) or net realizable value. Inventory consisted of the following components:
July 31, | October 31, | |||||||
2021 | 2020 | |||||||
Raw materials and parts | $ | $ | ||||||
Work in progress | ||||||||
Finished goods | ||||||||
Total Inventory | $ | $ |
NOTE 6 – FIXED ASSETS
Property and equipment, net consisted of the following as of:
July 31, | October 31, | |||||||
2021 | 2020 | |||||||
Buildings | $ | $ | ||||||
Land | ||||||||
Office machinery and equipment | ||||||||
Rental assets | ||||||||
Furniture, fixtures and improvements | ||||||||
Totals | ||||||||
Less: accumulated depreciation | ( | ) | ( | ) | ||||
Total Property and Equipment, net | $ | $ |
12 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 7 – OTHER CURRENT ASSETS
Other current assets consisted of the following at:
July 31, | October 31, | |||||||
2021 | 2020 | |||||||
Deposits | $ | $ | ||||||
Tax receivables | ||||||||
Total Other Current Assets | $ | $ |
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, valuation of stock compensation, valuation of deferred tax assets, evaluation of uncertain tax positions, and the valuation of goodwill and other intangibles.
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 balance sheet. These amounts are stated on the consolidated balance sheets as Unbilled
Receivables of $
Our
current Deferred Revenue of $
Revenue
received as part of sales of equipment includes a provision for warranty, extended warranty sales and TLS and is treated as deferred
revenue. These amounts are amortized over the relevant warranty period (12 months is our standard warranty or 24, 36 or 60 months
for extended warranty or TLS) from the date of sale. These amounts are stated on the consolidated balance sheets as a component
of non-current Deferred Revenue and were $
13 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 10 – CONCENTRATIONS
Significant Customers
During
the three months ended July 31, 2021, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues
from these customers were $
During
the three months ended July 31, 2020, the Company had two customers from whom it generated sales greater than 10% of net revenues.
Revenues from these customers were $
During
the nine months ended July 31, 2021, the Company had one customer from whom it generated sales greater than 10% of net revenues. Revenues
from this customer were $
During
the nine months ended July 31, 2020, the Company had one customer from whom it generated sales greater than 10% of net revenues. Revenues
from this customer was $
NOTE 11 – NOTE PAYABLE
July 31, | October 31, | |||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Total | ||||||||
Less: current portion | ( | ) | ( | ) | ||||
Total Long Term Note Payable | $ | $ |
The HSBC loan is secured by a blanket lien on all of the Company’s US subsidiaries. The foreign subsidiaries are each guarantors of the obligations undertaken in the loan agreement.
During
the nine months ended July 31, 2021, the Company received $
In
April and May 2020, our US companies, received $
14 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 11 – NOTE PAYABLE (Continued)
The
Company entered into a $
NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS
There have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
July 31, | July 31, | July 31, | July 31, | |||||||||||||
Fiscal Period | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Numerator: | ||||||||||||||||
Net Income (Loss) | $ | $ | $ | $ | ||||||||||||
Denominator: | ||||||||||||||||
Basic weighted average common shares outstanding | ||||||||||||||||
Unused portion of options and restricted stock awards | ||||||||||||||||
Diluted outstanding shares | ||||||||||||||||
Net income (Loss) per share | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | $ | $ | $ | $ |
NOTE 14 – 2017 STOCK INCENTIVE PLAN
On December 6, 2017, the Board of Directors adopted the 2017 Stock Incentive Plan (the “Plan”) with shares of Common Stock available under the Plan for issuance. This Plan was approved by Stockholders at its meeting held on or around July 24, 2018.
During the nine months ended July 31, 2020, the Company granted to various eligible individuals options to purchase an aggregate of shares of common stock pursuant to the terms of the Plan. During the nine months ended July 31, 2020, options lapsed. As of July 31, 2020, there were shares available for future issue under the Plan. The total stock compensation expense during the nine months ended July 31, 2020, was $ .
During the nine months ended July 31, 2021, the Company granted to various eligible individuals Restricted Stock Awards to purchase an aggregate of shares of common stock pursuant to the terms of the Plan. During the nine months ended July 31, 2021 we had options lapsing. As of July 31, 2021, shares of common stock were issued pursuant the exercise of options. options vested in March 2021 but remains unexercised as of July 31, 2021. As of July 31, 2021, there were shares of common stock available for future issue under the Plan. The total stock compensation expense during the nine months ended July 31, 2021, was $ .
15 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 15 -SEGMENT ANALYSIS
Based
on the fundamental difference between the types of our offerings products versus services, we operate
Segment operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Corporate includes general corporate administrative costs (“Overhead”).
The Company evaluates performance and allocates resources based upon segment operating income. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies.
There are inter-segment sales disclosed in the tables below for informational purposes, but which have been eliminated in our financial statements.
The following table summarizes segment asset and operating balances by reportable segment as of and for the three and nine months ended July 31, 2021 and 2020, respectively.
The Company’s reportable business segments sell their goods and services in four geographic locations:
● | Americas |
● | Europe |
● | Australia/Asia |
● | Middle East/Africa |
16 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 15 -SEGMENT ANALYSIS (Continued)
Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
Three Months Ended July 31, 2021 | ||||||||||||||||
Revenues from External Customers | $ | $ | $ | $ | ||||||||||||
Cost of Revenues | - | |||||||||||||||
Gross Profit | - | |||||||||||||||
Research & Development | - | |||||||||||||||
Selling, General & Administrative | ||||||||||||||||
Total Operating Expenses | ||||||||||||||||
Income (Loss) from Operations | ( | ) | ||||||||||||||
Other Income (Expense) | ||||||||||||||||
Other Income | - | |||||||||||||||
Funding from Paycheck Protection Program | - | - | - | - | ||||||||||||
Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ||||||||||
Income (Loss) before Income Taxes | ( | ) | ||||||||||||||
Income Tax (Expense) Benefit | ||||||||||||||||
Current Tax Benefit | - | |||||||||||||||
Deferred Tax (Expense) Benefit | ( | ) | ( | ) | ||||||||||||
Total Income Tax (Expense) Benefit | ( | ) | ||||||||||||||
Net Income (Loss) | $ | $ | $ | ( | ) | $ | ||||||||||
Supplemental Disclosures | ||||||||||||||||
Total Assets | $ | $ | $ | $ | ||||||||||||
Total Liabilities | $ | $ | $ | $ | ||||||||||||
Revenues from Intercompany Sales - eliminated from sales above | $ | $ | $ | $ | ||||||||||||
Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
Purchases of Long-lived Assets | $ | $ | $ | $ |
17 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 15 -SEGMENT ANALYSIS (Continued)
Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
Three Months Ended July 31, 2020 | ||||||||||||||||
Revenues from External Customers | $ | $ | $ | $ | ||||||||||||
Cost of Revenues | - | |||||||||||||||
Gross Profit | - | |||||||||||||||
Research & Development | ||||||||||||||||
Selling, General & Administrative | ||||||||||||||||
Total Operating Expenses | ||||||||||||||||
Income (Loss) from Operations | ( | ) | ||||||||||||||
Other Income (Expense) | ||||||||||||||||
Other Income | - | |||||||||||||||
Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ||||||||||
Income (Loss) before Income Taxes | ( | ) | ||||||||||||||
Income Tax (Expense) Benefit | ||||||||||||||||
Current Tax (Expense) Benefit | - | ( | ) | |||||||||||||
Deferred Tax (Expense) Benefit | ( | ) | ( | ) | ( | ) | ||||||||||
Total Income Tax (Expense) Benefit | ( | ) | ( | ) | ( | ) | ||||||||||
Net Income (Loss) | $ | $ | $ | ( | ) | $ | ||||||||||
Supplemental Disclosures | ||||||||||||||||
Total Assets | $ | $ | $ | $ | ||||||||||||
Total Liabilities | $ | $ | $ | $ | ||||||||||||
Revenues from Intercompany Sales - eliminated from sales above | $ | $ | $ | $ | ||||||||||||
Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
Purchases of Long-lived Assets | $ | $ | $ | $ |
18 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 15 -SEGMENT ANALYSIS (Continued)
Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
Nine Months Ended July 31, 2021 | ||||||||||||||||
Revenues from External Customers | $ | $ | $ | $ | ||||||||||||
Cost of Revenues | - | |||||||||||||||
Gross Profit | - | |||||||||||||||
Research & Development | - | |||||||||||||||
Selling, General & Administrative | ||||||||||||||||
Total Operating Expenses | ||||||||||||||||
Income (Loss) from Operations | ( | ) | ( | ) | ||||||||||||
Other Income (Expense) | ||||||||||||||||
Other Income | ||||||||||||||||
Funding from Paycheck Protection Program | - | |||||||||||||||
Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total Other Income (Expense) | ( | ) | ||||||||||||||
Income (Loss) before Income Taxes | ( | ) | ||||||||||||||
Income Tax (Expense) Benefit | ||||||||||||||||
Current Tax Benefit (Expense) | ( | ) | ||||||||||||||
Deferred Tax (Expense) Benefit | ( | ) | ( | ) | ( | ) | ||||||||||
Total Income Tax (Expense) Benefit | ( | ) | ( | ) | ||||||||||||
Net Income (Loss) | $ | $ | $ | ( | ) | $ | ||||||||||
Supplemental Disclosures | ||||||||||||||||
Total Assets | $ | $ | $ | $ | ||||||||||||
Total Liabilities | $ | $ | $ | $ | ||||||||||||
Revenues from Intercompany Sales - eliminated from sales above | $ | $ | $ | $ | ||||||||||||
Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
Purchases of Long-lived Assets | $ | $ | $ | $ |
19 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 15 -SEGMENT ANALYSIS (Continued)
Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
Nine Months Ended July 31, 2020 | ||||||||||||||||
Revenues from External Customers | $ | $ | $ | $ | ||||||||||||
Cost of Revenues | - | |||||||||||||||
Gross Profit | - | |||||||||||||||
Research & Development | ||||||||||||||||
Selling, General & Administrative | ||||||||||||||||
Total Operating Expenses | ||||||||||||||||
Income (Loss) from Operations | ( | ) | ||||||||||||||
Other Income (Expense) | ||||||||||||||||
Other Income | - | |||||||||||||||
Interest (Expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ||||||||||
Income (Loss) before Income Taxes | ( | ) | ||||||||||||||
Income Tax (Expense) Benefit | ||||||||||||||||
Current Tax (Expense) Benefit | - | ( | ) | |||||||||||||
Deferred Tax (Expense) Benefit | ( | ) | ( | ) | ( | ) | ||||||||||
Total Income Tax (Expense) Benefit | ( | ) | ( | ) | ( | ) | ||||||||||
Net Income (Loss) | $ | $ | $ | ( | ) | $ | ||||||||||
Supplemental Disclosures | ||||||||||||||||
Total Assets | $ | $ | $ | $ | ||||||||||||
Total Liabilities | $ | $ | $ | $ | ||||||||||||
Revenues from Intercompany Sales - eliminated from sales above | $ | $ | $ | $ | ||||||||||||
Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
Purchases of Long-lived Assets | $ | $ | $ | $ |
20 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 15 -SEGMENT ANALYSIS (Continued)
For the Three Months Ended July 31, 2021 | ||||||||||||
Marine | Marine | |||||||||||
Technology | Engineering | Grand | ||||||||||
Business | Business | Total | ||||||||||
Americas | $ | $ | $ | |||||||||
Europe | ||||||||||||
Australia/Asia | ||||||||||||
Middle East/Africa | ||||||||||||
$ | ||||||||||||
Equipment Sales | $ | $ | $ | |||||||||
Equipment Rentals | ||||||||||||
Software Sales | ||||||||||||
Engineering Parts | ||||||||||||
Services | ||||||||||||
$ | ||||||||||||
Goods transferred at a point in time | $ | $ | $ | |||||||||
Services transferred over time | ||||||||||||
$ | $ |
21 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 15 -SEGMENT ANALYSIS (Continued)
For the Three Months Ended July 31, 2020 | ||||||||||||
Marine | Marine | |||||||||||
Technology | Engineering | Grand | ||||||||||
Business | Business | Total | ||||||||||
Americas | $ | $ | $ | |||||||||
Europe | ||||||||||||
Australia/Asia | ||||||||||||
Middle East/Africa | ||||||||||||
$ | $ | $ | ||||||||||
Equipment Sales | $ | $ | $ | |||||||||
Equipment Rentals | ||||||||||||
Software Sales | ||||||||||||
Engineering Parts | ||||||||||||
Services | ||||||||||||
$ | $ | $ | ||||||||||
Goods transferred at a point in time | $ | $ | $ | |||||||||
Services transferred over time | ||||||||||||
$ | $ | $ |
22 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 15 -SEGMENT ANALYSIS (Continued)
For the Nine Months Ended July 31, 2021 | ||||||||||||
Marine | Marine | |||||||||||
Technology | Engineering | Grand | ||||||||||
Business | Business | Total | ||||||||||
Americas | $ | $ | $ | |||||||||
Europe | ||||||||||||
Australia/Asia | ||||||||||||
Middle East/Africa | ||||||||||||
$ | ||||||||||||
Equipment Sales | $ | $ | $ | |||||||||
Equipment Rentals | ||||||||||||
Software Sales | ||||||||||||
Engineering Parts | ||||||||||||
Services | ||||||||||||
$ | ||||||||||||
Goods transferred at a point in time | $ | $ | $ | |||||||||
Services transferred over time | ||||||||||||
$ | $ | $ |
23 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 15 -SEGMENT ANALYSIS (Continued)
For the Nine Months Ended July 31, 2020 | ||||||||||||
Marine | Marine | |||||||||||
Technology | Engineering | Grand | ||||||||||
Business | Business | Total | ||||||||||
Americas | $ | $ | $ | |||||||||
Europe | ||||||||||||
Australia/Asia | ||||||||||||
Middle East/Africa | ||||||||||||
$ | $ | $ | ||||||||||
Equipment Sales | $ | $ | $ | |||||||||
Equipment Rentals | ||||||||||||
Software Sales | ||||||||||||
Engineering Parts | ||||||||||||
Services | ||||||||||||
$ | $ | $ | ||||||||||
Goods transferred at a point in time | $ | $ | $ | |||||||||
Services transferred over time | ||||||||||||
$ | $ | $ |
24 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 16 – PAYROLL PROTECTION PROGRAM
In
the nine months ended July 31, 2021, two of our US companies, received $
In
the 2020 FY our US companies received $
NOTE 17 – COVID-19
The Company faces various risks related to the global outbreak of coronavirus disease (“COVID-19”).
The Engineering Services Business is dependent on its workforce to deliver its products and services primarily to the US and U.K. Governments. If significant portions of the Engineering Services Business’s workforce are unable to work effectively, or if the US or U.K. Government and/or other customers’ operations are curtailed due to illness, quarantines, government actions, facility closures, or other restrictions in connection with the COVID-19 Pandemic, the Engineering Services Business’s operations is likely to be severely impacted. The Engineering Services Business may be unable to perform fully on its contracts and costs may increase as a result of the COVID-19 outbreak. These cost increases may not be fully recoverable either from our customers or under existing insurance policies. At this time, the Company’s management cannot predict with any precision the full extent of the impact which COVID-19 Pandemic will have on the Company, but management continues to mitigate where it can and monitor the situation, to assess further possible implications to operations, the supply chain, and customers, and to take actions in an effort to mitigate adverse consequences. Further, the Pandemic may impact the Company’s results of operations and constrain the opportunity to grow its business operations in the near term.
The Marine Technology Business is dependent on its workforce and/or distributors/resellers to sell and deliver its products and services. Developments such as social distancing, shelter -in- place directives and travel restrictions introduced by governments have impacted the Marine Products Business’s ability to deploy its workforce effectively. These same developments may affect the operations of the Company’s suppliers, customers and distributors/resellers, as their own workforces and operations are disrupted by efforts to curtail the spread of this virus. The uncertainty relating to the trajectory of the Pandemic, in particular the evolving strains of the virus and the associated response of various Governments in the places which we operate will affect the pace at which the Company’s financial performance improves.
25 |
CODA OCTOPUS GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
July 31, 2021 and 2020
NOTE 18 – INCOME TAXES
The
Company’s effective tax rate for the three months ended July 31, 2021 and 2020 was (
The
Company’s effective tax rate for the nine months ended July 31, 2021 and 2020 was (
As
of July 31, 2021, we had US federal net operating losses carryforwards of $
NOTE 19 – 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 previously reported consolidated financial statements. An adjustment has been made to the disclosures of the composition of property and equipment.
26 |
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, 2021. 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
In the Management’s Discussion and Analysis (MDA) section, the terminologies referenced below are used throughout the MDA section and have the following meanings:
“Current Quarter” | Three-month period ended July 31, 2021 |
“Previous Quarter” | Three-month period ended July 31, 2020 |
“Current Nine Month Period” | The Nine-month period ended July 31, 2021 |
“Previous Nine Month Period” | The Nine-month period ended July 31, 2020 |
We operate two distinct business operations which are:
● | the Marine Technology Business (also referred to in this Form 10-Q as “Products Business”, “Products Operations” or “Products Segment”); and | |
● | the Marine Engineering Business (also referred to in this Form 10-Q as “Engineering Business”, “Engineering Operations”, “Services Business” or “Services Segment”). |
Our Marine Technology Business designs, manufactures and sells and/or rents underwater solutions, products and services to the underwater commercial and defense markets. Our product offerings comprise hardware, software and services which extend to customization of our technology for customers specific purposes and onsite training and mobilization assistance. The Products Business has operations in the USA, UK and Denmark. The most significant technology in the Products Business’ portfolio is its real time volumetric sonar technology which has unique capabilities for both the commercial and defense underwater imaging sonar markets. To our knowledge this is the only sonar in the world with these capabilities. There are several patents around this technology covering various methods. We have also filed multiple patents concerning our next generation of sonar technology (Echoscope PIPE®). We believe that Echoscope PIPE® is the only technology capable of generating and displaying in real time multiple 4D images of underwater targets. The Products Business generates most of its revenues from its real time volumetric sonar which includes both hardware and proprietary software. Our products are used primarily in the underwater construction market, offshore oil and gas, offshore wind energy industry, complex dredging, port security, search and rescue, salvaging, defense, shallow water and deep-water mining, diving 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. Increasingly we are performing development work around our technology for US defense bodies. This includes the recent development of a close in visualization real time 3D sonar, specifically for a US defense customer which we delivered in May 2021. This device is currently going through Customer Acceptance Testing. If successful, it will be integrated in new surface vessels, which has the potential to involve multiple sales over the life of the program.
Our Services Business acts primarily as a sub-contractor to prime defense contractors. This Business engineers, sub-assemblies which are utilized in broader defense programs. The Services Business has operations in the USA and UK. Its central business model is the design and manufacture of sub-assemblies for utilization into larger defense mission critical integrated systems (“MCIS”). An example of such MCIS is the US Close-In-Weapons Support (CIWS) Program for the Phalanx radar-guided cannon used on combat ships. These proprietary sub-assemblies, once approved within the MCIS program, afford the Services Business the status of preferred supplier for these items. Such status permits it to supply these sub-assemblies and upgrades in the event of obsolescence or advancement of technology for the life of the MCIS program. Clients include prime defense contractors such as Raytheon, Northrop Grumman, Thales Underwater and BAE systems. This Business generally creates the initial design and prototyping of the first sub-assembly item and once adopted within the designated program, secures ongoing manufacturing contract for the said sub-assembly.
Both the Marine Technology Business and Marine Engineering Business have established synergies in terms of customers and specialized engineering skill sets (hardware, firmware and software) encompassing capturing, computing, processing and displaying data in harsh environments. Both businesses jointly bid for development and engineering projects for which their common joint skills provide competitive advantage.
27 |
Factors Affecting our Business
The following is a short description of some of the factors that affect our business. For a more detailed discussion of these and additional factors, refer to the Company’s Form 10-K for the fiscal year ended October 31, 2020 which was filed with the Securities and Exchange Commission on January 28, 2021 and which incorporated by reference herein.
United Kingdom’s Withdrawal from the European Union (widely referred to as “Brexit”)
The United Kingdom (“UK”) withdrew from the European Union (“EU”) on December 31, 2020. This has resulted in the removal of previous existing rights concerning the freedom of movement of goods, persons, capital and services between the UK and the EU member states. The removal of these rights may reduce the demand for our goods and services in the European Union which is a major market for our products and services.
Although in the areas of our operation we believe that under the new trade agreement between the UK and EU, there are no trade tariffs or quotas applicable to our products or services, we nevertheless believe that our business is likely to be adversely affected by the withdrawal from the EU by the UK. The withdrawal took effect January 1, 2021 and therefore the full impact of this change in the status of the relationship between the UK and EU, is still not fully understood. However, some of the immediate areas that have impacted us since withdrawal include:
● | New restrictions which prevent our engineers from working freely in EU member countries. Our business relies on our field engineers going to our customers’ sites and assisting with training and mobilizing of our solutions. Under the new arrangement between the EU and UK, our engineers will now need a work permit for EU member countries. However, we are unable to assess the true impact of these new requirements for our engineers since there is uncertainty as to the new procedures further compounded by the border restrictions in EU member countries currently due to the Pandemic. | |
● | Since the withdrawal in December 2020, there has been wide-scale disruption in shipments between the UK and EU member countries with the introduction of significant customs checks or declarations. This has resulted in significant customs procedures to comply with causing increased costs and delays. Increasingly our European customers are requesting for our products to come from within the European Union as a condition of hiring the equipment. If we are unable to address this in the near future, this will affect the demand for our products in European Union member states. This means that our Danish subsidiary will become increasingly important to the Products Business operations. It also means an increase in the cost of our operations associated with managing a subsidiary in Denmark. | |
● | There is an acute shortage of engineering skills (both hardware and software) affecting both the Marine Technology Business and the Services Business. This has been further exacerbated by the withdrawal from the EU. The UK Government recently reported that in July 31, 2021 there were in excess of one million unfilled vacancies in the UK and that wages had increased by 8% compared to the same period last year. The inability to recruit staff from EU member state countries in specialized areas such as engineering and software development is having a significant impact on our business and adversely impacts on our ability to advance our technology at a commercially viable pace. | |
● | The EU member states have harmonized their approach including movement between borders during the Pandemic. With the UK outside of the EU, it follows different Pandemic management rules. This impacts our business ability to travel to EU member states to support our customers and therefore impacts on the demand for our goods and, particularly our support services, such as field installation and training. |
We have taken steps to mitigate some of its impact of the UK leaving the European Union by establishing a Danish based subsidiary, Coda Octopus Products A/S, to maintain a presence in the European Union. We intend to run a large part of our rental business from this office. We can give no assurance that this in itself will be sufficient to reduce the impact of the change in the UK access to the European Union single market.
28 |
Impact of the Coronavirus outbreak (“Pandemic”)
General Impact
All our operations continue to be affected by the Pandemic. In broad terms, our operations are acutely impacted by the ongoing reduction in staffing due to applicable quarantine rules and travel restrictions. A significant part of our goods and services are sold to customers in Asia. Due to travel restrictions, since February 2020 we have not been able to travel to support our customers projects or promote our goods and services.
Government Policies on the Pandemic
Our operations are based in a number of countries, with each country establishing different pandemic management related rules. This has generally resulted in a much less predictable working environment for planning and delivering customer projects along with increased project cost.
The ongoing Pandemic crisis has a number of adverse implications for our business:
● | Decrease in productivity which affects profitability of our projects. | |
● | Project over runs with associated increase costs. | |
● | A high percentage of staff may be required to quarantine for extended and recurring periods with all the associated implications such as increased costs and delays in finalizing projects. In the UK currently, it is widely reported in the news media, that the National Health Service (NHS) track and trace system is “pinging up to 100,000 people per day to quarantine – referred to as “Pingdemic”) and this is having a debilitating effect on business ability to operate. | |
● | Higher staff costs due to increased sick pay allowance which varies according to the country where the business operations are located combined with lower productivity. | |
● | While the number of units of rental of equipment has increased in the Current Quarter, ancillary support services (such as training or mobilization assistance) has reduced significantly. This reduces our rental income. Moreover, our products are complex and without such support, this could impact the customer’s experience thus jeopardizing long term relationships with such customers. | |
● | The business activities which we can pursue are still very limited and this is an industry-wide problem. | |
● | Higher costs associated with sending our engineers on customer projects due to requirements for both testing and quarantining upon arrival at the destination. |
Impact on Revenues and Earnings
Increasingly governments Pandemic response strategies are fluid with the evolving new strains of the virus. Until the business environment normalizes, we are uncertain as to the extent of the impact the Pandemic will have on our future financial results. In the Current Quarter both the Marine Technology Business and our Engineering Business have been adversely impacted by the constraints caused by the Pandemic causing, among other things, increasing costs of operations, reduction in the demand for our goods and services or postponement of projects.
Impact on Liquidity, Balance Sheet and Assets
Failure to curb the Pandemic in the near future, may adversely impact on our availability of free cash flow, working capital and business prospects. As of July 31, 2021, we had cash of approximately $19.2 million and for the nine months ended July 31, 2021, we generated approximately $3.6 million of cash from operations. Since the beginning of the Pandemic in March 2020, the level of cash generated from our operations has declined. However, based on our outstanding obligations including loans and notes payable (“Instruments”), terms of these Instruments and our cash balances, we believe we have sufficient working capital to effectively continue our business operations for the foreseeable future.
Supply Chain Disruption
Due to the exceptionally high demand in the semi-conductor market, we are experiencing extreme lead times for components which are necessary for the manufacture and service of our products. We are also seeing significant increases in price for these and other routine components. Both the extended lead time, in some instances 40 weeks lead time is being quoted by suppliers, and the price increase may affect our ability to meet customer requirements and make the prices of our products uncompetitive. The Products Business may reasonably endeavor to reduce the impact of the extended lead times by priming its supply chain as far as possible. However, the impact on the Engineering Business is more severe and could grind their operations to a halt, since this part of our business does not know what parts or components are required until their customers place an order for bespoke engineering work. We therefore have a high risk that our Engineering Business’ may be severely impacted by the shortages that we are currently experiencing in the market.
Supplying Products without Training
The underwater imaging products which we supply are complex. Customers benefit from our on-site training program as part of the adoption of the technology. Our customers for our products are globally based. Since February 2020, we have not been able to provide hands-on field support to our customers. Pre-pandemic we would typically supply equipment with engineering support for training and mobilization assistance and would run a number of customer training events. The Pandemic has rendered this impossible due to the various and varying restrictions applicable in the places where our customers reside. Our products are complex and without support, the risks increase for customers’ dissatisfaction, thus jeopardizing the long- term relationship and the reputation of the products.
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, 2020.
29 |
Revenue Recognition
Our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater solutions for imaging, mapping, defense and survey applications and from the engineering services that we provide. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential variable additional consideration. Our product sales do not include a right of return by the customer.
With regard to our Products Segment, all of our products are sold on a stand-alone basis and those market prices are evidence of the value of the products. To the extent that we also provide services (e.g., installation, training, etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been provided to the customer and evidence of the provision of those services exist.
For further discussion of our revenue recognition accounting policies, refer to Note 2 – “Revenue Recognition” in these unaudited consolidated financial statements and in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
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.
30 |
Income Taxes
The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes (ASC 740). Under ASC 740, deferred income tax assets and liabilities are recorded for the income tax effects of differences between the bases of assets and liabilities for financial reporting purposes and their bases for income tax reporting. The Company’s differences arise principally from the use of various accelerated and modified accelerated cost recovery system for income tax purposes versus straight line depreciation used for book purposes and from the utilization of net operating loss carry-forwards.
Deferred tax assets and liabilities are the amounts by which the Company’s future income taxes are expected to be impacted by these differences as they reverse. Deferred tax assets are based on differences that are expected to decrease future income taxes as they reverse. Correspondingly, deferred tax liabilities are based on differences that are expected to increase future income taxes as they reverse.
For income tax purposes, the Company uses the percentage of completion method of recognizing revenues on long-term contracts which is consistent with the Company’s financial reporting under US generally accepted accounting principles.
Intangible Assets
Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (or goodwill), customer relationships, non-compete agreements and licenses. Goodwill was allocated to our reporting units based on the original purchase price allocation. Goodwill is not amortized and is evaluated for impairment annually or more often if circumstances indicate impairment may exist. Customer relationships, non-compete agreements, patents and licenses are being amortized on a straight-line basis over periods of 2 to 15 years. The Company amortizes its limited lived intangible assets using the straight-line method over their estimated period of benefit. Annually, or sooner if there is indication of a loss in value, we evaluate the recoverability of intangible assets and consider events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
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
In the Current Quarter, we have seen less Pandemic-related restrictions on our business. The Products Business rental business activities increased significantly in the Current Quarter. In the Current Quarter we also paid materially less commission to agents on sale. This in turn increased Gross Profit Margins. The Products Business revenues increased by 25.5% over the Previous Quarter. The Services Business revenues (and therefore financial performance) declined during the Current Quarter. This is largely due to continued delay in received defense-related contracts which we anticipated.
We also had a Tax Benefit of $753,017 in the nine months ended July 31, 2021, which was due mainly to U.S. Employee Retention Credits of $496,485.
Segment Summary
Products Business