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 June 6, 2023 is .
INDEX
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
For the Three Months Ended April 30, 2023 and 2022
Contents
| 3 |
CODA OCTOPUS GROUP, INC.
Consolidated Balance Sheets
April 30, 2023 and October 31, 2022
| 2023 | 2022 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| 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)
April 30, 2023 and October 31, 2022
| 2023 | 2022 | |||||||
| Unaudited | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts Payable | $ | $ | ||||||
| Accrued Expenses and Other Current Liabilities | ||||||||
| Deferred Revenue | ||||||||
| Total Current Liabilities | ||||||||
| LONG TERM LIABILITIES | ||||||||
| Deferred Revenue, less current portion | ||||||||
| Total Liabilities | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common Stock, $ par value; shares authorized, issued and outstanding as of April 30, 2023 and shares issued and outstanding as of October 31, 2022 | ||||||||
| Treasury Stock | ( | ) | ( | ) | ||||
| 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 April 30, | Six Months Ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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 | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ||||||||||||
| Total Other Income | ||||||||||||||||
| INCOME BEFORE INCOME TAX EXPENSE | ||||||||||||||||
| INCOME TAX (EXPENSE) BENEFIT | ||||||||||||||||
| Current Tax Expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Deferred Tax Benefit | ||||||||||||||||
| Total Income Tax (Expense) Benefit | ( | ) | ( | ) | ||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| NET INCOME PER SHARE: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| WEIGHTED AVERAGE SHARES: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| Foreign Currency Translation Adjustment | ( | ) | ( | ) | ||||||||||||
| Total Other Comprehensive Income | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 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 Months and Six Months Ended April 30, 2023 and 2022
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | Treasury | ||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Stock | Total | ||||||||||||||||||||||
| Balance, October 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Employee stock-based compensation | - | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||
| Net Income | - | |||||||||||||||||||||||||||
| Balance, January 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Employee stock-based compensation | - | |||||||||||||||||||||||||||
| Stock issued for options exercised | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net Income | - | |||||||||||||||||||||||||||
| Balance, April 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | Treasury | ||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Stock | Total | ||||||||||||||||||||||
| Balance, October 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Employee stock-based compensation | - | |||||||||||||||||||||||||||
| Stock issued for options exercised | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||
| Net Income | - | |||||||||||||||||||||||||||
| Balance, January 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Employee stock-based compensation | - | |||||||||||||||||||||||||||
| Stock issued for options exercised | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||
| Net Income | - | |||||||||||||||||||||||||||
| Balance, April 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 7 |
CODA OCTOPUS GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended April 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ( | ) | ||||||
| (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 (used in) 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 | ( | ) | ||||||
| Purchase of treasury stock | ( | ) | ||||||
| Net Cash Used in Financing Activities | ( | ) | ( | ) | ||||
| EFFECT OF CURRENCY TRANSLATION ON CHANGES IN CASH | ( | ) | ||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | ||||||||
| CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS 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 Consolidated Financial Statements
April 30, 2023, and October 31, 2022
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Coda Octopus Group, Inc. (“Coda,” “the Company,” or “we”) operates two distinct operating business units. These are the Marine Technology Business (also referred to in this Form 10-Q as “Products Business,” or “Products Segment”) and the Marine Engineering Business (also referred to in this Form 10-Q as “Services Business,” “Engineering Business” or “Services Segment”). The Marine Technology Business sells technology solutions to the subsea and underwater markets. These solutions are designed, developed, manufactured, and supported by the Company. Its main revenue generating product is the Echoscope® and Echoscope PIPE® (Parallel Intelligent Processing Engine). In 2021, the Products Business launched a new diver management system (Diver Augmented Vision Display (“DAVD”)) for use in the global defense and commercial diving markets and which is a significant part of the Company’s growth plans. The requirements for the DAVD system emanated from the Office of Naval Research as part of its Future Naval Requirements Program. The DAVD embeds inside of the diver Head up Display (HUD) a pair of transparent glasses which is used as the data hub for displaying real time data to the diver. The concept of using a pair of transparent glasses in the Head up Display (HUD) underwater for this purpose is protected by patent and licensed to the Company by the United States Department of the Navy at Naval Surface Warfare Center Panama City Division. The Marine Engineering Business is an established sub-contractor to prime defense contractors and generally supplies proprietary sub-assemblies for incorporation into broader mission critical defense systems. These sub-assemblies are typically supplied for the life of the program. The Marine Engineering Business’ scope of services for these defense programs typically extends to concept, design, prototype and manufacture. The manufacturing contracts for these sub-assemblies can run over many years.
The consolidated financial statements include the accounts of Coda Octopus Group, Inc. and its wholly owned domestic and foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues including unbilled and deferred revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates related to the percentage of completion method used to account for contracts, including costs and earnings in excess of billings and billings in excess of costs, estimated earnings and the valuation of goodwill.
NOTE 2 – REVENUE RECOGNITION
The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s Topic 606, Revenue from Contracts with Customers (“Topic 606”).
Topic 606 has established a five-step process to determine the amount of revenue to record from contracts with customers. The five steps are:
| ● | Identify the contract with the customer; | |
| ● | Identify the performance obligations in the contract with customer; | |
| ● | Determine the transaction price; | |
| ● | Allocate the transaction price to performance obligations; and | |
| ● | Recognize revenue when (or as) a performance obligation is satisfied. |
| 9 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 2 – REVENUE RECOGNITION (Continued)
Our revenues are earned under formal contracts with our customers. These are derived from both sales and rental of underwater technologies and equipment for real time 3D imaging, mapping, defense and survey applications by the Marine Technology Business and from engineering services which the Company’s Services Business provide via sub-contracts primarily with 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.
Regarding our Marine Technology Business (“Products Business”), all our products are sold on a stand-alone basis and those market prices are evidence of the value of the products. To the extent that we also provide services (e.g., installation, training, post-sales technical support, customization of our technology for bespoke application, etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been performed and evidence of the provision of those services exists.
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 price to each performance obligation based on a relative standalone selling price basis and recognize revenue when performance obligations are met including when equipment is delivered, and for rental of equipment, when installation, training and other services prescribed by the contract are performed.
Our contracts sometimes require customer payments in advance of revenue recognition. These are recognized as revenue when the Company has fulfilled its obligations under the respective contracts. Until such time, we recognize 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 by the provision of the activation codes to the software.
With respect to revenues related to our Services Business, there are contracts in place that specify the fixed hourly rate and other reimbursable costs to be billed based on material and direct labor hours incurred and revenue is recognized on these contracts based on material and the direct labor hours incurred. Revenues from fixed-price contracts are recognized on the percentage of 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. We consider the effects of inflation on both the costs incurred and on the total overall cost estimate in order to ensure that we do not prematurely recognize revenue. 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 our fixed-price contracts to determine if there are any losses to be recognized during the period. Any such loss is recorded in the quarter in which the loss first becomes apparent based upon costs incurred to date and the estimated costs to complete as determined by experience from similar contracts. Variations from estimated contract performance could result in adjustments to operating results.
Recoverability of Deferred Costs
In accordance with Topic 606, we defer costs on projects for service revenue. Deferred costs consist primarily of incremental direct costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties. The pricing of these service contracts is intended to provide for the recovery of these types of deferred costs over the life of the contract.
| 10 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 2 – REVENUE RECOGNITION (Continued)
We recognize such costs in accordance with our revenue recognition policy by contract. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized over time, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each quarterly balance sheet date, we review deferred costs, to ensure they are ultimately recoverable.
Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.
Other Revenue Disclosures
See Notes 14 and 15 – Segment Analysis and Disaggregation of Revenue of our unaudited Consolidated Financial Statements. These Notes provide disclosure of our revenue by segment (Products Business versus Services Business); revenues from external customers and cost of those revenues; and split of revenue by geography including within and outside the U.S.
NOTE 3 – COST OF REVENUES
Our
Cost of Revenues includes the cost of materials and related direct costs. With respect to sales made through the Company’s sales
agents distribution network, we include in our Costs of Revenues commissions paid to agents for the specific sales they make. Without
using agents, we would not be eligible to participate in the Request for Proposals (“RFP”) for these sales on which we incur
commission costs. All other sales-related expenses, including those related to unsuccessful bids, are included in selling, general and
administrative costs. As a component of Cost of Revenues, commissions in the 3-month period ended April 30, 2023, were $
NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amounts of our financial instruments approximate fair values because of their short-term nature.
NOTE 5 – 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 is recorded at historical exchange rates. Resulting translation adjustments are recorded as a separate component in stockholders’ equity as part of accumulated other comprehensive income or (loss) as may be appropriate. Foreign currency transaction gains and losses are included in the consolidated statements of income and comprehensive income.
| 11 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 6 – INVENTORY
Inventory is stated at the lower of cost (First In, First Out method) or net realizable value. Inventory consisted of the following components as of:
| April 30, | October 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials and parts | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total Inventory | $ | $ | ||||||
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
| April 30, | October 31, | |||||||
| 2023 | 2022 | |||||||
| Buildings | $ | $ | ||||||
| Land | ||||||||
| Office machinery and equipment | ||||||||
| Rental assets | ||||||||
| Furniture, fixtures and improvements | ||||||||
| Totals | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total Property and Equipment, net | $ | $ | ||||||
NOTE 8 – OTHER CURRENT ASSETS
Other current assets consisted of the following as of:
| April 30, | October 31, | |||||||
| 2023 | 2022 | |||||||
| Deposits | $ | $ | ||||||
| Other Tax Receivables | ||||||||
| Employee Retention Credit Receivables | ||||||||
| Other Receivables | ||||||||
| Total Other Current Assets | $ | $ | ||||||
| 12 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
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 balance sheet date. These amounts are stated on the consolidated balance sheets as Unbilled Receivables
of $
Deferred
Revenue of $
Sales
of equipment include a separate performance obligation for warranty or Through Life Support (“TLS”) which may be
optionally purchased by the customer. This is treated as deferred revenue which are amortized over the relevant obligation period
(12 months is our standard warranty or 36 or 60-months from the date of delivery for our TLS product). These amounts are stated on the consolidated
balance sheets as a component of Deferred Revenue and were $
NOTE 10 – CONCENTRATIONS
Significant Customers
During
the three-months ended April 30, 2023, the Company had one customer from whom it generated sales greater than 10% of net revenues.
Revenue from this customer was $
During
the three-months ended April 30, 2022, the Company had one customer from whom it generated sales greater than 10% of net revenues. Revenue
from this customer was $
During
the six-months ended April 30, 2023, the Company had two customers from whom it generated sales greater than 10% of net revenues. Revenues
from these customers were $
During
the six-months ended April 30, 2022, the Company had two customers from whom it generated sales greater than 10% of net revenues.
Revenues from these customers were $
NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS
There have been no new accounting pronouncements not yet effective that have significance or potential significance to our Consolidated Financial Statements.
| 13 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
| Three Months | Three Months | Six Months | Six Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| Fiscal Period | April 30, 2023 | April 30, 2022 | April 30, 2023 | April 30, 2022 | ||||||||||||
| Numerator: | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Unused portion of options and restricted stock awards | ||||||||||||||||
| Diluted outstanding shares | ||||||||||||||||
| Net income per share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
NOTE 13 – 2017 STOCK INCENTIVE PLAN
2017 Stock Incentive Plan
On December 6, 2017, the Board of Directors adopted the 2017 Stock Incentive Plan (the “2017 Plan”). The purpose of the Plan is to advance the interests of the Company and its stockholders by enabling the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company, and to reward those individuals who contribute to the Company’s achievement of its economic objectives. The Plan was adopted subject to stockholders’ approval and was approved by Stockholders at the Company’s Annual General Meeting held on July 24, 2018.
The maximum number of shares of Common Stock available for issuance under the 2017 Plan is shares. The shares available for issuance under the 2017 Plan may, at the election of the Compensation Committee, be either treasury shares or shares authorized but unissued, and, if treasury shares are used, all references in the 2017 Plan to the issuance of shares will, for corporate law purposes, be deemed to mean the transfer of shares from treasury.
During the six-month period ended April 30, 2023, the Company granted restricted stock awards to various employees pursuant to the terms of the 2017 Plan. During the six-months ended April 30, 2023, options and restricted stock awards vested. options or restricted stock awards were forfeited. As of April 30, 2023, there were shares available for future issuance under the 2017 Plan. The total stock compensation expense during the six-months ended April 30, 2023, was $.
During the six-month period ended April 30, 2022, the Company granted restricted stock awards to various employees pursuant to the terms of the 2017 Plan. During the six-months ended April 30, 2022, options vested and remain unexercised, options were exercised on a cashless basis resulting in shares being issued. The total stock compensation expense during the six months ended April 30, 2022, was $.
2021 Stock Incentive Plan
On July 12, 2021, the Board of Directors adopted the 2021 Stock Incentive Plan (the “2021 Plan”). The 2021 Plan was approved by the Company’s stockholders at its Annual General Meeting held on September 14, 2021. The 2021 Plan is identical to the 2017 Plan in all material respects, except that the number of shares available for issuance thereunder is .
As of April 30, 2023, there were a total of shares available for future issuance under the 2017 Plan and 2021 Plan.
| 14 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 14 – SEGMENT ANALYSIS
Based on the fundamental difference in the types of offering, products and solutions versus services, we operate two distinct reportable segments which are managed separately. Coda Octopus Products (“Marine Technology Business” or “Products Business” or “Products Segment”) operations are comprised primarily of sale and/or rental of underwater technology sonar solutions, comprising hardware and software and support services. Coda Octopus Martech and Coda Octopus Colmek (“Marine Engineering Business” or “Services Segment”) provide engineering services primarily as sub-contractors to prime defense contractors.
Segment operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Corporate includes general corporate administrative costs (“Overhead”).
The Company evaluates performance and allocates resources based upon segment operating income. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies.
There are inter-segment sales which have been eliminated in our financial statements but are disclosed in the tables below for information purposes.
The following tables summarize segment asset and operating balances by reportable segment for the three and six months ended April 30, 2023 and 2022, respectively.
The Company’s reportable business segments sell their goods and services in four geographic locations:
| ● | Americas | |
| ● | Europe | |
| ● | Australia/Asia | |
| ● | Middle East/Africa |
| 15 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 14 -SEGMENT ANALYSIS (Continued)
| Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
| Three Months Ended April 30, 2023 | ||||||||||||||||
| Net Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of Revenues | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Research & Development | ||||||||||||||||
| Selling, General & Administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income (Loss) from Operations | ( | ) | ||||||||||||||
| Other Income | ||||||||||||||||
| Other Income | ||||||||||||||||
| Total Other Income | ||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| 16 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 14 - SEGMENT ANALYSIS (Continued)
| Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
| Three Months Ended April 30, 2022 | ||||||||||||||||
| Net Revenues | $ | $ | $ | $ | ||||||||||||
| 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 | ||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| 17 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 14 - SEGMENT ANALYSIS (Continued)
| Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
| Six Months Ended April 30, 2023 | ||||||||||||||||
| Net Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of Revenues | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Research & Development | ||||||||||||||||
| Selling, General & Administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income (Loss) from Operations | ( | ) | ||||||||||||||
| Other Income (Expense) | ||||||||||||||||
| Other Income | ||||||||||||||||
| Total Other Income | ||||||||||||||||
| Income (Loss) before Income Taxes | ( | ) | ||||||||||||||
| Income Tax (Expense) Benefit | ||||||||||||||||
| Current Tax (Expense) Benefit | ( | ) | ( | ) | ( | ) | ||||||||||
| Deferred Tax Benefit (Expense) | ||||||||||||||||
| 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 Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 14 - SEGMENT ANALYSIS (Continued)
| Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
| Six Months Ended April 30, 2022 | ||||||||||||||||
| Net Revenues | $ | $ | $ | $ | ||||||||||||
| 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 | ||||||||||||||||
| 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 Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 15 – DISAGGREGATION OF REVENUE
| For the Three Months Ended April 30, 2023 | ||||||||||||
| Marine | Marine | |||||||||||
| Technology | Engineering | Grand | ||||||||||
| Business | Business | Total | ||||||||||
| Disaggregation of Total Net Sales | ||||||||||||
| Primary Geographical Markets | ||||||||||||
| Americas | $ | $ | $ | |||||||||
| Europe | ||||||||||||
| Australia/Asia | ||||||||||||
| Middle East/Africa | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Major Goods/Service Lines | ||||||||||||
| Equipment Sales | $ | $ | $ | |||||||||
| Equipment Rentals | ||||||||||||
| Software Sales | ||||||||||||
| Engineering Parts | ||||||||||||
| Services | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Goods transferred at a point in time | $ | $ | $ | |||||||||
| Services transferred over time | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| 20 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 15 –DISAGGREGATION OF REVENUE (Continued)
| For the Three Months Ended April 30, 2022 | ||||||||||||
| Marine | Marine | |||||||||||
| Technology | Engineering | Grand | ||||||||||
| Business | Business | Total | ||||||||||
| Disaggregation of Total Net Sales | ||||||||||||
| Primary Geographical Markets | ||||||||||||
| Americas | $ | $ | $ | |||||||||
| Europe | ||||||||||||
| Australia/Asia | ||||||||||||
| Middle East/Africa | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Major Goods/Service Lines | ||||||||||||
| Equipment Sales | $ | $ | $ | |||||||||
| Equipment Rentals | ||||||||||||
| Software Sales | ||||||||||||
| Engineering Parts | ||||||||||||
| Services | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Goods transferred at a point in time | $ | $ | $ | |||||||||
| Services transferred over time | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| 21 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 15 –DISAGGREGATION OF REVENUE (Continued)
| For the Six Months Ended April 30, 2023 | ||||||||||||
| Marine | Marine | |||||||||||
| Technology | Engineering | Grand | ||||||||||
| Business | Business | Total | ||||||||||
| Disaggregation of Total Net Sales | ||||||||||||
| Primary Geographical Markets | ||||||||||||
| Americas | $ | $ | $ | |||||||||
| Europe | ||||||||||||
| Australia/Asia | ||||||||||||
| Middle East/Africa | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Major Goods/Service Lines | ||||||||||||
| Equipment Sales | $ | $ | $ | |||||||||
| Equipment Rentals | ||||||||||||
| Software Sales | ||||||||||||
| Engineering Parts | ||||||||||||
| Services | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Goods transferred at a point in time | $ | $ | $ | |||||||||
| Services transferred over time | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| 22 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 15 –DISAGGREGATION OF REVENUE (Continued)
| For the Six Months Ended April 30, 2022 | ||||||||||||
| Marine | Marine | |||||||||||
| Technology | Engineering | Grand | ||||||||||
| Business | Business | Total | ||||||||||
| Disaggregation of Total Net Sales | ||||||||||||
| Primary Geographical Markets | ||||||||||||
| Americas | $ | $ | $ | |||||||||
| Europe | ||||||||||||
| Australia/Asia | ||||||||||||
| Middle East/Africa | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Major Goods/Service Lines | ||||||||||||
| Equipment Sales | $ | $ | $ | |||||||||
| Equipment Rentals | ||||||||||||
| Software Sales | ||||||||||||
| Engineering Parts | ||||||||||||
| Services | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Goods transferred at a point in time | $ | $ | $ | |||||||||
| Services transferred over time | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| 23 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2023 and October 31, 2022
NOTE 16 – INCOME TAXES
The Company’s tax rate may vary according to several factors including the composition and percentage of its revenue from its foreign subsidiaries versus US subsidiaries.
The
Company’s effective tax rate for the three months ended April 30, 2023, and 2022, was
The
Company’s effective tax rate for the six months ended April 30, 2023, and 2022 was (
NOTE 17 – CERTIFIED DEPOSIT INTEREST BEARING ACCOUNTS
The Company established certified deposit interest-bearing accounts with its current bankers HSBC NA and Jyske Bank in February
2023. These interest-bearing accounts are for rolling fixed short-term periods not exceeding 3 months and are classified in our financial statements as “cash equivalent”. In addition, we have an
interest-bearing deposit account in UK that tracks the Bank of England base rate which has no restrictions on access and has a
current rate of
| Currency Denomination | Amount | HSBC | Jyske Bank (Denmark) | |||||||||
| USD | $ | % | ||||||||||
| GBP | £ | % | ||||||||||
| GBP (Unrestricted access) | £ | % | ||||||||||
| Euro | € | % | ||||||||||
| British Pound | £ | % | ||||||||||
| Danish Kroner | DKK | % | ||||||||||
| USD | $ | % | ||||||||||
| 24 |
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 30, 2023. This discussion should not be construed to imply that the results discussed herein will necessarily be indicative of actual operating results in the future. Such discussion represents only our management’s best present assessment.
General Overview
Throughout these discussions, the following terms shall have the meanings set forth below:
| “Current Quarter” | Three-month period ended April 30, 2023 |
| “Previous Quarter” | Three-month period ended April 30, 2022 |
| “Current Six-Month Period” | Six-month period ended April 30, 2023 |
| “Previous Six-Month Period” | Six-month period ended April 30, 2022 |
The Company operates two distinct businesses. These are:
| ● | the Marine Technology Business (also referred to in this Form 10-Q as “Products Business”, or “Products Segment”); and | |
| ● | the Marine Engineering Business (also referred to in this Form 10-Q as “Engineering Business”, or “Services Business” or “Services Segment”). |
Our Marine Technology Business has operations in the USA, UK and Denmark. This business is an established technology solution provider to the subsea and underwater imaging, surveying and diving market. It has been operating as a supplier of solutions comprising both hardware and software products for over 25 years to this market and it owns key proprietary technology including real time volumetric 3D imaging sonar technology and cutting-edge diving technology, that are used in both the underwater defense and commercial markets. All design, development and manufacturing of our technology and solutions are performed within the Company.
Our imaging sonar technology products and solutions marketed under the name of Echoscope® and Echoscope PIPE® are used primarily in the underwater construction market, offshore wind energy industry (offshore renewables), offshore oil and gas, forward looking obstacle avoidance, complex underwater mapping, salvage operations, dredging, bridge inspection, underwater hazard detection, port security, mining, mine counter measures, ship hull scanning, real time threat detection, fisheries, commercial and defense diving, and marine sciences sectors.
Our novel diving technology is distributed under the name “CodaOctopus® DAVD” (Diver Augmented Vision Display) to the global defense and commercial diving markets and is new to the market. The DAVD which embeds a pair of transparent glasses in the Head up Display (HUD) is used as the data hub for displaying comprehensive real time data to the diver underwater. This also allows both the diver and the dive supervisor to visualize in real time the same underwater scene. We believe that the DAVD system has the potential to radically transform how diving operations are performed globally because it provides a fully integrated singular system for topside control and a fully connected HUD system for the diver allowing both the topside and diver to share a range of critical information including depth (pressure and temperature), compass and head tracking, real time dive timers and alerts, diver position and navigation, ultra-low light enhanced video system and enhanced digital voice communications. Limitations of current diving operations are that the diver only shares analog voice communications with the topside and there is no real time information including real time navigation, tracking and mapping of the dive area available to the diver. The topside must also manage several independent systems for video, communications, and positioning. The Company’s solution addresses these deficiencies. Another critical part of our solution is that by using our sonar technology, diving can be performed in zero visibility conditions, a common problem which besets these operations.
| 25 |
Although we generate most of our revenues from our real time 3D sonar which includes both proprietary hardware and software, we have a number of other products which we supply to the marine offshore market such as our inertial navigation systems (F280 Series®) and our geophysical hardware (DA4G) and software solutions (GeoSurvey and Survey Engine®, which include artificial intelligence based automatic detection systems). Our customers include offshore service providers to major oil and gas companies, renewable energy companies, underwater construction companies, law enforcement agencies, ports, mining companies, defense bodies, prime defense contractors, navies, research institutes and universities and diving companies.
The Services Business has operations in the USA and UK. It is a trusted Department of Defense (DoD) supplier, and its central business model is working with Prime Defense Contractors to design and manufacture sub-assemblies for utilization into larger defense mission critical integrated systems (“MCIS”). An example of such MCIS is the US Close-In-Weapons Support (CIWS) Program for the Phalanx radar-guided cannon used on combat ships. These proprietary sub-assemblies, once approved within the MCIS program, afford the Services Business the status of preferred supplier. Such status permits it to supply these sub-assemblies and upgrades in the event of obsolescence or advancement of technology for the life of the MCIS program. Customers include prime defense contractors such as Raytheon, Northrop Grumman, Thales Underwater and BAE Systems. The scope of services provided by this business encompasses concept, design, prototype, manufacturing and support.
Key Pillars for our Growth Plans
Our volumetric real time imaging sonar technology and our DAVD are our most promising products for the Company’s near-term growth.
Our real time 3D/4D/5D/6D imaging sonars are the only underwater imaging sonars which are capable of providing complex seabed mapping, real time inspection and monitoring and providing 3D/4D/5D/6D data of moving underwater objects irrespective of water conditions including in zero visibility (which is a common and costly problem in underwater operations). Competing products such as the multibeam sonar can perform mapping (but not complex mapping) without the ability to perform real time inspection and monitoring of moving objects in 3D underwater. 3D information is important because it provides the complete detail of the underwater object being imaged (XYZ data), including the ability to make real time physical measurements. We also believe our Echoscope PIPE® is the only technology that can generate multiple real time 3D/4D/5D/6D acoustic images using different acoustic parameters such as frequency, field of view, pulse length, and filters.
In the industry in which we operate, we are widely considered the leading solution providers for underwater real time 3D visualization.
We also believe that the DAVD system is poised to radically change the way diving operations are performed globally by providing a fully integrated suite of sensor data shared in real time by the dive supervisor on the surface and the diver. Current diving is done largely by voice command missions from the topside using a disparate suite of systems for video data, communications and positioning.
The DAVD tethered version is now in early-stage adoption by different teams within the US Navy, such as the underwater construction and salvage teams and has been moved from the customer’s R&D phase to their operational phase. Operational phase means that the DAVD tethered version is now a standard item available for purchase and for which budget lines are established within the various user commands within the Navy.
The DAVD untethered prototype variant, which is the biggest market opportunity in the USA addressing the defense market, was delivered in our first quarter to our Navy customer for evaluation. This is currently going through testing and evaluation by the customer. As part of their evaluation process, we expect the customer to purchase a small batch of evaluation systems for wider fleet evaluation. The customer and the Company are currently actively demonstrating the untethered version at various trade shows.
The concept of utilizing a pair of transparent glasses in the Head Up Display (HUD) underwater for this purpose, is protected by patent. All component parts of the DAVD system are proprietary to the Company and include software (4G USE®), Diver Processing Pack – telemetry system (DPP), Top Side Controller and real time 3D Sonar. The Company benefits from the exclusive license from the United States Department of the Navy at Naval Surface Warfare Center Panama City Division to utilize the utility patent covering the concept of using the pair of transparent glasses as a data hub underwater. The DAVD is an “Approved Navy Use” item.
Both the Marine Technology Business and Engineering Business have established synergies in terms of customers and specialized engineering skill sets (hardware, firmware and software) encompassing capturing, computing, processing and displaying data in harsh environments. Both businesses jointly bid for projects for which their common joint skills provide competitive advantage and make them eligible for such projects.
Factors Affecting our Business in the Current Quarter
The following is a short description of some of the most critical and pressing factors that affect our business. For a more detailed discussion of these and additional factors, refer to our Form 10-K for the fiscal year ended October 31, 2022.
| 26 |
Cumulative Supply Chain Issues
We continue to experience shortage of key electronic components in the market and suppliers are still quoting lead times as long as 12 months out for routine components, including FPGAs (Field Programmable Gate Arrays) and significant price increases. The unavailability of components affects our business in a number of ways, including:
| Ø | Our ability to progress ongoing projects including customer projects, particularly in the Engineering Segment. | |
| Ø | Significant increase in prices because demand exceeds supply for these component |