SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q/A
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
quarterly period ended July 31, 2008
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
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For
the
transition period from ______________ to ______________
Commission
File Number 000-52815
CODA
OCTOPUS GROUP, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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34-200-8348
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(State
or other jurisdiction of Incorporation or organization)
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(I.R.S.
Employer Identification Number)
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164
West, 25 th
Street, 6 th
Floor, New York
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10001
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
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(212)
924-3442
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Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes o
No
x
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): o
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Large
accelerated filer o
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Accelerated
filer o
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
The
number of shares outstanding of issuer's common stock, $0.001 par value as
of
September 14, 2008: 48,853,664.
EXPLANATORY
NOTE
This
amendment to the quarterly report of Coda Octopus Group, Inc. for the quarter
ended July 31, 2008 is being filed to correct certain typographical errors
in
the sections included herein and to provide the GAAP reconcilliation with EBITDA
figures previously reported that was inadvertently omitted from the original
filing.
Item
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
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. 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
We
are a
developer of underwater technologies and equipment for imaging, mapping, defense
and survey applications. We are based in New York, with research and
development, sales and manufacturing facilities located in the United Kingdom,
United States and Norway as well as two engineering companies located in the
United States and the United Kingdom.
The
consolidated financial statements include the accounts of Coda Octopus and
our
domestic and foreign subsidiaries that are more than 50% owned and controlled
except that the financial statements, including Colmek, which was acquired
on
April 6, 2007. All significant intercompany transactions and balances have
been
eliminated in the consolidated financial statements.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the amounts reported in the consolidated financial statements and
accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions that we may undertake in the
future, actual results may differ from those estimates.
Background
We
are
engaged in 3-D subsea technology and are the developer and patent holder of
real-time 3-D sonar products which we expect to play a critical role in the
next
generation of underwater port security. We produce hardware, software and fully
integrated systems which are sold and supported on a worldwide basis, with
wide
applications in two distinct market segments:
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·
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marine
geophysical survey (commercial), which focuses around oil and gas,
construction and oceanographic research and exploration, where we
market
to survey companies, research institutions, salvage companies. This
was
our original focus, from original founding in 1994, with current
products
spanning geophysical data collection and analysis, through to printers
to
output geophysical data collected by sonar. We believe that our marine
geophysical survey markets are experiencing rapid growth due to:
1)
successful new product introductions in recent periods; 2)
market-proximity benefits derived from 2004 relocation to the United
States; 3) initial market penetration into new sub-sectors of the
marine
geophysical survey markets; 4) the high price of oil and gas in the
past
few years, resulting in unprecedented exploration and production
activity.
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underwater
defense/ security, where we market to ports and harbors, state and
federal
government agencies and defense contractors. We started to focus
on this
market following the acquisition of OmniTech AS, a Norwegian Company,
in
December 2002, a company which had developed a prototype system,
the
Echoscope™,
a unique, patented instrument which permits accurate three-dimensional
visualization, measurement, data recording and mapping of underwater
objects. We have recently completed developing and commenced marketing
this first real time, high resolution, three-dimensional underwater
sonar
imaging device which we believe has particularly important applications
in
the fields of port security, defense and undersea oil and gas
development.
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In
addition, through our two engineering services subsidiaries, Martech Systems
(Weymouth) Ltd, based in Weymouth, England, UK, and Colmek Systems Engineering,
based in Salt Lake City, Utah, USA , we provide engineering services to a wide
variety of clients in the subsea, defense, nuclear, government and
pharmaceutical industries. These engineering capabilities are increasingly
being
combined with our product offerings, bringing opportunities to provide complete
systems, installation and support.
For
the
foreseeable future, we intend to intensify our focus on port security. We
believe that in the post 9/11 era there are significant growth opportunities
available in that particular market segment because of increased government
expenditures aimed at enhancing security. Specifically, we believe that we
have
the ability to capitalize on this opportunity as a result of:
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First
mover advantage in 3-D sonar markets based on our patented technology,
our
research and development efforts and extensive and successful testing
in
this area that date back almost two decades as well as broad customer
acceptance.
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o
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Early
recognition of need for 3-D real-time sonar in defense/security
applications.
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o
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Expansion
into new geographies, such as North America.
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Expansion
into new commercial markets, such as construction and dredging, with
innovative products.
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Recent
sole source classification for one of our products and its derivatives
by
certain government procurement
agencies.
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Further,
we believe the Echoscope™ will transform certain segments of the sonar products
market. In addition, 3-D sonar, currently in the early stages of adoption,
has
disruptive technology qualities as it has the ability to change industry
standard practice in respect of the method for visualization and imaging of
underwater objects and environment. Therefore, it will likely change who the
suppliers into this market are as well as our market position and that of our
competitors. We believe the market opportunity in underwater security and
defense could grow at a rapid pace over the next several years.
Approximately
52% of our nine month 2008 revenues of $13,232,440 were attributable to pure
products business. The rest was attributable to our engineering businesses
at
Colmek and Martech, and a development contract with TSWG fulfilled through
our
corporate Research and Development division.
To
this
established base of business, we now plan to add other
sub-sections:
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we
are now starting to bid (sometimes in partnership, where areas of
focus
other than underwater sonar and wireless video surveillance capability
are
demanded) for complete port security and other solutions. We have
bid on a
small number of these in the last six months and hope for our first
successes shortly. We have not yet been awarded any contracts for
the
purchase of complete solutions. However, in March of 2008, we received
a
$1.6 million follow on order from the U.S. Department of Defense
to
deliver an additional next-generation Underwater Inspection System
(UIS)™
for TSWG and other potential users, to enable rapid underwater searches
in
the nation’s ports and waterways. In addition to the additional hardware
(we delivered four original units in December of 2007) TSWG has committed
to a $1 million development project to help advance the product.
The
contract includes additional options which, if fully funded, would
require
us to deliver further UIS™ systems in fiscal 2009. The contract was
awarded to us on a sole source basis, which means that the product
is
considered to be available from one source only and under Federal
rules
may be acquired from that source without competitive bidding process.
Although this is not a complete port security system, it represents
the
first step towards achieving this.
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we
are currently reviewing the possibility of launching next year, in
partnership with others, a services business based on our product
set.
This business will be port based and will, for example, provide ship
hull
inspections by way of rental of equipment and provision of a team
to
operate the equipment for any ship entering that particular
port.
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Critical
Accounting Policies
This
discussion and analysis of our financial condition and results of operations
are
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 US 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 3, "Summary of Significant Accounting Policies"
of
our Consolidated Financial Statements.
Revenue
Recognition
We
record
revenue in accordance with the guidance of the SEC's Staff
Accounting Bulletin SAB No. 104
(SAB
104), which supersedes SAB
No. 101
in order
to encompass EITF
No. 00-21
,
Revenue
Arrangements with Multiple Deliverables
(EITF
00-21).
Revenue
is derived from sales of underwater technologies and equipment for imaging,
mapping, defense and survey applications. Revenue is also derived through
contracts gained by our Martech, Colmek and Innalogic businesses.
Revenue
is recognized when conclusive evidence of firm arrangement exists, delivery
has
occurred or services have been rendered, the contract price is fixed or
determinable, and collectability is reasonably assured. No right of return
privileges are granted to customers after shipment.
For
arrangements with multiple deliverables, we recognize product revenue by
allocating the revenue to each deliverable based on the fair value of each
deliverable in accordance with EITF
No. 00-21
and SAB
No. 104, and recognize revenue for equipment upon delivery and for installation
and other services as performed. EITF No. 00-21 was effective for revenue
arrangements entered into in fiscal periods beginning after June 15,
2003.
Our
contracts typically require customer payments in advance of revenue recognition.
These deposit amounts are reflected as liabilities and recognized as revenue
when the Company has fulfilled its obligations under the respective
contracts.
Revenues
derived from our software license sales are recognized in accordance with
Statement of Position (SOP) SOP No. 97-2, “Software Revenue Recognition,” and
SOP No. 98-9, “Modifications of SOP No. 97-2, Software Revenue Recognition with
Respect to Certain Transactions”. For software license sales for which any
services rendered are not considered essential to the functionality of the
software, we recognize revenue upon delivery of the software, provided (1)
there
is evidence of an arrangement, (2) collection of our fee is considered probable
and (3) the fee is fixed and determinable.
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 in accordance with our revenue recognition policy by
contract. 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 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.
Stock
Based Compensation
SFAS
No. 123, “Accounting for Stock-Based Compensation,” established and
encouraged the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using
the
fair value of stock-based compensation determined as of the date of the grant
or
the date at which the performance of the services is completed and is recognized
over the periods in which the related services are rendered. The statement
also
permitted companies to elect to continue using the current intrinsic value
accounting method specified in Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees,” to account for
stock-based compensation to employees. Prior to the adoption of SFAS 123(R)
we
elected to use the intrinsic value based method for grants to our employees
and
directors and have disclosed the pro forma effect of using the fair value based
method to account for our stock-based compensation to employees.
On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R (revised 2004), “Share-Based Payment” (“Statement 123R”) which is a
revision of SFAS No. 123.
Statement
123R supersedes APB opinion No. 25 and amends SFAS No. 95, “Statement of Cash
Flows”. Generally, the approach in Statement 123R is similar to the approach
described in Statement 123. However, Statement 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro-forma
disclosure is no longer an alternative. This statement does not change the
accounting guidance for share based payment transactions with parties other
than
employees provided in SFAS No. 123(R). This statement does not address the
accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership
Plans.” On April 14, 2005, the SEC amended the effective date of the provisions
of this statement. The effect of this amendment by the SEC is that the Company
had to comply with Statement 123R and use the Fair Value based method of
accounting no later than the first quarter of 2006. We implemented SFAS
No. 123(R) on November 1, 2004 using the modified prospective method.
The fair value of each option grant issued after November 1, 2004 will be
determined as of grant date, utilizing the Black-Scholes option pricing model.
The amortization of each option grant will be over the remainder
of the vesting period of each option grant. We use the fair value method
for equity instruments granted to non-employees and use the Black Scholes model
for measuring the fair value. The stock based fair value compensation is
determined as of the date of the grant or the date at which the performance
of
the services is completed (measurement date) and is recognized over the periods
in which the related services are rendered.
Income
Taxes
Deferred
income taxes are provided using the asset and liability method for financial
reporting purposes in accordance with the provisions of Statements of Financial
Standards No. 109, "Accounting for Income Taxes". Under this method, deferred
tax assets and liabilities are recognized for temporary differences between
the
tax bases of assets and liabilities and their carrying values for financial
reporting purposes, and for operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be removed or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
consolidated statements of operations in the period that includes the enactment
date.
Purchase
price allocation and impairment of intangible and long-lived
assets
Intangible
and long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts of such
assets may not be recoverable. Determination of recoverability is based on
an
estimate of undiscounted future cash flows resulting from the use of the asset,
and its eventual disposition. Measurement of an impairment loss for intangible
and long-lived assets that management expects to hold and use is based on the
fair value of the asset as estimated using a discounted cash flow
model.
We
measure the carrying value of goodwill recorded in connection with the
acquisitions for potential impairment in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets”. To apply SFAS 142, a company is divided into
separate “reporting units”, each representing groups of products that are
separately managed. For this purpose, we have one reporting unit. To determine
whether or not goodwill may be impaired, a test is required at least annually,
and more often when there is a change in circumstances that could result in
an
impairment of goodwill. If the trading of our common stock is below book value
for a sustained period, or if other negative trends occur in our results of
operations, a goodwill impairment test will be performed by comparing book
value
to estimated market value. To the extent goodwill is determined to be impaired
an impairment charge is recorded in accordance with SFAS 142.
Introduction
The
third
quarter ending July 31, 2007 contained $1,521,675 of TSWG (US Coast Guard)
Revenues which had an unusual impact on that period. Comparisons will be
dramatically impacted by that anomaly. In fact, business with the Coast Guard
has continued but has not had as significant effect on quarterly revenues as
were realized in the third quarter of 2007.
Comparison
of Three Months Ended July 31, 2008 (“2008 Period”) to Three Months Ended July
31, 2007 (“2007 Period”)
Revenues
. Total
revenues for the 2008 period and the 2007 period were $5,008,525 and $5,859,907
respectively. This represented a decrease of $851,382 or 14.5%. The acquisition
of Colmek occurred on April 6, 2007 which makes the period to period comparisons
consistent for the first time without breaking out the subsidiary. This reflects
increased business in our products division specifically with regard to the
oil
and gas business in Europe, the construction business in the Middle East, the
US
Coast Guard continuing to purchase products and services, and a UIS™ (Underwater
Inspection System) sale to a law enforcement agency in the US. Alongside this
was a decrease in TSWG/USCG revenues, reflecting the current status of the
contract in each year.
Margins
. Gross
margins were 60.4% in the 2008 period compared with 60.7% for the 2007 period.
This was achieved with the increase in the sale of our signature products,
the
Echoscope™ and the UIS™, as well as the mix of traditional products which are
sold at higher margins and are becoming a dominant part of the revenue stream.
The engineering contracting business represented $1,772,894 or 35.4% of sales
with the products business attaining a level of $2,450,727 or 48.9% of revenues.
The company is targeting an average gross margin in the vicinity of 63% going
forward.
Research
and Development (R&D)
.
R&D increased 39% to $880,339 in the 2008 period from $634,679 in 2007. This
reflects further development of the Echoscope™ and UIS™ tied to the TSWG (US
Coast Guard) contract, the initial stage of which finished in January, with
the
next stage having begun in March. Additionally, work commenced on the
development contract for the company’s new application which deploys the
Echoscope ™ for underwater construction. The company continues to invest in new
applications of its signature product.
Selling,
General and Administrative Expenses (SG&A)
.
SG&A expenses for the 2008 period decreased to $3,311,267 from $3,594,560 in
2007, or by 7.9%. However, the non-cash charges attributable to stock and option
compensation were $433,478 against $805,825 which brings SG&A for the 2008
Period to $2,786,391 against $2,788,735 for the 2007 Period, virtually static
year on year.
Key
areas
of expenditures include wages and salaries where the company spent $1,719,375
while the 2007 period was $1,534,028; legal and professional fees, including
accounting, audit and investment banking services, decreased to $241,928 in
2008
from $480,892 in 2007; travel increased to $186,297 from $127,283; rent
increased to $164,306 in 2008, from $148,376; and marketing increased to
$294,732 from $74,031 in 2007, mainly due to reclassification of
consultants.
Operating
Income/Loss
.
Adjusted Earnings before Interest, Tax, Depreciation and Amortization (EBITDA)
for the period, without non-cash charges for stock and options, were a loss
of
$298,310 against positive $172,853 for the 2007 Period. The Company produced
an
operating loss for the period of $1,167,795 (which, when adjusted for non-cash
charges, becomes $498,778) against a loss of $670,060 in 2007.
Interest
Expense.
Interest
expense for the period was $481,876, of which $383,571 was associated with
the
convertible debenture financing by the Royal Bank of Scotland. Interest expense
in 2007 was $561,350.
Preferred
Dividends
. During
the 2008 period there was a $31,819 dividend paid on the remaining series A
preferred stock versus $31,851 in 2007. All of the series B preferred stock
and
most of the series A preferred stock was converted to equity in April/May
2007.
Comparison
of Nine Months Ended July 31, 2008
(“2008 Period”) to the Nine Months Ended July 31, 2007 (“2007
Period”)
Introduction
Due
to
the acquisition of Colmek in April 2007, the financial information presented
for
Coda Octopus for the period ended July 31, 2007 (the "2007 Period"), includes
activity in Colmek from April 6 to the end of the period, combined with revenue,
other income and SG&A expenses of the rest of Coda Octopus Group, Inc. for
the period ending July 31, 2007. The financial information presented (“2007
Period") includes revenues and expenses for Colmek only for the period after
the
acquisition which occurred on April 6, 2007. As a result, the increased
revenues and expenses in the accompanying consolidated statements of operations
for the period in 2008 compared to those in 2007 may not be a meaningful
comparison.
Revenues
. Total
revenues for the 2008 Period and the 2007 Period were $13,232,440 and
$10,794,621 respectively, representing an increase of 22.6%. Contributions
from
Colmek were $1,709,014 in the 2007 period against $2,928,495 for 2008.
Subtracting the contribution from this acquisition to the 2008 and 2007 Periods,
there was a 13.4% increase in our original businesses. This was due to a strong
demand for our traditional products in the geophysical and hydrographic survey
markets as well as added traction in selling the UIS™ and
Echoscope™.
Gross
Margins
.
Margins were stronger in the 2008 Period at 62.7% compared with 58.2% for the
2007 period reflecting stronger sales in our traditional products business,
a
UIS™ sale to a US law enforcement agency and several Echoscopes™ sold to various
customers including three units sold into the construction market.
Research
and Development (R&D)
.
R&D spending increased to $2,333,840 in the 2008 Period from $1,736,437 in
the 2007 Period, an increase of 34.4%, as we continue to focus considerable
effort into enhancing the Echoscope™ and releasing other products in our suite
of marine geophysical offerings. In particular, work focused on delivering
our
Underwater Inspection System (UIS™), a turnkey system built around the
Echoscope™ platform and further development work for the US Coast Guard on the
UIS™ system. Additionally, the company began development work on the project
which deploys the Echoscope™ in the underwater construction market.
Selling,
General and Administrative Expenses (SG&A)
.
SG&A expenses for the 2008 Period increased to $9,170,389 (the costs for the
period include $1,323,029 in share compensation, amortization and depreciation
which are non-cash charges) from $8,883,099 during the 2007 Period ,
an
increase of $287,290 or 3.2%. Some of the increase is attributable to the
acquisition of Colmek which was included for the entire period in
2008.
Key
areas
of expenditure include wages and salaries, where we spent $4,614,613 of our
SG&A costs (2007 Period was $3,736,218 ); legal and professional fees,
including accounting, audit and investment banking services, amounted to
$877,821(2007 Period was $1,169,935); travel costs increased to $418,687 in
2008
from $389,987 in 2007; rent for our various locations increased to $394,811
in
2008, from $390,526 in 2007; marketing increased to $905,794 in 2008 from
$200,459 in 2007, which included reclassification of certain consultants engaged
in sales of our signature products who were previously included in legal and
professional fees.
Other
Operating Expenses
. We
incurred other operating expenses of $435,000 in the 2007 Period for fees
incurred connected with equity fund raising. We incurred no comparable expenses
in the 2008 Period.
Operating
Loss
. The
adjusted EBITDA results for the 2008 period were a loss of $1,887,226, not
including non-cash charges for stock and options compensation, against a loss
of
$1,946,429 for the 2007 period. As a result of the foregoing, the Company incurred a loss from
operations of $3,206,055 during the 2008 Period compared to a loss from
operations of $4,773,016 during the 2007 Period.
Interest
Expense
.
Interest expense for the 2008 Period decreased to $1,051,181 (consisting of
accrued bond interest and factoring) from $6,349,946 during the 2007 Period.
Of
the 2007 amount, $5,544,445 was attributable to the valuation of warrants issued
as part of our financing, booked as a non-cash financing charge.
Dividends
and Other Stock Charges
. During
the 2008 Period, dividends of $106,843 were declared against $346,630 in the
2007 Period on preferred stock (most of the preferred stock was converted into
common stock during the 2007 Period). The 2007 amount includes $238,950 paid
on
the series A preferred stock and $107,680 on the series B preferred. In
addition, the 2007 Period included $800,000 in non-cash charges for the
beneficial conversion feature related to the issuance of series B preferred
stock in January 2007. This took the net loss applicable to common shares to
$12,196,051 or $0.34 per share for the 2007 Period, based on an average of
35,490,398 shares outstanding, compared to a loss of $4,267,300 or $0.09 per
share for the 2008 Period, based on an average of 48,369,873 shares outstandin
g.
Non-GAAP
Financial Measures
Following
is a reconciliations of differences between non-GAAP financial information
that
may be required in connection with issuing the company’s quarterly financial
results included herein.
As
is
common in our industry, we use EBITDA as a measure of performance to demonstrate
earnings exclusive of interest and non-cash events. We manage our business
based
on our cash flows. The Company, in its daily management of its business affairs
and analysis of its monthly, quarterly and annual performance, makes its
decisions based on cash flows, not on the amortization of assets obtained
through historical activities. The Company, in managing its current and future
affairs, cannot affect the amortization of the intangible assets to any material
degree, and therefore uses EBITDA as its primary management guide. Since an
outside investor may base its evaluation of the Company’s performance based on
the Company’s net loss not its cash flows, there is a limitation to the EBITDA
measurement. EBITDA is not, and should not be considered, an alternative to
net
loss, loss from operations, or any other measure for determining operating
performance of liquidity, as determined under accounting principles generally
accepted in the United States (GAAP). The most directly comparable GAAP
reference in the Company’s case is the removal of interest, depreciation,
amortization, taxes and other non-cash expense. In assessing the overall health
of its business during the third quarter of 2008 and 2007, the Company excluded
the following:
| |
·
|
Stock-Based
Compensation:
The Company believes that because of the variety of equity awards
used by
companies, varying methodologies for determining stock-based compensation
and the assumptions and estimates involved in those determinations,
the
exclusion of non-cash stock-based compensation enhances the ability
of
management and investors to understand the impact of non-cash stock-based
compensation on our operating results. Further, the Company believes
that
excluding stock-based compensation expense allows for a more transparent
comparison of its financial results to previous
periods.
|
| |
·
|
Other
Income: The
Company considers this a one time transaction, and it is not an indication
of current or future operating performance. Therefore the Company
does not
consider the inclusion of this transaction helpful in assessing its
current financial performance compared to previous periods as well
as
prospects for the future.
|
CODA
OCTOPUS GROUP, INC.
RECONCILIATION
OF NET INCOME (LOSS) TO ADJUSTED EBITDA
FOR
THE THREE AND NINE MONTHS ENDED JULY 31, 2008 AND 2007
(Unaudited)
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
July 31, 2008
|
|
July 31, 2007
|
|
July 31, 2008
|
|
July 31, 2007
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net (loss), as
reported
|
|
$
|
(1,602,117
|
)
|
$
|
(1,195,665
|
)
|
$
|
(4,160,457
|
)
|
$
|
(11,049,422
|
)
|
|
Interest
expense, net
|
|
|
481,876
|
|
|
561,350
|
|
|
1,051,181
|
|
|
6,349,946
|
|
|
Depreciation
and amortization
|
|
|
200,468
|
|
|
65,596
|
|
|
453,623
|
|
|
226,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(919,773
|
)
|
|
(568,719
|
)
|
|
(2,655,653
|
)
|
|
(4,473,167
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense (income)
|
|
|
(47,554
|
)
|
|
(35,745
|
)
|
|
(96,779
|
)
|
|
(73,540
|
)
|
|
Stock
based compensation
|
|
|
669,017
|
|
|
777,317
|
|
|
865,206
|
|
|
2,600,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$
|
(298,310
|
)
|
$
|
172,853
|
|
$
|
(1,887,226
|
)
|
$
|
(1,946,429
|
)
|
Liquidity
and Capital Resources
As
of
July 31, 2008 the Company had positive working capital of $10,892,026 and cash
totaling $6,050,996.
The
net
loss of $4,160,457 generated a cash flow deficit from operations of $4,117,784
in the 2008 Period, compared to $8,031,167 in 2007. During the 2008 Period,
we
also invested around $291,000 in tangible and intangible assets for use within
our various businesses, and completed the acquisition of Colmek for an outlay
of
a final amount of $763,936. During the 2008 Period, we raised $12M through
the
issuance of a convertible debenture in February 2008 (this was $10,453,421
after
the deduction of associated costs), which, combined with the cash flow uses
outlined above, resulted in a net cash flow into the company for the period
of
$5,134,739. The secured convertible debenture attracts interest at a rate of
8.5%, and has a conversion price of $1.05 per share callable after 2 years
at
$2.50, after 3 years at $2.90, and after 4 years at $3.50. The instrument is
redeemable after 7 years at 130%. The company feels that this funding will
enable the company to execute its plan over the next 12
months.
In
the
short term, our plan involves, specifically:
|
|
·
|
Continue
to sell our current range of products into a mixture of commercial,
defense and security markets, increasing sales of these products
over the
course of this financial year - we have seen strong growth over the
course
of the year so far.
|
|
|
·
|
Start
to sell complete turnkey systems based around our leading Echoscope™ 3-D
technology, to open markets in law enforcement and inspection - a
great
deal of our R&D expenditure has been directed towards refining our
product and completing sales this year that are currently in our
pipeline,
with first deliveries occurring in this financial year.
|
|
|
·
|
Continue
to deliver to the Coast Guard on the contract we were awarded last
July.
Work on stage 2 began in the second quarter of this year and continues
until at least the end of the financial
year.
|
|
|
·
|
Deliver
on our first port security solution contract through the provision
of our
unique 3-D technology and other products and services, enabling us
to
provide complete solutions.
|
|
|
·
|
Leverage
our subsidiaries to take advantage of our lead in underwater sonar
technology by cross marketing all group products and services from
each
company.
|
|
|
·
|
Continue
to review and refocus our cost base where necessary to achieve a
cost
level commensurate with our current level of
activity.
|
Through
these measures, we aim to move from cash negative for last year and the first
quarter of this year to cash positive. We also aim to move from heavily
loss-making for the past 2 years to profitable for the coming year, prior to
any
non-cash charges made to our income statement. Although we intend to pursue
our
plans aggressively as set forth in the previous paragraph, there can be no
assurance that we will be successful in our attempt to make the company
profitable in the near future, or ever.
Inflation
and Foreign Currency
The
Company maintains its books in local currency: US Dollars for the parent holding
Company in the United States of America and the US operations, Pounds Sterling
for UK operations and Norwegian Kroner for Norwegian operations.
The
Company’s operations are primarily inside of the United States through its
wholly-owned subsidiaries, though a significant proportion of revenues and
costs
are incurred outside of the US. As a result, fluctuations in currency exchange
rates may significantly affect the Company's sales, profitability and financial
position when the foreign currencies of its international operations are
translated into U.S. dollars for financial reporting. In additional, we are
also
subject to currency fluctuation risk with respect to certain foreign currency
denominated receivables and payables. Although the Company cannot predict the
extent to which currency fluctuations may, or will, affect the Company's
business and financial position, there is a risk that such fluctuations will
have an adverse impact on the Company's sales, profits and financial position.
Because differing portions of our revenues and costs are denominated in foreign
currency, movements could impact our margins by, for example, decreasing our
foreign revenues when the dollar strengthens and not correspondingly decreasing
our expenses. The Company does not currently hedge its currency exposure. In
the
future, we may engage in hedging transactions to mitigate foreign exchange
risk.
It
is the
opinion of the Company that inflation has not had a material effect on its
operations.
Financing
Activities
Since
February 2005, we have raised approximately $36,724,289 in cash through the
issuance in private offerings at various times of shares of our common stock,
and units consisting of shares of preferred stock and warrants to purchase
common stock.
In
February 2005, we issued a total of 1,000,000 shares of our common stock for
a
total cash consideration of $800,534.
In
October 2005, we issued a total of 15,000 Series A Preferred Stock (Sterling
Denominated), since converted into 2,655,000 shares of common stock, for a
total
cash consideration of £1,500,000 equivalent to approximately $2,655,000, based
upon a conversion ratio of $1.77 for each UK Pound at the time of the
investment.
On
April
30, 2006, we issued to one investor a total of 7,320.88 shares of our Series
A
Preferred Stock to a group of individual investors for total cash consideration
of £684,618.83 UK Pounds equivalent to $1,211,755 based upon a conversion ratio
of $1.77 for each UK Pound at the time of the investment.
From
June
2006 through January 2007, we issued to one institutional investor units
consisting 46,000 shares of our Series B Preferred Stock and four five year
warrants to purchase 9.2 million shares of our common stock at a price ranging
from $1.30 to $2.00 per share and 650,000 shares of our Common Stock for a
total
cash consideration of $4,600,000. Of these 46,000 shares of Series B Preferred
Stock, 18,181 were redeemed in April 2007 and the remaining shares were
converted into 2,781,900 shares of our common stock.
In
July
2006, we issued to two individual investors 820 shares of our Series A Preferred
Stock for a total cash consideration of $82,000. These have since been converted
into 820,000 shares of our common stock.
On
October 31, 2006, we issued to one investor 500 shares of our Series A Preferred
Stock for a total consideration of $50,000. These have since been converted
into
50,000 shares of our common stock.
In
January 2007, we issued to one investor 3,000 shares of our Series B Preferred
Stock plus five-year warrants to purchase 300,000 shares of our common stock
at
$1.30 per share and five-year warrants to purchase 300,000 shares of our common
stock at $1.70 per share for a total cash consideration of $300,000. The 3,000
shares of Series B Preferred Stock have since been converted into 300,000 shares
of our common stock.
In
April
2007, we issued to an individual investor 25,000 shares of our common stock
plus
five-year warrants to purchase the same number of shares of common stock (of
which 12,500 may be purchased at $1.30 and the balance at $1.70 per share)
for a
total of $25,000.
During
April and May 2007, we issued to a group of investors a total of 15,000,000
shares of our common stock plus five-year warrants to purchase the same number
of shares of common stock (of which 7,500,000 may be purchased at $1.30 and
the
balance at $1.70 per share) for a total of $15,000,000.
In
February 2008, we issued $12 million of 8.50% secured convertible debentures.
This instrument is convertible into common stock at $1.05 per share. It is
callable by the company at $2.50 after two years, $2.90 after three years and
at
$3.50 after four years. It matures at 130% after seven years.
Off-Balance
Sheet Arrangements
We
do not
have any off balance sheet arrangements that are reasonably likely to have
a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
Item
6. Exhibits
|
31
|
Certifications
of the Chief Executive Officer and Chief Financial Officer pursuant
to
Rule 13a-14(a)
|
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
Coda
Octopus Group, Inc.
(Registrant)
|
|
|
|
|
|
Date:
September 17, 2008
|
|
/s/ Jason
Reid
|
|
|
Jason
Reid
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
Date:
September 17, 2008
|
|
/s/ Jody
E. Frank
|
|
|
Jody
Frank
|
|
|
Chief
Financial Officer
|