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 14, 2022 is .
INDEX
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
For the Three Months Ended April 30, 2022 and 2021
Contents
| 3 |
CODA OCTOPUS GROUP, INC.
Consolidated Balance Sheets
April 30, 2022 and October 31, 2021
| 2022 | 2021 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable, net | ||||||||
| Inventory | ||||||||
| Unbilled Receivables | ||||||||
| Prepaid Expenses | ||||||||
| Other Current Assets | ||||||||
| Total Current Assets | ||||||||
| FIXED ASSETS | ||||||||
| Property and Equipment, net | ||||||||
| OTHER ASSETS | ||||||||
| Goodwill and Other Intangibles, net | ||||||||
| Deferred Tax Asset | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 4 |
CODA OCTOPUS GROUP, INC.
Consolidated Balance Sheets (Continued)
April 30, 2022 and October 31, 2021
| 2022 | 2021 | |||||||
| Unaudited | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts Payable | $ | $ | ||||||
| Accrued Expenses and Other Current Liabilities | ||||||||
| Note Payable | ||||||||
| Deferred Revenue | ||||||||
| Total Current Liabilities | ||||||||
| LONG TERM LIABILITIES | ||||||||
| Deferred Revenue, less current portion | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common Stock, $ par value; shares authorized, issued and outstanding as of April 30, 2022 and shares issued and outstanding as of October 31, 2021 | ||||||||
| 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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of Revenues | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Research & Development | ||||||||||||||||
| Selling, General & Administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| INCOME FROM OPERATIONS | ||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Other Income | ||||||||||||||||
| Funding from Paycheck Protection Program | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other Income | ||||||||||||||||
| INCOME BEFORE INCOME TAX EXPENSE | ||||||||||||||||
| INCOME TAX BENEFIT (EXPENSE) | ||||||||||||||||
| Current Tax Benefit (Expense) | ( | ) | ||||||||||||||
| Deferred Tax Benefit (Expense) | ( | ) | ||||||||||||||
| Total Income Tax Benefit (Expense) | ( | ) | ||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| NET INCOME PER SHARE: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| WEIGHTED AVERAGE SHARES: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| Foreign Currency Translation Adjustment | ( | ) | ( | ) | ||||||||||||
| Total Other Comprehensive (Loss) Income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| COMPREHENSIVE (LOSS) 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 and Six Months Ended April 30, 2022 and 2021
(Unaudited)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Total | |||||||||||||||||||
| Balance, October 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Employee stock based compensation | - | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| Net Income | - | |||||||||||||||||||||||
| Balance, January 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Employee stock based compensation | - | |||||||||||||||||||||||
| Stock issued for options exercised | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| Net Income | - | |||||||||||||||||||||||
| Balance, April 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | 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 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
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, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock based compensation | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Funding from Paycheck Protection Program recognized as income | ( | ) | ||||||
| (Increase) decrease in operating assets: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Unbilled receivables | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Increase (decrease) in operating liabilities: | ||||||||
| Accounts payable and other current liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Net Cash Provided by Operating Activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Purchases of other intangible assets | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of notes | ( | ) | ( | ) | ||||
| Proceeds from Paycheck Protection Program | ||||||||
| Net Cash (Used in) Provided by Financing Activities | ( | ) | ||||||
| EFFECT OF CURRENCY TRANSLATION ON CHANGES IN CASH | ( | ) | ||||||
| NET INCREASE IN CASH | ||||||||
| CASH AT THE BEGINNING OF THE PERIOD | ||||||||
| CASH AT THE END OF THE PERIOD | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 8 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
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 (“Products Business”, “Products Operations” or “Products Segment”) and the Marine Engineering Business (“Services Business”, “Engineering Business”; “Engineering Operations” 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. Among the solutions which it offers to the market and currently its main revenue generating product, is its real time 3D volumetric imaging sonar which is a patented and leading product in the subsea/underwater market. This product is marketed under the name Echoscope® and Echoscope PIPE®, PIPE being an acronym for Parallel Intelligent Processing Engine. It also recently launched a new diver management system (Diver Augmented Vision Display (DAVD)) addressing the global defense and commercial diving market and which it believes is a significant part of its growth pillars. The requirements for the DAVD system emanated from Office of Naval Research and the concept of using a pair of transparent glasses in the Head up Display (HUD) underwater is patented and licensed to the Company by United States Department of the Navy at Naval Surface Warfare Center Panama City Division. The Marine Engineering Business are sub-contractors to prime defense contractors and generally supplies proprietary sub-assemblies to these Primes for incorporation into broader mission critical defense systems. These parts typically are supplied for the life of the program to which they pertain.
The consolidated financial statements include the accounts of Coda Octopus Group, Inc. and our domestic and foreign subsidiaries based outside of the US. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.
NOTE 2 – REVENUE RECOGNITION
The Company recognizes revenue under 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:
| ● | Determine if we have a contract with a customer; | |
| ● | Determine the performance obligations in that contract; | |
| ● | Determine the transaction price; | |
| ● | Allocate the transaction price to the performance obligations; and | |
| ● | Determine when to recognize revenue. |
Our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater technologies and equipment for real time 3D imaging, mapping, defense and survey applications and from engineering services which we provide primarily to prime defense contractors. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential additional variable consideration. Our sales do not include a right of return by the customer.
| 9 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 2 – REVENUE RECOGNITION (Continued)
Regarding our Marine Technology Business (“Products Business”), all of our products are sold on a stand-alone basis and those market prices are evidence of the value of the products. To the extent that we also provide services (e.g., installation, training, post-sales technical support etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been performed and evidence of the provision of those services exist.
Revenue derived from either our subscription package offerings or rental of our equipment is recognized when performance obligations are met, in particular, on a daily basis during the subscription or rental period.
For arrangements with multiple performance obligations, we recognize product revenue by allocating the transaction revenue to each performance obligation based on the relative fair value of each deliverable and recognize revenue when performance obligations are met including when equipment is delivered, and for rental of equipment, when installation and other services are performed.
Our contracts sometimes require customer payments in advance of revenue recognition. These are recognized as revenue when the Company has fulfilled its obligations under the respective contracts. Until such time, we recognize this prepayment as deferred revenue.
For software license sales for which any services rendered are not considered 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. This method is used as we consider expenditures for direct materials and labor hours to be the best available measure of progress on these contracts.
On a quarterly basis, we examine all of our fixed-price contracts to determine if there are any losses to be recognized during the period. Any such loss is recorded in the quarter in which the loss first becomes apparent based upon costs incurred to date and the estimated costs to complete as determined by experience from similar contracts. Variations from estimated contract performance could result in adjustments to operating results.
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, 2022, and October 31, 2021
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.
Deferred Commissions
Our
incremental direct costs of obtaining a contract, which consists of sales commissions are deferred and amortized over the period of the
contract performance. We classify deferred commissions as current or noncurrent based on the timing of when we expect to recognize the
expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets, and other
assets, net, respectively, in our consolidated balance sheets. As of April 30, 2022, and October 31, 2021, we had deferred commissions
of $
Other Revenue Disclosures
See Note 15 – Disaggregation of Revenue for a breakdown of revenues from external customers and cost of those revenues between our Product Segment and Services Segment including information on the split of revenues by geography.
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments include cash, accounts receivable, accounts payable, accrued expenses and notes payable. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair values because of the short-term nature of these instruments. The aggregate carrying amount of the notes payable approximates fair value as they bear interest at a market interest rate based on their term and maturity.
| 11 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 4 – FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated at the prevailing exchange rates at the balance sheet dates. Related revenues and expenses are translated at weighted average exchange rates in effect during the reporting period. Stockholders’ equity, fixed assets and long-term investments are recorded at historical exchange rates. Resulting translation adjustments are recorded as a separate component in stockholders’ equity as part of accumulated other comprehensive income or (loss) as may be appropriate. Foreign currency transaction gains and losses are included in the consolidated statements of income and comprehensive income.
NOTE 5 – INVENTORY
Inventory is stated at the lower of cost (First in, First Out method) or net realizable value. Inventory consisted of the following components:
| April 30, 2022 | October 31, 2021 | |||||||
| Raw materials and parts | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total Inventory | $ | $ | ||||||
NOTE 6 – FIXED ASSETS
Property and equipment consisted of the following as of:
| April 30, 2022 | October 31, 2021 | |||||||
| Buildings | $ | $ | ||||||
| Land | ||||||||
| Office machinery and equipment | ||||||||
| Rental assets | ||||||||
| Furniture, fixtures and improvements | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total Property and Equipment, net | $ | $ | ||||||
| 12 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 7 – OTHER CURRENT ASSETS
Other current assets consisted of the following as of:
| April 30, 2022 | October 31, 2021 | |||||||
| Deposits | $ | $ | ||||||
| Other Tax Receivables | ||||||||
| Employee Retention Credit Receivables | ||||||||
| Total Other Current Assets | $ | $ | ||||||
NOTE 8 – ESTIMATES
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, billings in excess of costs and estimated earnings and the valuation of goodwill.
NOTE 9 – CONTRACTS IN PROGESS
Costs
and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have not
been invoiced to customers as of the date of the balance sheet. These amounts are stated on the consolidated balance sheets as Unbilled
Receivables of $
Our
Deferred Revenue of $
Sales
of equipment include a separate performance obligation for warranty, which is treated as deferred revenue, along with sales for which
the customer may purchase extended warranty option. These amounts are amortized over the relevant obligation period (12 months
is our standard warranty or 24, 36 or 60 months for extended warranty, sold as Through Life Support (TLS) Package) from the date of delivery.
These amounts are stated on the consolidated balance sheets as a component of Deferred Revenue and were $
| 13 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 10 – CONCENTRATIONS
Significant Customers
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 three months ended April 30, 2021, the Company had three 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 $
During
the six months ended April 30, 2021, the Company had one customer from whom it generated sales greater than 10% of net revenues. Revenues
from this customer were $
| 14 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS
There have been no new accounting pronouncements not yet effective that have significant or potential significance, to our Consolidated Financial Statements.
| Three Months | Three Months | Six Months | Six Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| April 30 | April 30 | April 30 | April 30 | |||||||||||||
| Fiscal Period | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| 15 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 13 – 2017 STOCK INCENTIVE PLAN
On December 6, 2017, the Board of Directors adopted the 2017 Stock Incentive Plan (the “2017 Plan”) with shares of Common Stock available under the Plan for issuance. This Plan was approved by Stockholders at its meeting held on or around July 24, 2018.
On July 12, 2021, the Board of Directors adopted the 2021 Stock Incentive Plan (the “2021 Plan”). The 2021 Plan is identical to the 2017 in all material respects, except that the number of shares available for issuance thereunder is .
During the six months ended April 30, 2022, the Company granted to various eligible individuals Restricted Stock Awards of shares of common stock pursuant to the terms of the Plan. During the six months ended April 30, 2022, options vested and remain unexercised. options were exercised on a cashless basis, and shares were issued. As of April 30, 2022, there were shares available for future issue under both 2017 and 2021 Plans. The total stock compensation expense during the six months ended April 30, 2022, was $.
During the six months ended April 30, 2021, options were forfeited. During the six months ended April 30, 2021, options vested. As of April 30, 2021, shares of common stock were issued pursuant the cashless exercise of options. options vested in March 2021 remained unexercised as of April 30, 2021. As of April 30, 2021, there were shares of common stock available for future issue under the 2017 Plan. The total stock compensation expense during the six months ended April 30, 2021, was $.
NOTE 14 -SEGMENT ANALYSIS
Based
on the fundamental difference in the types of offering products versus services, we operate
Segment operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Corporate includes general corporate administrative costs (“Overhead”).
The Company evaluates performance and allocates resources based upon segment operating income. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies.
There are inter-segment sales 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 as of and for the three and six months ended April 30, 2022 and 2021, respectively.
The Company’s reportable business segments sell their goods and services in four geographic locations:
| ● | Americas | |
| ● | Europe | |
| ● | Australia/Asia | |
| ● | Middle East/Africa |
| 16 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
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 (Expense) | ||||||||||||||||
| Income (Loss) before Income Taxes | ( | ) | ( | ) | ||||||||||||
| Income Tax (Expense) Benefit | ||||||||||||||||
| Current Tax Benefit (Expense) | ( | ) | ||||||||||||||
| Deferred Tax (Expense) Benefit | ( | ) | ( | ) | ||||||||||||
| Total Income Tax (Expense) Benefit | ( | ) | ||||||||||||||
| Net Income (Loss) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Supplemental Disclosures | ||||||||||||||||
| Total Assets | $ | $ | $ | $ | ||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||||
| Revenues from Intercompany Sales - eliminated from sales above | $ | $ | $ | $ | ||||||||||||
| Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
| Purchases of Long-lived Assets | $ | $ | $ | $ | ||||||||||||
| 17 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 14 -SEGMENT ANALYSIS (Continued)
| Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
| Three Months Ended April 30, 2021 | ||||||||||||||||
| Net Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of Revenues | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Research & Development | ||||||||||||||||
| Selling, General & Administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income (Loss) from Operations | ( | ) | ( | ) | ||||||||||||
| Other Income (Expense) | ||||||||||||||||
| Other Income | ||||||||||||||||
| Funding from Paycheck Protection Program | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ||||||||||||
| Total Other Income (Expense) | ( | ) | ||||||||||||||
| Income (Loss) before Income Taxes | ( | ) | ||||||||||||||
| Income Tax (Expense) Benefit | ||||||||||||||||
| Current Tax Benefit | ||||||||||||||||
| Deferred Tax (Expense) Benefit | ( | ) | ( | ) | ( | ) | ||||||||||
| Total Income Tax (Expense) Benefit | ( | ) | ( | ) | ||||||||||||
| Net Income (Loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Supplemental Disclosures | ||||||||||||||||
| Total Assets | $ | $ | $ | $ | ||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||||
| Revenues from Intercompany Sales - eliminated from sales above | $ | $ | $ | $ | ||||||||||||
| Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
| Purchases of Long-lived Assets | $ | $ | $ | $ | ||||||||||||
| 18 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
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 (Expense) | ||||||||||||||||
| Income (Loss) before Income Taxes | ( | ) | ( | ) | ||||||||||||
| Income Tax (Expense) Benefit | ||||||||||||||||
| Current Tax Benefit (Expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Deferred Tax 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, 2022, and October 31, 2021
NOTE 14 -SEGMENT ANALYSIS (Continued)
| Marine Technology Business (Products) | Marine Engineering Business (Services) | Overhead | Total | |||||||||||||
| Six Months Ended April 30, 2021 | ||||||||||||||||
| Net Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of Revenues | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Research & Development | ||||||||||||||||
| Selling, General & Administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income (Loss) from Operations | ( | ) | ( | ) | ||||||||||||
| Other Income (Expense) | ||||||||||||||||
| Other Income | ||||||||||||||||
| Funding from Paycheck Protection Program | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ||||||||||||
| Total Other Income (Expense) | ( | ) | ||||||||||||||
| Income (Loss) before Income Taxes | ( | ) | ||||||||||||||
| Income Tax (Expense) Benefit | ||||||||||||||||
| Current Tax Benefit | ||||||||||||||||
| Deferred Tax (Expense) Benefit | ( | ) | ( | ) | ||||||||||||
| Total Income Tax (Expense) Benefit | ( | ) | ( | ) | ||||||||||||
| Net Income (Loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Supplemental Disclosures | ||||||||||||||||
| Total Assets | $ | $ | $ | $ | ||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||||
| Revenues from Intercompany Sales - eliminated from sales above | $ | $ | $ | $ | ||||||||||||
| Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
| Purchases of Long-lived Assets | $ | $ | $ | $ | ||||||||||||
| 20 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 15 –DISAGGREGATION OF REVENUE
| 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, 2022, and October 31, 2021
NOTE 15 –DISAGGREGATION OF REVENUE (Continued)
| For the Three Months Ended April 30, 2021 | ||||||||||||
| 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, 2022, and October 31, 2021
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 | ||||||||||||
| Revenues | ||||||||||||
| 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, 2022, and October 31, 2021
NOTE 15 –DISAGGREGATION OF REVENUE (Continued)
| For the Six Months Ended April 30, 2021 | ||||||||||||
| Marine | Marine | |||||||||||
| Technology | Engineering | Grand | ||||||||||
| Business | Business | Total | ||||||||||
| Disaggregation of Total Net Sales | ||||||||||||
| Revenues | ||||||||||||
| 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 | $ | $ | $ | |||||||||
| 24 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 16 – COVID-19
The Company is continuing to face various risks related to the global outbreak of coronavirus disease (“COVID-19”).
The Engineering Services Business is dependent on its workforce and supply chain to deliver its products and services primarily to the U.S. and U.K. Governments. COVID-19 outbreaks among the workforce affect our ability to complete our projects within specified timeline and also increase the costs of such projects. Furthermore, costs of increase in labor due to a general shortage of labor or supply chain issues, may not be fully recoverable either from our customers or under existing insurance policies.
The Marine Technology Business is dependent on its workforce and/or distributors/resellers to sell and deliver its products and services. Travel restrictions introduced by governments in the areas in which we sell our solutions have impacted the Marine Products Business’s ability to deploy its workforce effectively. The Company’s activities are performed in certain international locations that are also impacted by the COVID-19 outbreak. Furthermore, it is critical for the Marine Technology Business to have in-person engagement with customers for the demonstration of its products from a vessel at sea. The restriction on global travel has resulted in significantly less customer engagement which affects the demand for its goods and services. These disruptions continue to impact the business. Particularly, its ability to perform sustained and meaningful business development and marketing activities, which require demonstrations at sea at customer locations.
Further, the Pandemic may continue to affect the Company’s results of operation, financial position, and liquidity.
| 25 |
CODA OCTOPUS GROUP, INC.
Notes to the Consolidated Financial Statements
April 30, 2022, and October 31, 2021
NOTE 17 – INCOME TAXES
The
Company’s effective tax rate for the three months ended April 30, 2022, and 2021 was (
The Company’s effective tax rate for the
six months ended April 30, 2022, and 2021 was
NOTE 18 - RECLASSIFICATION OF PRIOR YEAR PRESENTATION
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications have no effect on the previously reported consolidated financial statements.
| 26 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The information herein contains forward-looking statements. All statements other than statements of historical fact made herein are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith and the audited financial statements included in our annual report on Form 10-K filed with the Securities and Exchange Commission on February 14, 2022. 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 terminologies listed immediately below are used and have the meanings ascribed to them in the said table.
| “Current Quarter” | Three-month period ended April 30, 2022 |
| “Previous Quarter” | Three-month period ended April 30, 2021 |
| “Current Six-Month Period” | The Six-month period ended April 30, 2022 |
| “Previous Six-Month Period” | The Six-month period ended April 30, 2021 |
We operate two distinct business operations. These are:
| ● | the Marine Technology Business (also referred to in this Form 10-Q as “Products Business”, “Products Operations” or “Products Segment”); and | |
| ● | the Marine Engineering Business (also referred to in this Form 10-Q as “Engineering Business”, “Engineering Operations”, or “Services Business” or “Services Segment”). |
Our Marine Technology Business is an established technology solution provider to the subsea and underwater imaging, surveying and diving market. It has been operating in this sector for over 25 years and it owns key proprietary technology including real time volumetric 3D Imaging Sonar technology and diving technology, that are used both in 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, fisheries, commercial and defense diving, and marine sciences sectors. Our diving technology which is new to the market is distributed under the name “CodaOctopus® DAVD” (Diver Augmented Vision Display) addresses the global defense and commercial diving markets. We believe that it has the potential to radically change how diving operations are performed globally because it delivers a real time information platform for diving, allows diving operations to be performed in zero visibility water conditions and provides real time mapping of the dive area.
| 27 |
Although we generate most of our revenues from our real time 3D sonar which includes both hardware and proprietary software, we have a number of other products in the subsea market such as our inertial navigation systems (F180 Series® and F280 Series®) and our geophysical hardware and software solutions, which include machine learning 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, research institutes and universities and diving companies.
Our Services Business acts primarily as a sub-contractor to prime defense contractors and engineer sub-assemblies which are utilized in broader defense programs. The Services Business has operations in the USA and UK. Its central business model is the design and manufacture of sub-assemblies for utilization into larger defense mission critical integrated systems (“MCIS”). An example of such MCIS is the US Close-In-Weapons Support (CIWS) Program for the Phalanx radar-guided cannon used on combat ships. These proprietary sub-assemblies, once approved within the MCIS program, afford the Services Business the status of preferred supplier. Such status permits it to supply these sub-assemblies and upgrades in the event of obsolescence or advancement of technology for the life of the MCIS program. Clients include prime defense contractors such as Raytheon, Northrop Grumman, Thales Underwater and BAE Systems.
Key Pillars for our Growth Plans
Our volumetric real time imaging sonar technology and our DAVD are our most promising products for the Group’s near-term growth.
Our real time 3D/4D/5D/6D Imaging sonars are the only underwater imaging sonars capable of providing not only complex seabed mapping but inspecting and monitoring in real time 3D/4D/5D and 6D moving objects underwater irrespective of water conditions including in zero visibility water conditions (a perennial problem in underwater operations). Competing technology can perform mapping (but not complex mapping) without the ability to perform real time 3D inspection and monitoring of moving objects underwater. Furthermore, we believe our Echoscope PIPE® is the only technology that can generate multiple real time 3D/4D/5D and 6D acoustic images of moving objects underwater using different acoustic parameters such as frequency, field of view, pulse length and acoustic 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 advancing the methods of communication, ability to consume and use digital information and real time imaging sonar data, thereby improving safety and reducing the costs of these operations. The DAVD HUD (Head Up Display) concept of utilizing a pair of transparent glasses in the HUD underwater, is protected by patent. The DAVD HUD is manufactured and distributed under license from the United States Department of the Navy at Naval Surface Warfare Center Panama City Division. The other component parts of the DAVD system are proprietary to the Company and include software (4G USE®), Diver Processing Pack, Top Side Controller and real time 3D Sonar. The successful adoption of the DAVD is dependent on the Company’s ability to have on-site demonstrations with existing and prospective customers. The DAVD system does not lend itself to adoption without such demonstration and training.
Both the Marine Technology Business and Marine Engineering Business have established synergies in terms of customers and specialized engineering skill sets (hardware, firmware and software) encompassing capturing, computing, processing and displaying data in harsh environments. Both businesses jointly bid for 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
Our Form 10-K for the fiscal year ended October 31, 2021, covers factors affecting our business and are incorporated by reference herein. Set out immediately below are additional factors that affect our business in the Current Quarter:
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Cumulative Supply Chain Issues including Ripple Effect On Orders
The biggest challenge for the Company in the Current Quarter is the ongoing shortage of components in the market. We are experiencing a very high percentage of routine items required for the manufacture of our products and solutions or performing custom upgrades for customers that are unavailable for purchase in the market with crippling lead times being quoted from anywhere between six months to a year. In addition, suppliers are now charging on an hourly basis for time spent on seeking alternative parts. Since the beginning of the Coronavirus outbreak in March 2020, the Company has been ramping up its investment in inventory items that were typically on long lead time. We believe that in the current year we have built sufficient inventory for these high value long lead items. However, our systems are complex, and it is the low value inventory items that have traditionally been readily available that have unexpectedly become unavailable. To complete a system or perform customer upgrades, we need all parts and not just a high percentage of parts and it is these previously readily available items that have now become extremely challenging.
Our suppliers of certain subassemblies are also receiving decommits (i.e., cancellation) on orders that have been under contract with their suppliers for a long time. Therefore, even if there is a supply contract in place, firm or expected delivery dates are increasingly no longer met by suppliers.
We are also experiencing significant price increases for all our raw materials and components. Price increases sometimes exceed 100%. The significant price increases also means that unless these increased prices are fully absorbed by customers, margins and net income may be adversely affected.
The general shortage of components in the market impacts our Services Business even more acutely given the prototyping nature of its business which does not enable pre-emptive forward buying. The very nature of prototyping means that any requisite components are unknown until the prototype requirements are finalized and order is placed by the customer. Therefore, these components cannot be pre-emptively purchased until contract award or letter of intent received.
Additionally, our customers are also experiencing supply chain problems. This impacts on their ability to progress to the point of placing orders for the sub-assemblies that we typically design and manufacture for them. Consequently, this delays orders and impacts the level of order take by the Business.
Pandemic
Our operations continue to be impacted by the ongoing Coronavirus outbreak with its various mutations (“Pandemic”), which in turn continues to impact the demand for our goods and services. We rely on the ability to sell our solutions offered by the Marine Technology Business globally. Asia is a very significant market for our technology solutions including Japan, China and South Korea. During the Current Quarter, all of these countries had various degrees of entry restrictions which continue to prevent in-person visits with existing and prospective customers to demonstrate our new offerings which underpin our growth strategy. Our products and solutions, including the top end software which controls the sonar and DAVD are complex and, as a pre-requisite for adoption, do require in-person demonstration and training for customers. It is therefore not feasible to do these virtually.
Furthermore, in the Current Quarter our business experienced critical shortage of staff due to a high infection rate. This has resulted in increased project costs for various ongoing internal and external projects and significantly reduced productivity which will have a negative impact on our overall performance during the current financial year.
Inflation
Due to the global supply chain issues and after-shock of the Pandemic, inflation measured as the Consumer Price Index is significant in the countries in which we operate. In the twelve months to April 2022, these were:
| - | Denmark 6.7%, | |
| - | UK 9.0% and | |
| - | USA 8.3%. |
Inflation affects our business in a number of areas including increasing the costs of our operations and therefore our overall financial results. See section of this report “Inflation and Foreign Currency”.
Currency Fluctuations
The Company has operations in the UK, USA, Denmark, Australia and India. In the Current Quarter the USD has strengthened against major currencies including the British Pound, Euro and Danish Kroner (the functional currencies of the Company’s foreign subsidiaries). A significant part of our consolidated results is transacted in Pounds and translated into USD, our reporting currency. In the Current Quarter, for the purposes of reporting revenues and expenses the value of the Pound fell 5.8% when compared to the Previous Quarter and for assets and liabilities the Pound fell 9.1% when compared to the Previous Quarter. The impact of currency fluctuations, including the impact of the Pound falling, is discussed more fully below in the section “Inflation and Foreign Currency”. See also Note 4 (Foreign Currency Translation) and section of this report “Inflation and Foreign Currency”.
Skills/Resource Shortages and Pressure on Salaries and Wages
We are experiencing skills shortage in areas that are critical to our growth strategy including experienced sales and marketing personnel and software developers.
Due to the inflationary conditions in the countries in which we operate (US, the UK and Denmark), there are significant pressures on wages making it difficult to attract staff and also risking retention of skills.
Impact on Revenues and Earnings
We are uncertain as to the extent that these factors reported immediately above including the global supply chain issues will have on our future financial results. In the Current Quarter, we continue to be negatively impacted by the reduction in customer orders and the resulting drop in our revenues and earnings. The supply chain issues further exacerbate this problem as our customers are unable to sub-contract to us, due to problems with availability of components and raw materials under the main part of the programs. Furthermore, with the significant increase in the costs of components and raw materials, this may affect our earnings, as we may not be able to sustainably pass on these dramatic increases onto our customers which may result in reduce demand for our products or services or the erosion of our gross profit margins.
Impact on Liquidity, Balance Sheet and Assets
Failure to curb the Pandemic in the near future, address the supply chain issues and inflation may adversely impact on our availability of our free cash flow, working capital, earnings and business prospects. As of April 30, 2022, we had cash and cash equivalents of approximately $20,658,119. Based on our outstanding obligations and our cash balances, we believe we have sufficient working capital to effectively continue our business operations for the foreseeable future.
Critical Accounting Policies
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements that have been prepared under accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported values of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported levels of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.
Below is a discussion of accounting policies that we consider critical to an understanding of our financial condition and operating results and that may require complex judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, “Summary of Accounting Policies” of our Consolidated Financial Statements for the year ended October 31, 2021.
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Revenue Recognition
Our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater solutions for imaging, mapping, defense and survey applications and from the engineering services that we provide. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential variable additional consideration. Our product sales do not include a right of return by the customer.
Regarding our Products Segment, all of our products are sold on a stand-alone basis and those market prices are evidence of the value of the products. To the extent that we also provide services (e.g., installation, training, etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been provided to the customer and evidence of the provision of those services exist.
For further discussion of our revenue recognition accounting policies, refer to Note 2 – “Revenue Recognition” in these consolidated financial statements and in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
Recoverability of Deferred Costs
We defer costs on projects for service revenue. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties.
We recognize such costs on a contract-by-contract basis in accordance with our revenue recognition policy. For revenue recognized under the completed contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer acceptance. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized ratably over the term of the contract, costs are also recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each balance sheet date, we review deferred costs, to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.
| 30 |
Income Taxes
The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes (ASC 740). Under ASC 740, deferred income tax assets and liabilities are recorded for the income tax effects of differences between the bases of assets and liabilities for financial reporting purposes and their bases for income tax reporting. The Company’s differences arise principally from the use of various accelerated and modified accelerated cost recovery system for income tax purposes versus straight line depreciation used for book purposes and from the utilization of net operating loss carry-forwards.
Deferred tax assets and liabilities are the amounts by which the Company’s future income taxes are expected to be impacted by these differences as they reverse. Deferred tax assets are based on differences that are expected to decrease future income taxes as they reverse. Correspondingly, deferred tax liabilities are based on differences that are expected to increase future income taxes as they reverse.
For income tax purposes, the Company uses the percentage of completion method of recognizing revenues on long-term contracts which is consistent with the Company’s financial reporting under US generally accepted accounting principles.
Intangible Assets
Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (or goodwill), customer relationships, non-compete agreements and licenses. Goodwill was allocated to our reporting units based on the original purchase price allocation. Goodwill is not amortized and is evaluated for impairment annually or more often if circumstances indicate impairment may exist. Customer relationships, non-compete agreements, patents and licenses are being amortized on a straight-line basis over periods of 2 to 15 years. The Company amortizes its limited lived intangible assets using the straight-line method over their estimated period of benefit. Annually, or sooner if there is indication of a loss in value, we evaluate the recoverability of intangible assets and consider events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, goodwill is reduced by the excess of the carrying amount of the reporting unit over that reporting unit’s fair value. Goodwill can never be reduced below zero. At the end of each year, we evaluate goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. There were no impairment charges during the periods presented.
Summary of Consolidated Results of Operations
Our consolidated financial results in the Current Quarter were down compared to the Previous Quarter. This is attributed to reduced order bookings in both the Products and Services businesses during the Current Quarter. The Products Business experienced delays in several anticipated rental projects which were included in our pipeline of opportunities in both the first quarter and the second quarter of the financial year. This was further exacerbated by Oceanology 2022 (one of the main industry trade events) being held in March 2022. Typically, customers postpone capital expenditure investment decisions until after this trade event. Furthermore, many key customers from Asia were not in attendance of Oceanology 2022 due to the Pandemic-related restrictions in these countries. This has resulted in reduced order by the Marine Technology Product in the first two quarters of this financial year. Although we have experienced reduced demand, we believe this relates to the current environment and not a broader issue with our offerings.
The Services Business order take continues to be slower than anticipated and is compounded by their customers projects being affected by the ongoing supply chain shortages and inflationary prices and therefore impacting the timing of the placement of sub-contracts for sub-assemblies that would typically be awarded to the Services Business.
Furthermore, during the Current Quarter we continued to be materially impacted by the Pandemic-related constraints placed upon the business environment which limited the extent of the business development activities the Products Business could undertake in Asia. Our UK operations were also significantly impacted by a high level of infection of the coronavirus amongst staff which impacted productively and hampered our progress.
Segment Summary
Products Business
In the Current Quarter the Products Business generated $3,491,009 or 70% of our consolidated revenues compared to $4,184,409 or 77.9% in the Previous Quarter, representing a fall of 16.6%. Revenues generated from Europe fell by 86.7% and were $221,334 compared to $1,665,443 in the Previous Quarter. We believe that this is due to the Pandemic which surged in Europe in the first half of our financial year affecting demand in Europe for our products. Gross Profit Margin increased slightly by 1% and was 76.6% in the Current Quarter compared to 75.6% in the Previous Quarter. In the Current Quarter more units of revenues in the Products Business emanated from sales through agents, resulting in an increase in commissions on sales which were 165.2% higher at $266,300 in the Current Quarter compared to $100,400, thus negatively affecting margins. In the Current Quarter Total Operating Expenses fell in the Products Business by 11.6%, compared to the Previous Quarter and Net Income Before Taxes fell by 20.8% and was $1,494,832 compared to $2,009,600 in the Previous Quarter.
Services Business
In the Current Quarter the Services Business generated $1,493,829 or 30% of our consolidated revenues compared to $1,188,667 or 22.1% in the Previous Quarter representing an increase of 25.7%. Gross Profit Margin was 23.9% representing a fall of 25.6%. The fall in Gross Profit Margin in the Services Business is largely due to the mix of engineering projects executed in the Current Quarter. Revenues generated by the Services Business includes equipment sales in the amount of $534,134 which carry a lower than typical Gross Profit Margin profile for the Services Business. This project afforded the Company an opportunity to serve a new market sector with a prestigious customer which we believe will open other opportunities with this customer in the new sector. Total Operating Expenses decreased by 12.0%, largely due to a decrease in R&D expenditures in the amount of $206,271, which resulted from R&D costs incurred being subsequently applied to a contracted engineering project and moved from Operating expenses to Direct Costs. In the Current Quarter the Services Business realized a loss before income taxes of $222,916 compared to an income of $361,472 in the Previous Quarter. Although the Services Business realized a loss in the Current Quarter, we do anticipate that on an annualized basis the Services Business operations will generate a net income, as we are expecting the third and fourth quarters to be more solid for this operating segment.
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Results of Operations for the Current Quarter compared to the Previous Quarter
Revenue: Total consolidated revenues for the Current Quarter and the Previous Quarter were $4,984,838 and $5,373,076 respectively, representing a fall of 7.8%. The Products Business revenues fell from $4,184,409 in the Previous Quarter to $3,491,009 in the Current Quarter, representing a fall of 16.6%. This is largely due to slower than anticipated closure of orders in the first two quarters of this financial year, where we are seeing customer projects being postponed, thus impacting order take. In the Current Quarter, the Services Business revenues increased by 25.7% and was $1,493,829 compared to $1,188,667 in the Previous Quarter. Although the Services Business is quoting more projects in this financial year, the pace of progress for closing these opportunities has slowed. We believe this is largely due to supply chain issues under the prime contract causing delay in the sub-contracting process.
Gross Profit Margins: Margin percentage was weaker in the Current Quarter at 60.8% (gross profit of $3,031,706 compared to 69.8% (gross profit of $3,749,604) in the Previous Quarter.
Gross Profit Margins in the reporting period may vary according to a number of factors. These include:
| ● | The percentage of consolidated sales attributed to the Products Business. The Gross Profit Margin yielded by the Products Business is generally higher than that of the Services Business. | |
| ● | The percentage of consolidated sales attributed to the Services Business. The Services Business yields a lower gross profit margin on generated sales which are largely based on time and materials contracts. | |
| ● | The mix of sales generated by the Products Business: |
| ● | Outright sales versus rentals. | ||
| ● | Hardware related sales versus Software related sales. | ||
| ● | Extent of Offshore Engineering Support Services provided in the period. | ||
| ● | Extent of paid customer engineering work relating to customizing our technology for their purpose. |
| ● | Level of commissions on sales (both the Services and Products businesses work with a global network of sales agents). Most sales by the Products Business from Asia attract commission as those are typically sales via our agents/distributors Network. | |
| ● | Level of assets in rental pool and cost of sales associated with these Assets (and which are subject to depreciation). |
Services Business
In the Current Quarter Gross Profit Margins for the Services Business were 23.9% compared to 49.5% in the Previous Quarter. This significant fall is due to the fact that 36.4% of the total revenues generated in the Current Quarter by this segment relates to a particular work package which has a much lower than typical Gross Profit Margin, due to the type of project it involves. This project afforded the Company an opportunity to serve a new market sector with a prestigious customer which we believe will open other opportunities for the Company with this customer and in this sector. This has impacted the Gross Profit Margin of the Services Business in the Current Quarter and overall consolidated Gross Profit Margin.
Products Business
In the Current Quarter Gross Profit Margins for the Products operations were 76.6% compared to 75.6% in the Previous Quarter.
Since there are more variable factors affecting Gross Profit Margins in the Products Business, a table showing a summary of break-out of sales generated by the Products Business in the Current Quarter compared to the Previous Quarter is set out below:
| Current Quarter Products | Previous Quarter Products | Percentage Change | ||||||||||
| Equipment Sales | $ | 2,058,137 | $ | 3,090,462 | Decrease 33.4 | % | ||||||
| Equipment Rentals | 715,308 | 598,190 | Increase 19.6 | % | ||||||||
| Software Sales | 134,422 | 221,053 | Decrease 39.2 | % | ||||||||
| Services | 583,142 | 274,704 | Increase 112.3 | % | ||||||||