a Octopus (CODA) - 2020 Q1 - Quarterly Report

PART I - Financial Information This section presents the unaudited consolidated financial statements and management's discussion and analysis for the reporting period Item 1: Financial Statements This section presents unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheets Total assets and stockholders' equity increased as of January 31, 2020, driven by higher cash, inventory, and property Consolidated Balance Sheets ($) | Metric | Jan 31, 2020 (Unaudited) ($) | Oct 31, 2019 ($) | | :----------------------- | :----------------------- | :----------- | | Total Current Assets | $25,918,475 | $24,279,857 | | Total Assets | $36,483,470 | $34,511,244 | | Total Current Liabilities| $3,838,604 | $3,167,450 | | Total Liabilities | $4,424,173 | $3,883,471 | | Total Stockholders' Equity| $32,059,297 | $30,627,773 | - Cash increased by $806,276 from $11,721,683 as of October 31, 2019, to $12,527,959 as of January 31, 2020[7] - Inventory increased by $911,098 from $5,350,514 as of October 31, 2019, to $6,261,612 as of January 31, 2020[7] Consolidated Statements of Income and Comprehensive Income Net revenues, gross profit, and net income increased for the three months ended January 31, 2020, despite a rise in R&D and operating expenses Consolidated Statements of Income and Comprehensive Income | Metric | Three Months Ended Jan 31, 2020 ($) | Three Months Ended Jan 31, 2019 ($) | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :--------- | | Net Revenues | $6,680,979 | $5,758,508 | 16.0% | | Gross Profit | $4,274,440 | $3,533,072 | 21.0% | | Total Operating Expenses | $2,819,943 | $2,190,601 | 28.7% | | Income From Operations | $1,454,497 | $1,342,471 | 8.3% | | Net Income | $1,346,773 | $1,239,013 | 8.7% | | Basic Net Income Per Share | $0.13 | $0.12 | 8.3% | | Comprehensive Income | $1,431,524 | $1,536,868 | -6.9% | - Research & Development expenses increased by 62.5% from $571,326 in 2019 to $928,265 in 2020[12] - Selling, General & Administrative expenses increased by 16.8% from $1,619,275 in 2019 to $1,891,678 in 2020[12] Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $32,059,297 as of January 31, 2020, primarily due to net income and foreign currency translation Consolidated Statements of Stockholders' Equity ($) | Metric | Oct 31, 2019 (Audited) ($) | Jan 31, 2020 (Unaudited) ($) | | :-------------------------------- | :--------------------- | :----------------------- | | Common Stock Amount | $10,723 | $10,723 | | Additional Paid-in Capital | $59,521,665 | $59,521,665 | | Accumulated Other Comprehensive Loss| $(2,135,408) | $(2,050,657) | | Accumulated Deficit | $(26,769,207) | $(25,422,434) | | Total Stockholders' Equity | $30,627,773 | $32,059,297 | - Net Income for the three months ended January 31, 2020, was $1,346,773[16] - Foreign currency translation adjustment contributed $84,751 to comprehensive income[16] Consolidated Statements of Cash Flows Net cash provided by operating activities decreased significantly, while cash used in investing and financing activities also saw reductions Consolidated Statements of Cash Flows ($) | Cash Flow Activity | Three Months Ended Jan 31, 2020 ($) | Three Months Ended Jan 31, 2019 ($) | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net Cash Provided by Operating Activities | $1,484,140 | $2,418,625 | | Net Cash Used in Investing Activities | $(643,159) | $(919,135) | | Net Cash Used in Financing Activities | $(119,456) | $(508,578) | | Net Increase in Cash | $806,276 | $1,288,767 | | Cash at the End of the Period | $12,527,959 | $8,801,189 | - The decrease in net cash from operating activities was partly due to an increase in inventory and a decrease in accounts payable and other current liabilities[20] - Purchases of property and equipment decreased from $919,135 in 2019 to $606,345 in 2020[20] Notes to Unaudited Consolidated Financial Statements These notes provide essential details on accounting policies, revenue recognition, financial instrument fair values, and segment performance NOTE 1 – BASIS OF PRESENTATION Unaudited interim consolidated financial statements are prepared under SEC rules, consistent with US GAAP, and include foreign operations translated using local functional currencies - The Company's functional currencies include US Dollars, British Pound Sterling, Australian Dollars, and Danish Kroner[22] - Foreign currency translation gains and losses are recorded as a change in other comprehensive income[22] NOTE 2 – REVENUE RECOGNITION The Company adopted Topic 606, recognizing revenue through a five-step process for product sales, rentals, subscriptions, and services - Revenue recognition follows a five-step process under FASB Topic 606[26] - Revenue from product sales is recognized on a stand-alone basis, while rental and subscription revenue is recognized daily over the period[28][29] - Deferred commissions were $42,816 in Q1 2020, amortized over the contract performance period[40] NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's short-term financial instruments, including cash, receivables, and payables, have carrying values approximating their estimated fair values - Short-term financial instruments include cash, receivables, accounts payable, accrued expenses, and a revolving line of credit[44] - Carrying values of these instruments are adjusted for foreign currency exchange rates and approximate their fair values[44] NOTE 4 – FOREIGN CURRENCY TRANSLATION Foreign subsidiary financial statements are translated into US dollars using local functional currencies, with translation gains/losses in other comprehensive income - Assets and liabilities of foreign operations are translated at balance sheet date exchange rates[47] - Revenues and expenses are translated at weighted average exchange rates during the reporting period[47] - Translation gains and losses are recorded in accumulated other comprehensive income (loss)[47] NOTE 5 – INVENTORY Inventory is valued at the lower of cost or net realizable value, showing an increase in all components as of January 31, 2020 Inventory ($) | Inventory Component | Jan 31, 2020 ($) | Oct 31, 2019 ($) | | :------------------ | :----------- | :----------- | | Raw materials and parts | $4,965,915 | $4,379,260 | | Work in progress | $714,269 | $517,354 | | Finished goods | $581,428 | $453,900 | | Total Inventory | $6,261,612 | $5,350,514 | NOTE 6 – FIXED ASSETS Net property and equipment increased due to higher buildings and rental assets, partially offset by accumulated depreciation Fixed Asset Components ($) | Fixed Asset Component | Jan 31, 2020 ($) | Oct 31, 2019 ($) | | :-------------------- | :----------- | :----------- | | Buildings | $5,167,156 | $4,654,029 | | Rental assets | $1,976,512 | $1,634,684 | | Total Fixed Assets | $9,986,377 | $9,435,124 | | Accumulated depreciation | $(3,611,388) | $(3,448,312) | | Property and Equipment, Net | $6,374,989 | $5,986,812 | NOTE 7 – OTHER CURRENT ASSETS Other current assets decreased mainly due to a reduction in tax receivables, partially offset by an increase in deposits Other Current Asset Components ($) | Other Current Asset Component | Jan 31, 2020 ($) | Oct 31, 2019 ($) | | :---------------------------- | :----------- | :----------- | | Deposits | $104,952 | $42,932 | | Tax receivables | $135,839 | $255,254 | | Total Other Current Assets | $240,791 | $298,186 | NOTE 8 – ESTIMATES Financial statement preparation requires significant management estimates for revenues, receivables, fixed assets, inventory, deferred tax assets, and goodwill - Significant estimates include valuation of accounts receivable, fixed assets, inventory, deferred tax assets, and goodwill[54] - Estimates also cover costs and estimated earnings in excess of billings, and billings in excess of costs and estimated earnings[54] NOTE 9 – CONTRACTS IN PROGRESS Unbilled receivables and total deferred revenue increased, with deferred revenue amortized over contractual periods Contracts in Progress ($) | Metric | Jan 31, 2020 ($) | Oct 31, 2019 ($) | | :-------------------- | :----------- | :----------- | | Unbilled Receivables | $2,490,905 | $2,279,362 | | Total Deferred Revenue| $1,178,537 | $973,735 | - Deferred revenue for subscription packages, warranty, and TLS obligations was $501,795 as of January 31, 2020[57] - Subscription package and warranty obligations are amortized over 12 months, while TLS varies between 36 and 60 months[57] NOTE 10 – CONCENTRATIONS The Company experienced significant customer concentration, with two customers accounting for 41% of net revenues and 44% of accounts receivable - Two customers generated $2,710,008, or 41% of net revenues, for the three months ended January 31, 2020[60] - Total accounts receivable from these two customers was $1,817,725, or 44% of accounts receivable, at January 31, 2020[60] - Customer concentration is a consequence of the Services Segment's business model, working with a small number of Prime Defense Contractors[62] NOTE 11 – NOTE PAYABLE The secured note payable to HSBC NA decreased, and a revolving line of credit had a zero outstanding balance Note Payable ($) | Metric | Jan 31, 2020 ($) | Oct 31, 2019 ($) | | :-------------------- | :----------- | :----------- | | Total Note Payable | $940,118 | $1,059,574 | | Current Portion | $(492,692) | $(487,140) | | Total Long Term Note Payable | $447,426 | $572,434 | - The secured note payable has an annual interest rate of 4.56% and matures in December 2021[63] - A $4,000,000 revolving line of credit with HSBC NA had an outstanding balance of $0 as of January 31, 2020[63] NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS The adoption of ASU No. 2016-02, Leases, had no material impact on financial statements as the Company owns most of its facilities - ASU No. 2016-02, Leases, was adopted effective November 1, 2019[66] - The adoption did not materially impact financial statements because the Company owns most of its facilities[66] NOTE 13 – EARNINGS PER COMMON SHARE Basic net income per share increased to $0.13 for the three months ended January 31, 2020, based on increased weighted average common shares outstanding Earnings Per Common Share | Metric | Three Months Ended Jan 31, 2020 | Three Months Ended Jan 31, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net Income ($) | $1,346,773 | $1,239,013 | | Basic weighted average common shares outstanding | 10,721,881 | 10,660,694 | | Basic EPS ($) | $0.13 | $0.12 | NOTE 14 – SEGMENT ANALYSIS The Company operates in Marine Technology (Products) and Marine Engineering (Services) segments, with disaggregated revenues showing strong performance in key regions Three Months Ended January 31, 2020 ($) | Metric | Marine Technology Business (Products) ($) | Marine Engineering Business (Services) ($) | Overhead ($) | Total ($) | | :-------------------------------- | :------------------------------------ | :------------------------------------- | :------- | :---------- | | Revenues from External Customers | $3,632,812 | $3,048,167 | $0 | $6,680,979 | | Gross Profit | $2,977,135 | $1,297,305 | $0 | $4,274,440 | | Income (Loss) from Operations | $1,552,408 | $454,571 | $(552,482)| $1,454,497 | | Net Income (Loss) before Income Taxes | $1,562,000 | $450,889 | $(565,182)| $1,447,707 | | Net Income (Loss) | $1,509,694 | $442,699 | $(605,620)| $1,346,773 | Total Net Sales by Geographic Area (Three Months Ended January 31, 2020) ($) | Geographic Area | Marine Technology Business ($) | Marine Engineering Business ($) | Grand Total ($) | | :-------------- | :------------------------- | :-------------------------- | :---------- | | Americas | $541,332 | $2,135,905 | $2,677,237 | | Europe | $619,017 | $912,262 | $1,531,279 | | Australia/Asia | $2,421,360 | $0 | $2,421,360 | | Middle East & Africa | $51,103 | $0 | $51,103 | | Total Net Sales | $3,632,812 | $3,048,167 | $6,680,979 | Total Net Sales by Product Line (Three Months Ended January 31, 2020) ($) | Product Line | Marine Technology Business ($) | Marine Engineering Business ($) | Grand Total ($) | | :----------- | :------------------------- | :-------------------------- | :---------- | | Equipment Sales | $2,722,919 | $0 | $2,722,919 | | Equipment Rentals | $323,645 | $0 | $323,645 | | Software Sales | $229,775 | $0 | $229,775 | | Engineering Parts | $0 | $2,553,229 | $2,553,229 | | Services | $356,473 | $494,938 | $851,411 | | Total Net Sales | $3,632,812 | $3,048,167 | $6,680,979 | NOTE 15 – INCOME TAXES The effective tax rate decreased to 6.9% due to a reduction in the AMT tax refund, with U.S. federal net operating loss carryforwards totaling $2,831,621 - Effective tax rate decreased from 8.2% in 2019 to 6.9% in 2020[88] - The decrease in effective tax rate was due to a reduction in the AMT tax refund from $75,004 in 2019 to $37,502 in 2020[88] NOL Expiration Year ($) | NOL Expiration Year | Amount ($) | | :------------------ | :----------- | | 2029 | $2,707,158 | | 2028 | $124,463 | | Total | $2,831,621 | NOTE 16 – RECLASSIFICATION OF PRIOR YEAR PRESENTATION Certain prior year amounts were reclassified for consistency, specifically a VAT receivable adjustment, with no effect on reported results of operations - Prior year amounts were reclassified for consistency, including VAT receivable[89] - These reclassifications had no effect on the reported results of operations[89] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, critical accounting policies, and significant factors affecting the business, including Brexit and the Coronavirus outbreak General Overview Coda Octopus Group, Inc. operates two distinct businesses: Marine Technology (Products) and Marine Engineering (Services), focusing on underwater technologies and proprietary defense parts - Products Segment focuses on real-time 3D imaging, mapping, defense, and survey applications for subsea commercial and defense markets[93] - Services Segment designs and manufactures proprietary parts for larger defense mission-critical integrated systems (MCIS), such as the Close-In-Weapons Support (CIWS) Program for the Phalanx[94] - The Services Segment holds 'preferred supplier' status for its proprietary parts, ensuring supply and upgrades for the life of programs[94] Factors Affecting our Business The Company's business is significantly affected by Brexit, posing risks of increased costs and supply chain disruptions, and the Coronavirus outbreak, leading to project postponements and reduced sales - Brexit could lead to WTO trade rules, increasing import/export costs, custom duties, and compliance costs for UK operations[98] - The Company established a Danish subsidiary, Coda Octopus Products A/S, to mitigate Brexit impact and maintain EU market access[100] - The Coronavirus outbreak has caused indefinite postponements of projects due to travel restrictions and disruptions in the supply of product components, particularly impacting sales in China and other Asian countries[103] Critical Accounting Policies The Company's critical accounting policies involve significant management estimates for revenue recognition, deferred costs, income taxes, and intangible assets - Revenue recognition for products is based on stand-alone sales, while services are recognized when provided or based on percentage-of-completion for fixed-price contracts[108][109] - Deferred costs on service projects are recognized in accordance with revenue recognition policies and are reviewed quarterly for recoverability[111] - Goodwill is not amortized but evaluated for impairment annually, while other intangible assets are amortized on a straight-line basis over 2 to 15 years[116][117] Consolidated Results of Operations Consolidated financial results improved with increased revenues and net income before taxes, driven by the Products Segment, despite significant R&D investments in the Services Segment - Consolidated net income before taxes increased by 7.2%, and revenues increased by 16% in the Current Quarter[119] - Products Segment revenues increased by 28.4%, and net income before taxes rose by 70.4% to $1,562,000[120] - Services Segment's net income before taxes decreased by 42.9% to $450,889, primarily due to a 534% increase in R&D expenditures for the new Thermite® mission computer division[121] Results of Operations for the Current Quarter compared to the Previous Quarter Total consolidated revenues increased by 16%, with improved gross profit margins, while operating expenses rose due to R&D and SG&A investments Results of Operations Comparison | Metric | Current Quarter (Jan 31, 2020) ($) | Previous Quarter (Jan 31, 2019) ($) | Change (%) | | :-------------------------------- | :----------------------------- | :------------------------------ | :--------- | | Net Revenues | $6,680,979 | $5,758,508 | 16.0% | | Gross Profit Margin | 64.0% | 61.4% | +2.6 ppts | | R&D Expenditures | $928,265 | $571,326 | 62.5% | | SG&A Expenses | $1,891,678 | $1,619,275 | 16.8% | | Income from Operations | $1,454,497 | $1,342,471 | 8.3% | | Net Income | $1,346,773 | $1,239,013 | 8.7% | - R&D increase was driven by investment in the Thermite® mission computer division ($206,438) and CRADA HUD prototype development ($165,098)[125][127] - SG&A increase was mainly due to higher wages and salaries in the UK and increased legal/professional fees, partially offset by decreased rent due to property ownership[130][131][132][133] Liquidity and Capital Resources The Company maintained a strong liquidity position with substantial working capital and stockholders' equity, generating cash from operating activities and reducing debt Liquidity and Capital Resources ($) | Metric | As of Jan 31, 2020 ($) | | :-------------------- | :----------------- | | Accumulated Deficit | $(25,422,434) | | Working Capital | $22,079,871 | | Stockholders' Equity | $32,059,297 | | Cash from Operating Activities (Current Quarter) | $1,484,140 | - The outstanding balance on the secured note payable to HSBC NA was $940,118 as of January 31, 2020, down from $1,410,216 in the Previous Quarter[136][144] - A $4,000,000 revolving line of credit with HSBC NA had an outstanding balance of $0 as of January 31, 2020[142] Inflation and Foreign Currency The Company's financial results are exposed to foreign currency fluctuations across multiple functional currencies, with actual currency movements positively impacting net income and net assets - The Company's functional currencies include US Dollars, British Pound, Danish Kroner, and Australian Dollars[146] - Currency fluctuations can affect sales, profitability, and financial position, and the Company does not currently hedge its currency exposure[147] Total Effect of Currency Fluctuations (Jan 31, 2020) ($) | Metric | Total Effect of Currency Fluctuations (Jan 31, 2020) | | :-------------------- | :------------------------------------------------- | | Net profit (losses) | $103,029 (increase) | | Net assets | $293,079 (increase) | Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements - The Company has no off-balance sheet arrangements[150] Item 3: Quantitative and Qualitative Disclosures about Market Risks This item is not required for smaller reporting companies - Not required for smaller reporting companies[151] Item 4: Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective, with no material changes in internal controls - Disclosure controls and procedures were evaluated and deemed effective as of January 31, 2020[153] - No material changes in internal controls over financial reporting occurred during the quarter[155] PART II - Other Information This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, and other disclosures Item 1: Legal Proceedings The Company is not currently aware of any legal proceedings expected to have a material adverse effect on its business or financial condition - The Company is not aware of any material adverse legal proceedings[156] Item 1A: Risk Factors This item is not required for smaller reporting companies - Not required for smaller reporting companies[157] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report - None to report[157] Item 3: Default Upon Senior Securities There were no defaults upon senior securities to report - None to report[157] Item 4: Mine Safety Disclosures This item is not applicable to the Company - Not Applicable[158] Item 5: Other Information No other information is specifically reported under this item Item 6: Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and various XBRL documents - Includes Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350[159] - Various XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation) are filed as exhibits[159] Signatures The report is duly signed on behalf of Coda Octopus Group, Inc. by its Chief Executive Officer and Chief Financial Officer - Report signed by Annmarie Gayle, Chief Executive Officer, and Michael Midgley, Chief Financial Officer[163] - Signatures dated March 16, 2020[163]