a Octopus (CODA) - 2021 Q4 - Annual Report

Part I Business The company operates two segments: Marine Technology (Products) for proprietary imaging sonars and DAVD, and Marine Engineering (Services) for defense sub-assemblies - The company operates two distinct businesses: the Marine Technology Business (Products Segment) and the Marine Engineering Business (Services Segment)[11] - The Marine Technology Business focuses on proprietary real-time volumetric imaging sonar (Echoscope®) and diving technology (DAVD), targeting commercial and defense underwater markets[12][13] - The Marine Engineering Business serves as a sub-contractor to prime defense contractors like Raytheon and Northrop Grumman, designing and manufacturing mission-critical sub-assemblies, which provides a recurring revenue stream[14] - The company's key growth pillars are its volumetric real-time imaging sonar technology and the Diver Augmented Vision Display (DAVD)[18] Marine Technology Business (Products Segment) This segment develops and sells proprietary subsea solutions, including Echoscope® real-time imaging sonars and the DAVD system - The segment's core products are its real-time 3D/4D/5D/6D imaging sonars, which are unique in their ability to inspect and monitor moving underwater objects in real-time, even in zero visibility conditions[19][39] - The company has introduced the world's first 5D and 6D series of volumetric imaging sonars, marketed as Echoscope PIPE®, which can process up to 40 million data points per ping compared to 16,386 in the previous generation[45][46][50] - The Diver Augmented Vision Display (DAVD) system integrates a transparent head-up display (HUD) into diving helmets, providing divers with real-time data, sonar imagery, and enhanced communication, radically improving safety and efficiency[52][53][56] - The company has developed a new generation of sonar software, "4G USE", which is a multi-sensor platform that integrates sonar, positioning, camera, and other data sources[61] Marine Engineering Businesses (Services Segment) This segment provides engineered sub-assembly solutions to prime defense contractors, securing long-term, sole-supplier status - The segment operates as a sub-contractor to prime defense contractors, providing bespoke design and manufacturing services for mission-critical systems[80][83] - The business model ensures recurring revenue by becoming the sole-source supplier for parts designed for long-life defense programs, such as Raytheon's CIWS and Northrop Grumman's Mine Hunting Systems[81][86] - Colmek acquired and develops the Thermite® line of rugged visual mission computers, which are designed for harsh environments and used in applications like robotic control, sensor processing, and as the "Diver Processing Pack" for the DAVD system[87][88][90] Competition The company faces fragmented competition in GEO and Motion Products, but has no direct competitors for its unique real-time volumetric sonar - In the field of real-time 3D/4D/5D/6D imaging, the company is unaware of other companies offering a similar product capable of imaging moving targets underwater in real-time[95] - Major competitors in the broader subsea imaging and positioning markets include large, well-capitalized companies such as Teledyne Technologies, Kongsberg Gruppen, and iXblue[94][95] - The Marine Engineering business competes with larger defense contractors like Ultra Electronics, BAE Systems, and Thales, and also with the in-house capabilities of its own prime contractor clients[98] Intellectual Property The company's growth relies on its intellectual property, including patents for 5D/6D sonar and subsea cable laying Key U.S. Patents | Patent No. | Description | Expiration Date | | :--- | :--- | :--- | | US 10,718,865 | Concerns a method of compressing beamforming sonar data (related to 5D sonar) | March 1, 2039 | | US 10,816,652 | Concerns a method of compressing sonar data | October 28, 2038 | | US 11,061,136 | Concerns a method of tracking unknown possible objects with sonar | March 28, 2039 | | US 11204108 | Concerns a method of predicting and adjusting the laying of cable | March 22, 2039 | - The company holds numerous registered trademarks, including CodaOctopus®, Echoscope®, Echoscope PIPE®, and Thermite®[103] Research and Development R&D is central to the company's strategy, with spending decreasing by 6.5% in FY2021 and expected to remain stable in FY2022 R&D Expenditure (FY 2021 vs. FY 2020) | Fiscal Year | R&D Spend | Change YoY | | :--- | :--- | :--- | | 2021 | $2,982,676 | -6.5% | | 2020 | $3,188,389 | N/A | Properties The company owns primary operational facilities in Orlando, Salt Lake City, and Edinburgh, leasing premises in Copenhagen to mitigate Brexit impacts - The company owns its primary facilities in Orlando, FL, Salt Lake City, UT, and Edinburgh, Scotland[116][117][118] - A Danish subsidiary and leased premises in Copenhagen were established to mitigate the business impacts of the UK's withdrawal from the European Union[119] Legal Proceedings The company is not currently involved in any legal proceedings expected to materially adversely affect its business or financial condition - The company is not currently involved in any material legal proceedings[123] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "CODA", with no cash dividends declared as earnings are retained for business expansion - The company's common stock has traded on the Nasdaq Capital Market under the symbol "CODA" since July 19, 2017[128] - No cash dividends have been declared or paid, and the company intends to retain future earnings for business expansion[129] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2021 revenue increased 6.4% to $21.3 million, driven by 40.1% Products growth, with gross margin at 69.2% and net income up 48.0% Factors Affecting our Business The business faces challenges from Brexit, COVID-19, export restrictions to China, supply chain disruptions, and a shortage of skilled personnel - The UK's withdrawal from the EU (Brexit) has adversely impacted business by subjecting shipments to customs, increasing costs, and making it more difficult to deploy engineers for training and support[141][143][144] - The COVID-19 pandemic has continued to hamper business development by preventing in-person customer visits and on-water demonstrations, which are crucial for promoting complex products like Echoscope PIPE® and DAVD[150][151] - US and UK government policies restricting technology exports to China are likely to have a significant negative impact on revenues and growth, as China is a key market for offshore renewables[172][174][177] - The company is facing extreme lead times (up to 99 weeks) and price increases for semiconductor components, which may affect gross margins and the ability to fulfill orders[179] - An extreme shortage of personnel with key skills, such as electronics and software development, is impacting the business, compounded by significant global increases in salaries[183][184] Fiscal Year 2021 Consolidated Results of Operations FY2021 consolidated revenue grew 6.4% to $21.3 million, driven by 40.1% Products segment growth, with gross margin at 69.2% and net income up 48.0% Consolidated Financial Performance (FY 2021 vs. FY 2020) | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $21,331,527 | $20,043,810 | +6.4% | | Gross Profit | $14,769,718 | $12,729,448 | +16.0% | | Gross Margin | 69.2% | 63.5% | +5.7 pts | | Operating Income | $3,871,467 | $2,803,765 | +38.1% | | Net Income | $4,947,765 | $3,343,585 | +48.0% | Segment Revenue Performance (FY 2021 vs. FY 2020) | Segment | FY 2021 Revenue | FY 2020 Revenue | % Change | | :--- | :--- | :--- | :--- | | Products Business | $15,804,222 | $11,278,181 | +40.1% | | Services Business | $5,527,305 | $8,765,629 | -36.9% | - The increase in gross margin was primarily due to a higher percentage of consolidated sales from the Marine Technology Business, which yields a higher margin than the Services Business[217] - Selling, General and Administrative (SG&A) expenses increased by 17.5% to $7.9 million, driven by higher stock-based compensation, increased professional fees, and reduced pandemic-related government contributions compared to the prior year[230] - Other Income increased significantly to $1.44 million, primarily due to receiving $648,872 from the Paycheck Protection Program (PPP) and $701,568 in Employee Retention Credits (ERC)[238][239][240] Liquidity and Capital Resources As of October 31, 2021, the company maintained strong liquidity with $17.75 million in cash, $31.3 million in working capital, and $3.27 million in operating cash flow Key Liquidity Metrics (as of Oct 31, 2021) | Metric | Amount | | :--- | :--- | | Cash and Cash Equivalents | $17,747,656 | | Working Capital | $31,310,563 | | Stockholders' Equity | $41,049,073 | | Cash Flow from Operations (FY21) | $3,269,770 | - The company has access to an undrawn $4 million revolving line of credit from HSBC NA, which was renewed through November 2022[261] - The remaining balance of a secured promissory note with HSBC NA was $63,559 as of year-end and was fully repaid by the end of the 2021 calendar year[268][269] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for FY2021 and FY2020, including balance sheets, income statements, cash flow statements, and notes Notes to Consolidated Financial Statements These notes detail accounting policies, financial results, revenue recognition, segment analysis, capital stock, income taxes, and government COVID-19 relief programs - Goodwill of $3.38 million was tested for impairment as of October 31, and no impairment was recorded[462][463] - In FY 2021, one customer accounted for 12% of net revenues ($2.48 million)[497][498] - In FY 2020, one customer accounted for 21% of net revenues ($4.27 million)[497][498] Revenue by Geography (FY 2021) | Region | Revenue | % of Total | | :--- | :--- | :--- | | Europe | $8,961,720 | 42.0% | | Australia/Asia | $5,867,710 | 27.5% | | Americas | $5,623,364 | 26.4% | | Middle East/Africa | $878,733 | 4.1% | - The company received and recognized as income $648,872 from the Paycheck Protection Program (PPP) in FY2021, which has been forgiven[484][530] - It also recognized $701,568 in Employee Retention Credits[484][530] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of October 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of October 31, 2021[284] - Management concluded that the company's internal control over financial reporting was effective as of October 31, 2021, based on the COSO 2013 framework[286] Part III Directors, Executive Officers, and Corporate Governance This section details the company's leadership, including CEO Annmarie Gayle, the five-member Board with four independent directors, and its three independent committees - The executive team includes Annmarie Gayle (CEO & Chairman), Michael Midgley (CFO), Kevin Kane (CEO of Colmek), and Blair Cunningham (President of Technology)[291] - The Board of Directors has determined that all directors are independent except for CEO and Chairman Annmarie Gayle[304] - The Board has an Audit Committee, a Compensation Committee, and a Nominating Committee, all composed of independent directors[305] Executive Compensation FY2021 executive compensation included $405,000 for CEO Annmarie Gayle, $236,879 for CFO, and $260,417 for President of Technology Executive Compensation Summary (FY 2021) | Name and Principal Position | Salary ($) | Bonus ($) | Restricted Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Annmarie Gayle, CEO | 305,000 | 100,000 | 0 | 405,000 | | Michael Midgley, CFO | 193,846 | 0 | 26,400 | 236,879 | | Blair Cunningham, President of Technology | 213,160 | 0 | 26,400 | 260,417 | - Each non-employee director (Michael Hamilton, Captain J Charles Plumb, Mary Losty, Tyler G Runnels) received $40,000 in fees for their service in FY 2021[340] - The company has two active stock incentive plans, the 2017 Plan and the 2021 Plan, with 238,112 and 1,000,000 shares available for future issue, respectively, as of October 31, 2021[341][345][347] Security Ownership of Certain Beneficial Owners and Management As of January 31, 2022, directors and executive officers collectively owned 33.0% of common stock, with CEO Annmarie Gayle holding 21.2% Beneficial Ownership >5% (as of Jan 31, 2022) | Name of Beneficial Owner | Percent of Common Stock | | :--- | :--- | | Annmarie Gayle (CEO) | 21.2% | | Niels Sondergaard | 20.6% | | J. Steven Emerson | 10.8% | | G. Tyler Runnels (Director) | 10.4% | | Bryan Ezralow | 9.9% | | Tocqueville Asset Management LP | 5.0% | - All directors and executive officers as a group beneficially own 33.0% of the company's common stock[356] Principal Accountant Fees and Services Frazier & Deeter, LLC billed $247,118 for audit and audit-related services in FY2021 and $212,369 in FY2020 Audit Fees (Frazier & Deeter, LLC) | Fiscal Year | Audit Fees Billed | | :--- | :--- | | 2021 | $247,118 | | 2020 | $212,369 |