a Octopus (CODA) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Coda Octopus Group, Inc. for the periods ended April 30, 2023, and October 31, 2022, including balance sheets, income statements, statements of changes in stockholders' equity, cash flow statements, and detailed notes Consolidated Balance Sheets | Metric | April 30, 2023 (Unaudited) | October 31, 2022 | | :-------------------------------- | :------------------------- | :--------------- | | Total Current Assets | $40,843,201 | $37,010,722 | | Total Assets | $50,903,462 | $46,927,458 | | Total Current Liabilities | $2,504,463 | $3,468,522 | | Total Liabilities | $2,592,721 | $3,544,649 | | Total Stockholders' Equity | $48,310,741 | $43,382,809 | Consolidated Statements of Income and Comprehensive Income | Metric | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net Revenues | $5,301,509 | $4,984,838 | $10,897,793 | $10,823,046 | | Gross Profit | $3,623,241 | $3,031,706 | $7,376,246 | $7,191,640 | | Income From Operations | $855,108 | $481,212 | $2,201,204 | $1,846,266 | | Net Income | $1,008,477 | $611,303 | $2,406,334 | $1,828,551 | | Basic Net Income Per Share | $0.09 | $0.06 | $0.22 | $0.17 | | Diluted Net Income Per Share | $0.09 | $0.05 | $0.21 | $0.16 | | Comprehensive Income | $1,546,850 | $(1,655,448) | $4,552,357 | $(197,050) | Consolidated Statements of Changes in Stockholders' Equity | Equity Component | Balance, October 31, 2022 | Balance, April 30, 2023 | | :-------------------------------- | :------------------------ | :---------------------- | | Common Shares | 10,916,853 | 11,042,897 | | Stock Amount | $10,918 | $11,043 | | Additional Paid-in Capital | $62,313,988 | $62,692,276 | | Accumulated Other Comprehensive Loss | $(4,737,124) | $(2,591,101) | | Accumulated Deficit | $(14,176,636) | $(11,770,302) | | Treasury Stock | $(28,337) | $(31,175) | | Total | $43,382,809 | $48,310,741 | Consolidated Statements of Cash Flows | Cash Flow Activity | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------------------------------------ | :------------------------------ | :------------------------------ | | Net Cash (used in) provided by Operating Activities | $(261,033) | $4,707,661 | | Net Cash Used in Investing Activities | $(224,354) | $(1,141,476) | | Net Cash Used in Financing Activities | $(2,838) | $(63,559) | | Effect of Currency Translation on Changes in Cash | $1,015,972 | $(592,163) | | Net Increase in Cash and Cash Equivalents | $527,747 | $2,910,463 | | Cash and Cash Equivalents at End of Period | $23,455,118 | $20,658,119 | Notes to Unaudited Consolidated Financial Statements NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS Coda Octopus Group, Inc. operates two distinct business units: the Marine Technology Business (Products Segment), which sells technology solutions like Echoscope and DAVD to subsea markets, and the Marine Engineering Business (Services Segment), which provides proprietary sub-assemblies and engineering services to prime defense contractors - The Company operates two distinct business units: Marine Technology Business (Products Segment) and Marine Engineering Business (Services Segment)[28][53] - Marine Technology Business offers Echoscope, Echoscope PIPE, and the new Diver Augmented Vision Display (DAVD) for subsea and underwater markets, with DAVD being a significant growth driver[28] - Marine Engineering Business acts as a sub-contractor to prime defense contractors, supplying proprietary sub-assemblies and engineering services for mission-critical defense systems[28] NOTE 2 – REVENUE RECOGNITION The Company recognizes revenue following FASB Topic 606, applying a five-step process. Revenue from product sales, rentals, and software is recognized when performance obligations are met, while engineering services revenue is recognized based on fixed hourly rates or the percentage of completion method for fixed-price contracts - Revenue is recognized in accordance with FASB Topic 606, which involves a five-step process: identifying the contract, performance obligations, transaction price, allocating price to obligations, and recognizing revenue when obligations are satisfied[14][29][55] - For Marine Technology Business (Products), revenue from product sales is recognized on a stand-alone basis, and services (installation, training) are either included or contracted separately[57][184] - Revenue from subscription packages or equipment rentals is recognized daily over the subscription or rental period, while software license sales are recognized upon delivery of activation codes[31][59] - For Marine Engineering Business (Services), revenue from time-and-materials contracts is recognized based on incurred material and direct labor hours, and fixed-price contracts use the percentage of completion method[33] NOTE 3 – COST OF REVENUES Cost of revenues includes materials, direct costs, and commissions paid to sales agents, particularly for the Marine Technology Business. Commissions decreased by 61.0% for the three months ended April 30, 2023, but increased by 51.6% for the six months ended April 30, 2023, reflecting varying sales agent activity - Cost of Revenues includes materials, direct costs, and commissions paid to sales agents, primarily for the Marine Technology Business[37] | Period | Commissions (2023) | Commissions (2022) | Change | | :-------------------------------- | :------------------- | :------------------- | :------- | | Three Months Ended April 30 | $102,452 | $262,632 | -61.0% | | Six Months Ended April 30 | $607,828 | $401,004 | +51.6% | NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, approximate their fair values due to their short-term nature - The carrying amounts of financial instruments (cash, receivables, payables, accrued expenses) approximate fair values due to their short-term nature[38] NOTE 5 – FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated at prevailing exchange rates at balance sheet dates, while revenues and expenses use weighted average exchange rates. Stockholders' equity is recorded at historical rates, with translation adjustments recognized in accumulated other comprehensive income or loss - Assets and liabilities are translated at prevailing exchange rates at balance sheet dates[39] - Revenues and expenses are translated at weighted average exchange rates during the reporting period[39] - Stockholders' equity is recorded at historical exchange rates, and translation adjustments are part of accumulated other comprehensive income or (loss)[39] NOTE 6 – INVENTORY Inventory is valued at the lower of cost (FIFO method) or net realizable value, comprising raw materials, work in progress, and finished goods - Inventory is stated at the lower of cost (First In, First Out method) or net realizable value[66] | Inventory Component | April 30, 2023 | October 31, 2022 | | :------------------ | :------------- | :--------------- | | Raw materials and parts | $8,568,699 | $7,219,344 | | Work in progress | $366,485 | $383,427 | | Finished goods | $2,298,501 | $2,424,340 | | Total Inventory | $11,233,685 | $10,027,111 | NOTE 7 – PROPERTY AND EQUIPMENT Property and equipment, net of accumulated depreciation, includes buildings, land, office machinery, rental assets, and furniture, fixtures, and improvements | Property and Equipment Component | April 30, 2023 | October 31, 2022 | | :------------------------------- | :------------- | :--------------- | | Buildings | $5,776,882 | $5,419,946 | | Land | $200,000 | $200,000 | | Office machinery and equipment | $1,702,189 | $1,556,030 | | Rental assets | $2,493,622 | $2,252,292 | | Furniture, fixtures and improvements | $1,197,705 | $1,108,787 | | Totals | $11,370,398 | $10,537,055 | | Less: accumulated depreciation | $(5,299,732) | $(4,704,523) | | Total Property and Equipment, net | $6,070,666 | $5,832,532 | NOTE 8 – OTHER CURRENT ASSETS Other current assets consist of deposits, other tax receivables, employee retention credit receivables, and other receivables | Other Current Asset | April 30, 2023 | October 31, 2022 | | :------------------ | :------------- | :--------------- | | Deposits | $24,647 | $18,631 | | Other Tax Receivables | $214,274 | $151,217 | | Employee Retention Credit Receivables | $173,213 | $173,213 | | Other Receivables | $10,236 | $- | | Total Other Current Assets | $422,371 | $343,061 | NOTE 9 – CONTRACTS IN PROGRESS The Company recognizes warranty or Through Life Support (TLS) as deferred revenue, amortized over the obligation period. Unbilled receivables represent accumulated project expenses and fees not yet invoiced to customers - Warranty or Through Life Support (TLS) is treated as deferred revenue, amortized over 12, 36, or 60 months[44] | Deferred Revenue Type | April 30, 2023 | October 31, 2022 | | :-------------------- | :------------- | :--------------- | | Warranty/TLS | $233,592 | $229,238 | | Billings in excess of costs and revenues | $878,423 | $790,458 | | Unbilled Receivables | April 30, 2023 | October 31, 2022 | | :------------------- | :------------- | :--------------- | | Total | $1,099,066 | $602,115 | NOTE 10 – CONCENTRATIONS The Company had significant customer concentrations in both the three-month and six-month periods ended April 30, 2023 and 2022, with certain customers accounting for over 10% of net revenues and receivables | Period | Customer Count | Revenue % of Net Revenues | Receivables % of Net Receivables | | :-------------------------------- | :------------- | :------------------------ | :------------------------------- | | Three Months Ended April 30, 2023 | 1 | 24.0% ($1,270,138) | 35.1% ($1,365,300) | | Three Months Ended April 30, 2022 | 1 | 11.0% ($549,134) | 9.3% ($184,374) | | Six Months Ended April 30, 2023 | 2 | 23.1% ($2,517,093) | 38.1% ($1,483,542) | | Six Months Ended April 30, 2022 | 2 | 22.0% ($2,374,201) | 0.03% ($600) | NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS There have been no new accounting pronouncements not yet effective that have significance or potential significance to the Company's Consolidated Financial Statements - No new accounting pronouncements with significant impact are yet effective[70][96] NOTE 12 – EARNINGS PER SHARE This note provides the basic and diluted net income per share, along with the weighted average common shares outstanding for both basic and diluted calculations | Metric | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Basic Net Income Per Share | $0.09 | $0.06 | $0.22 | $0.17 | | Diluted Net Income Per Share | $0.09 | $0.05 | $0.21 | $0.16 | | Basic Weighted Average Common Shares | 11,010,077 | 10,857,673 | 10,970,806 | 10,857,429 | | Diluted Outstanding Shares | 11,330,754 | 11,405,507 | 11,291,483 | 11,405,263 | NOTE 13 – 2017 STOCK INCENTIVE PLAN The Company operates under the 2017 and 2021 Stock Incentive Plans to attract and retain qualified individuals. During the six months ended April 30, 2023, 39,000 restricted stock awards were granted, 146,168 options and 90,073 restricted stock awards vested, and total stock compensation expense was $378,414 - The 2017 Stock Incentive Plan and 2021 Stock Incentive Plan aim to attract and retain talent through equity participation[72][99] - As of April 30, 2023, 1,321,026 shares were available for future issuance under both plans[74] | Metric | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Restricted Stock Awards Granted | 39,000 | 55,181 | | Options Vested | 146,168 | 177,333 | | Restricted Stock Awards Vested | 90,073 | - | | Total Stock Compensation Expense | $378,414 | $690,743 | NOTE 14 – SEGMENT ANALYSIS The Company operates two distinct reportable segments: Marine Technology Business (Products) and Marine Engineering Business (Services). This note provides a detailed breakdown of their financial performance, including revenues, gross profit, operating expenses, and income from operations, along with segment assets and liabilities - The Company has two reportable segments: Marine Technology Business (Products) and Marine Engineering Business (Services), managed separately due to fundamental differences in offerings[76] Three Months Ended April 30, 2023: | Metric | Marine Technology Business | Marine Engineering Business | Overhead | Total | | :-------------------------- | :------------------------- | :-------------------------- | :------- | :---------- | | Net Revenues | $3,583,429 | $1,718,080 | $- | $5,301,509 | | Gross Profit | $2,698,047 | $925,194 | $- | $3,623,241 | | Income (Loss) from Operations | $1,301,681 | $261,921 | $(708,494) | $855,108 | | Net Income (Loss) | $1,342,876 | $283,205 | $(617,604) | $1,008,477 | | Total Assets | $36,187,625 | $13,618,065 | $1,097,772 | $50,903,462 | | Total Liabilities | $1,665,630 | $802,459 | $124,632 | $2,592,721 | Six Months Ended April 30, 2023: | Metric | Marine Technology Business | Marine Engineering Business | Overhead | Total | | :-------------------------- | :------------------------- | :-------------------------- | :------- | :---------- | | Net Revenues | $7,407,588 | $3,490,205 | $- | $10,897,793 | | Gross Profit | $5,457,962 | $1,918,284 | $- | $7,376,246 | | Income (Loss) from Operations | $2,961,529 | $602,551 | $(1,362,876) | $2,201,204 | | Net Income (Loss) | $2,998,871 | $604,724 | $(1,197,261) | $2,406,334 | | Total Assets | $36,187,625 | $13,618,065 | $1,097,772 | $50,903,462 | | Total Liabilities | $1,665,630 | $802,459 | $124,632 | $2,592,721 | NOTE 15 – DISAGGREGATION OF REVENUE This note disaggregates the Company's total net sales by primary geographical markets (Americas, Europe, Australia/Asia, Middle East/Africa) and major goods/service lines (Equipment Sales, Rentals, Software Sales, Engineering Parts, Services) for both the Marine Technology and Marine Engineering segments Three Months Ended April 30, 2023 - Total Revenues by Geography: | Geography | Marine Technology Business | Marine Engineering Business | Total Revenues | | :---------------- | :------------------------- | :-------------------------- | :------------- | | Americas | $1,754,250 | $1,144,891 | $2,899,141 | | Europe | $812,188 | $573,189 | $1,385,377 | | Australia/Asia | $924,251 | $- | $924,251 | | Middle East/Africa | $92,740 | $- | $92,740 | | Total | $3,583,429 | $1,718,080 | $5,301,509 | Three Months Ended April 30, 2023 - Total Revenues by Goods/Service Lines: | Goods/Service Line | Marine Technology Business | Marine Engineering Business | Total Revenues | | :----------------- | :------------------------- | :-------------------------- | :------------- | | Equipment Sales | $2,500,156 | $7,953 | $2,508,109 | | Equipment Rentals | $519,427 | $- | $519,427 | | Software Sales | $219,423 | $- | $219,423 | | Engineering Parts | $- | $1,071,906 | $1,071,906 | | Services | $344,423 | $638,221 | $982,644 | | Total | $3,583,429 | $1,718,080 | $5,301,509 | Six Months Ended April 30, 2023 - Total Revenues by Geography: | Geography | Marine Technology Business | Marine Engineering Business | Total Revenues | | :---------------- | :------------------------- | :-------------------------- | :------------- | | Americas | $2,240,543 | $2,467,868 | $4,708,411 | | Europe | $1,508,598 | $1,022,337 | $2,530,935 | | Australia/Asia | $3,356,679 | $- | $3,356,679 | | Middle East/Africa | $301,768 | $- | $301,768 | | Total | $7,407,588 | $3,490,205 | $10,897,793| Six Months Ended April 30, 2023 - Total Revenues by Goods/Service Lines: | Goods/Service Line | Marine Technology Business | Marine Engineering Business | Total Revenues | | :----------------- | :------------------------- | :-------------------------- | :------------- | | Equipment Sales | $5,072,716 | $7,953 | $5,080,669 | | Equipment Rentals | $785,330 | $- | $785,330 | | Software Sales | $636,593 | $- | $636,593 | | Engineering Parts | $- | $2,220,985 | $2,220,985 | | Services | $912,949 | $1,261,267 | $2,174,216 | | Total | $7,407,588 | $3,490,205 | $10,897,793| NOTE 16 – INCOME TAXES The Company accounts for income taxes under ASC 740, recording deferred tax assets and liabilities for temporary differences. Effective tax rates varied significantly, with specific provisions for US (25%), UK (0% due to R&D credits), and Danish (22%) operations - The Company accounts for income taxes under ASC 740, recording deferred tax assets and liabilities for temporary differences[187] | Period | Effective Tax Rate | | :-------------------------------- | :----------------- | | Three Months Ended April 30, 2023 | 1.9% | | Three Months Ended April 30, 2022 | (23.9)% | | Six Months Ended April 30, 2023 | (0.7)% | | Six Months Ended April 30, 2022 | 5.6% | - Tax rates applied: US at 25%, UK at 0% (due to R&D tax credits), and Danish at 22%[112][139] NOTE 17 – CERTIFIED DEPOSIT INTEREST BEARING ACCOUNTS The Company established certified deposit interest-bearing accounts with HSBC NA and Jyske Bank in February 2023, classified as cash equivalents. These accounts, along with an unrestricted UK deposit account, earn interest at various rates - Certified deposit interest-bearing accounts were established in February 2023 with HSBC NA and Jyske Bank, classified as cash equivalents[140] | Currency Denomination | Amount | Bank/Rate (HSBC) | Bank/Rate (Jyske Bank) | | :-------------------- | :---------- | :--------------- | :--------------------- | | USD | $13,100,000 | 4.5% | - | | GBP | £750,000 | 3.77% | - | | GBP (Unrestricted) | £1,585,277 | 4.00% | - | | Euro | €665,000 | - | 1.3% | | British Pound | £414,000 | - | 2.65% | | Danish Kroner | DKK 2,850,000 | - | 0.91% | | USD | $819,000 | - | 3.41% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and operating results for the three and six months ended April 30, 2023, compared to the prior periods, covering business overview, factors affecting performance, critical accounting policies, and detailed analysis of consolidated and segment-specific financial results, liquidity, and the impact of inflation and foreign currency General Overview Coda Octopus Group, Inc. operates two core businesses: Marine Technology (Products), focusing on subsea imaging and diving technology like Echoscope and DAVD, and Marine Engineering (Services), providing sub-assemblies for defense contractors. Both segments leverage specialized engineering skills and customer synergies, with DAVD and real-time 3D sonar identified as key growth drivers - The Company operates two distinct businesses: Marine Technology Business (Products Segment) and Marine Engineering Business (Services Segment)[115][144] - Marine Technology Business provides Echoscope and Echoscope PIPE for underwater construction, offshore energy, and defense, and the CodaOctopusDAVD for global defense and commercial diving, which is poised to transform diving operations[115][116][145][148][150][151] - Marine Engineering Business is a Department of Defense (DoD) supplier, designing and manufacturing proprietary sub-assemblies for mission-critical integrated systems, with customers including prime defense contractors[147] Factors Affecting our Business in the Current Quarter The Company faces challenges from cumulative supply chain issues, leading to component shortages and price increases, and significant inflation in its operating countries. Additionally, skill shortages in critical areas and the long, unpredictable sales cycle for defense contracts pose risks to project progression, manufacturing, and overall growth - Cumulative supply chain issues, including shortages of key electronic components (e.g., FPGAs) and lead times up to 12 months, are impacting project progression, manufacturing, and staff utilization[123][154] - Significant inflation in operating countries (Denmark 5.3%, UK 7.8%, USA 4.9% for 12 months to April 2023) increases operational costs and material expenses, and creates pressure on wages, exacerbating skill shortages[124][156][179][180] - The sales cycle for defense contracts is long and unpredictable, affecting quarterly revenues and growth plans, particularly for the Services Business and key Products Business opportunities in the Defense Market[126][181] Critical Accounting Policies This section highlights critical accounting policies for revenue recognition, recoverability of deferred costs, income taxes, and intangible assets. Management's estimates and assumptions are crucial, particularly for percentage of completion contracts, deferred cost recovery, deferred tax assets/liabilities, and goodwill impairment evaluations - Revenue recognition policies follow GAAP, with contracts for sales and rentals of underwater solutions and engineering services. Product sales do not include a right of return[159][184] - Deferred costs on service projects, including direct and incremental costs for customization and installation, are recognized contract-by-contract in accordance with revenue recognition policies and reviewed quarterly for recoverability[160][185] - Income taxes are accounted for under ASC 740, with deferred tax assets and liabilities recorded for temporary differences. Intangible assets, including goodwill, customer relationships, and licenses, are evaluated annually for impairment, with finite-lived assets amortized over 2 to 15 years[161][163][187][189] Consolidated Results of Operations For the Current Quarter, consolidated revenue increased by 6.4% to $5,301,509, with operating income up 77.7% and net income after taxes rising 65.0% to $1,008,477. Currency fluctuations, particularly the strengthening USD, resulted in $429,180 lower reported revenue | Metric | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | Change (%) | | :-------------------------------- | :------------------------------- | :-------------------------------- | :--------- | | Consolidated Revenue | $5,301,509 | $4,984,838 | +6.4% | | Total Operating Expenses | $2,768,133 | $2,550,494 | +8.5% | | Income from Operations | $855,108 | $481,212 | +77.7% | | Net Income before Income Tax | $1,028,484 | $493,207 | +108.5% | | Net Income after Income Tax | $1,008,477 | $611,303 | +65.0% | - Applying a constant exchange rate, consolidated revenue would have increased by 8.6% over the Previous Quarter, indicating a negative impact of currency fluctuations of $429,180 on reported revenue[164] Segment Summary In the Current Quarter, the Products Business revenue increased by 2.6% (5.0% at constant rates) to $3,583,429, with a gross profit margin of 75.3%. The Services Business revenue increased by 15.0% (17.1% at constant rates) to $1,718,080, with operating income of $261,921. Agent commissions for the Products Business decreased by 61.0% | Segment | Current Quarter Revenue (Actual) | Current Quarter Revenue (Constant Rate) | Previous Quarter Revenue | Change (Actual) | Change (Constant Rate) | | :------------------------- | :------------------------------- | :-------------------------------------- | :----------------------- | :-------------- | :--------------------- | | Products Business | $3,583,429 | $3,665,060 | $3,491,009 | +2.6% | +5.0% | | Services Business | $1,718,080 | $1,748,958 | $1,493,829 | +15.0% | +17.1% | - Products Business gross profit margin was 75.3% in the Current Quarter, a 1.3% decrease from the Previous Quarter, partly due to a 61.0% fall in agent commissions[191] - Services Business operating income was $261,921 in the Current Quarter, with total operating expenses increasing by 13.6%[167] Results of Operations for the Current Quarter compared to the Previous Quarter This section details the financial performance for the three months ended April 30, 2023, compared to the same period in 2022, highlighting changes in revenue, gross profit, operating expenses, and net income, with specific attention to the impact of currency fluctuations and strategic shifts Revenue | Metric | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | Change (%) | | :------------------------- | :------------------------------- | :-------------------------------- | :--------- | | Total Consolidated Revenues | $5,301,509 | $4,984,838 | +6.4% | | Products Business Revenues | $3,583,429 | $3,491,009 | +2.6% | | Services Business Revenues | $1,718,080 | $1,493,829 | +15.0% | - Currency fluctuations resulted in $429,180 lower reported revenue for the Current Quarter compared to using a constant exchange rate[194] Gross Profit Margins | Segment/Metric | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | Change (Percentage Points) | | :------------------------- | :------------------------------- | :-------------------------------- | :------------------------- | | Consolidated Gross Profit Margin | 68.3% | 60.8% | +7.5 | | Marine Technology Business Margin | 75.3% | 76.6% | -1.3 | | Services Business Margin | 53.9% | 23.9% | +30.0 | - The significant improvement in consolidated gross profit margin was largely due to the Services Business recovering from an exceptionally low margin in the Previous Quarter, which was impacted by a specific motor racing project[168][196] - Agent commissions for the Marine Technology Business decreased by 61.0% to $102,452, reflecting decreased sales from Asia[197] Research and Development (R&D) | Segment/Metric | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | Change (%) | | :------------------------- | :------------------------------- | :-------------------------------- | :--------- | | Total R&D Expenditure | $525,939 | $517,378 | +1.7% | | Services Segment R&D Expenditure | $7,534 | $(99,868) | +107.5% | | Products Segment R&D Expenditure | $518,405 | $617,246 | -16.0% | - The modest increase in total R&D aligns with a strategy to focus more resources on business development, marketing, and global brand building[198] - The negative R&D for the Services Segment in the Previous Quarter was due to reallocation of expenditure to a customer project after receiving the purchase order[226] Selling, General and Administrative Expenses (SG&A) | SG&A Category | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | Change (%) | | :---------------------------------------- | :------------------------------- | :-------------------------------- | :--------- | | Total SG&A Expenses | $2,242,194 | $2,033,116 | +10.3% | | Wages and Salaries | $907,297 | $940,460 | -3.5% | | Legal and Professional Fees | $467,784 | $390,218 | +19.9% | | Marketing | $66,578 | $108,569 | -38.7% | - The increase in SG&A was primarily driven by higher legal and professional fees due to engaging tax specialists and increased audit fees[173][174] - Non-cash items as a percentage of SG&A decreased to 13.9% from 24.8%, largely due to a 46.3% reduction in stock-based compensation charges[227] Operating Income | Metric | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | Change (%) | | :----------------- | :------------------------------- | :-------------------------------- | :--------- | | Operating Income | $855,108 | $481,212 | +77.7% | - The increase in operating income was a result of higher consolidated revenues and improved gross profit margins[202] Other Income | Metric | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | Change (%) | | :----------------- | :------------------------------- | :-------------------------------- | :--------- | | Other Income | $173,376 | $14,497 | +1095.9% | - The significant increase in other income was primarily due to $170,596 in interest earned on newly established certified deposit accounts[175] Net Income before income taxes | Metric | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | Change (%) | | :------------------------- | :------------------------------- | :-------------------------------- | :--------- | | Net Income before Income Taxes | $1,028,484 | $493,207 | +108.5% | - The increase was driven by higher consolidated revenues, improved gross profit margins, and material interest earned on certified deposit accounts[230] Net Income | Metric | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | Change (%) | | :----------------- | :------------------------------- | :-------------------------------- | :--------- | | Net Income | $1,008,477 | $611,303 | +65.0% | | Current Tax Expense (Benefit) | $(68,773) | $109,150 | - | | Deferred Tax Benefit | $48,766 | $8,946 | - | - Net income increased by 65.0%, with tax expenses varying based on the composition of consolidated income and specific tax provisions for US, UK (no provision due to carryforward losses), and Danish (22% rate) subsidiaries[9][176] Comprehensive Income | Metric | Current Quarter (April 30, 2023) | Previous Quarter (April 30, 2022) | | :------------------------------------ | :------------------------------- | :-------------------------------- | | Comprehensive Income (Loss) | $1,546,850 | $(1,655,448) | | Foreign Currency Translation Adjustment | $538,373 | $(2,266,751) | - Comprehensive income shifted from a loss to a gain, primarily reflecting significant positive adjustments from foreign currency translations, which are largely non-cash gains/losses[9][231] Results of Operations for the Current Six Month Period compared to the Previous Six Month Period This section analyzes the Company's financial performance for the six months ended April 30, 2023, versus the same period in 2022, detailing revenue, gross profit, operating expenses, and net income, emphasizing the impact of strategic shifts, currency fluctuations, and specific project influences Revenue | Metric | Current Six Month Period (April 30, 2023) | Previous Six Month Period (April 30, 2022) | Change (%) | | :------------------------- | :---------------------------------------- | :----------------------------------------- | :--------- | | Total Consolidated Revenues | $10,897,793 | $10,823,046 | +0.7% | | Products Business Revenues | $7,407,588 | $7,314,757 | +1.3% | | Services Business Revenues | $3,490,205 | $3,508,289 | -0.5% | - Currency fluctuations negatively impacted total consolidated revenues by $471,956; at a constant rate, revenues would have increased by 4.4%[177] Gross Profit Margins | Segment/Metric | Current Six Month Period (April 30, 2023) | Previous Six Month Period (April 30, 2022) | Change (Percentage Points) | | :------------------------- | :---------------------------------------- | :----------------------------------------- | :------------------------- | | Consolidated Gross Profit Margin | 67.7% | 66.4% | +1.3 | | Products Business Margin | 73.7% | 81.0% | -7.3 | | Services Business Margin | 55.0% | 36.1% | +18.9 | - Consolidated margin improved due to a significant strengthening in the Services Business margin, which was exceptionally low in the prior period due to a specific low-margin motor racing project[207][232] - Products Business margins weakened due to a 51.6% increase in foreign agent commission costs ($607,828 vs. $401,004), particularly from Asia sales[208] Research and Development (R&D) | Segment/Metric | Current Six Month Period (April 30, 2023) | Previous Six Month Period (April 30, 2022) | Change (%) | | :------------------------- | :---------------------------------------- | :----------------------------------------- | :--------- | | Total R&D Expenditures | $970,397 | $1,190,268 | -18.5% | | Services Segment R&D Expenditures | $13,684 | $43,647 | -68.6% | | Products Segment R&D Expenditures | $956,713 | $1,146,621 | -16.6% | - The overall decrease in R&D reflects a strategic shift towards marketing and business development, and the completion of high-expenditure projects like Echoscope PIPE, F280 Series, and DAVD development in the Products Segment[209][211] - Services Business R&D decrease is due to a reduction in Thermite product line development, with re-engagement with customers expected to potentially increase future expenditure[210] Selling, General and Administrative Expenses (SG&A) | SG&A Category | Current Six Month Period (April 30, 2023) | Previous Six Month Period (April 30, 2022) | Change (%) | | :---------------------------------------- | :---------------------------------------- | :----------------------------------------- | :--------- | | Total SG&A Expenses | $4,204,645 | $4,155,106 | +1.2% | | Wages and Salaries | $1,754,811 | $1,843,622 | -4.8% | | Legal and Professional Fees | $872,872 | $749,235 | +16.5% | | Marketing | $87,020 | $122,335 | -28.8% | - The increase in SG&A was primarily due to higher legal and professional fees, including costs for tax specialists and increased audit fees[213][240] - Non-cash items as a percentage of SG&A decreased to 14.2% from 23.3%, mainly due to a 45.2% reduction in stock-based compensation charges[239] Operating Income | Metric | Current Six Month Period (April 30, 2023) | Previous Six Month Period (April 30, 2022) | Change (%) | | :----------------- | :---------------------------------------- | :----------------------------------------- | :--------- | | Operating Income | $2,201,204 | $1,846,266 | +19.2% | - The increase in operating income reflects a small increase in revenues, improved gross profit margins, and a reduction in R&D expenditure[216] Other Income | Metric | Current Six Month Period (April 30, 2023) | Previous Six Month Period (April 30, 2022) | Change (%) | | :----------------- | :---------------------------------------- | :----------------------------------------- | :--------- | | Other Income | $189,141 | $91,589 | +106.5% | - The significant increase in other income was primarily due to $183,457 in interest earned on certified deposit accounts[242] Net Income before income taxes | Metric | Current Six Month Period (April 30, 2023) | Previous Six Month Period (April 30, 2022) | Change (%) | | :------------------------- | :---------------------------------------- | :----------------------------------------- | :--------- | | Net Income before Income Taxes | $2,390,345 | $1,937,855 | +23.4% | - The increase reflects a small increase in revenues, improved gross profit margins, reduced total operating expenses, and a material increase in other income[217] Net Income | Metric | Current Six Month Period (April 30, 2023) | Previous Six Month Period (April 30, 2022) | Change (%) | | :------------------------------------ | :---------------------------------------- | :----------------------------------------- | :--------- | | Net Income | $2,406,334 | $1,828,551 | +31.6% | | Current Tax Expense (Benefit) | $(68,784) | $(176,459) | - | | Deferred Tax Benefit | $84,773 | $67,155 | - | - Net income increased by 31.6%, influenced by tax expense variations across subsidiaries, with UK subsidiaries having no tax provision due to carryforward losses and the Danish subsidiary having a 22% tax provision[9][218] Comprehensive Income (loss) | Metric | Current Six Month Period (April 30, 2023) | Previous Six Month Period (April 30, 2022) | | :------------------------------------ | :---------------------------------------- | :----------------------------------------- | | Comprehensive Income (Loss) | $4,552,357 | $(197,050) | | Foreign Currency Translation Adjustment | $2,146,023 | $(2,025,601) | - Comprehensive income shifted from a loss to a significant gain, primarily due to a large positive foreign currency translation adjustment, reflecting the strengthening USD against major currencies[9][244] Liquidity and Capital Resources As of April 30, 2023, the Company reported an accumulated deficit of $11,770,302, but maintained strong liquidity with $38,338,739 in working capital and $23,455,118 in cash. Despite a cash deficit from operating activities of ($261,033) in the Current Six-Month Period, management believes it has sufficient working capital for foreseeable operations. The Company also has a $4,000,000 revolving line of credit with HSBC NA, with a zero outstanding balance | Metric | April 30, 2023 | | :-------------------------------- | :------------- | | Accumulated Deficit | $(11,770,302) | | Working Capital | $38,338,739 | | Cash | $23,455,118 | | Stockholders' Equity | $48,310,741 | | Cash Deficit from Operating Activities (Current Six-Month Period) | $(261,033) | - The Company has a $4,000,000 revolving line of credit with HSBC NA, with a $0 outstanding balance as of April 30, 2023, expiring November 26, 2023[219] Inflation and Foreign Currency Inflation impacts the Company's operating costs and material expenses. Foreign currency fluctuations significantly affect sales, profitability, and financial position due to the translation of foreign subsidiaries' functional currencies (GBP, DKK, AUD, INR) into USD for reporting, with the USD strengthening against major currencies in the Current Quarter and Six-Month Period - Inflation affects operating costs and bill of material costs[179] - The Company's functional currencies include USD, British Pound, Danish Kroner, Australian Dollars, and Indian Rupees[247][260] - Currency fluctuations impact sales, profitability, and financial position, with the USD strengthening against major currencies in the Current Quarter and Six-Month Period[125][244][260] Impact of Currency Fluctuations (Constant Rate vs. Actual) - Three Months Ended April 30, 2023: | Metric | Actual Results | Constant Rates | Effect (Actual - Constant) | | :---------------- | :------------- | :------------- | :------------------------- | | Net Profit (Losses) | $183,538 | $160,885 | $22,653 | | Net Assets | $23,969,620 | $21,878,937 | $2,090,683 | Impact of Currency Fluctuations (Constant Rate vs. Actual) - Six Months Ended April 30, 2023: | Metric | Actual Results | Constant Rates | Effect (Actual - Constant) | | :---------------- | :------------- | :------------- | :------------------------- | | Net Profit (Losses) | $1,750,499 | $1,811,025 | $(60,526) | | Net Assets | $23,969,620 | $21,878,916 | $2,090,704 | Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements, noting that this disclosure is not required for smaller reporting companies - The Company has no off-balance sheet arrangements[251][263] Item 3. Quantitative and Qualitative Disclosures About Market Risks This item is not required for smaller reporting companies - This item is not required for smaller reporting companies[225][263] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were ineffective as of April 30, 2023, due to a material weakness related to intercompany elimination entries. However, new controls and procedures have been implemented and are being monitored for effectiveness, with no other material changes to internal controls reported Evaluation of Disclosure Controls and Procedures - Disclosure controls and procedures were deemed ineffective as of April 30, 2023, due to a material weakness concerning inadequate processes for reviewing intercompany elimination entries during consolidation[252][264] - New controls and procedures, including metrics for comparison and expanded review, have been implemented and are being monitored, with quarterly closing procedures completed without intercompany elimination errors[253][265] Changes in Internal Controls - No material changes in internal control over financial reporting occurred during the period, except for those implemented to address the identified material weakness[254][266] PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently aware of any legal proceedings that are expected to have a material adverse effect on its business, financial condition, or operating results - The Company is not aware of any legal proceedings that will have a material adverse effect on its business, financial condition, or operating results[269] Item 1A. Risk Factors This item is not required for smaller reporting companies - This item is not required for smaller reporting companies[270] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None[270] Item 3. Default Upon Senior Securities There were no defaults upon senior securities during the period - None[271] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not Applicable[272] Item 5. Other Information No other information is required to be disclosed under this item - None[270] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including XBRL documents for financial data and certifications from the Chief Executive Officer and Acting Chief Financial Officer - Exhibits include Inline XBRL Instance Document, Taxonomy Extension Calculation, Label, Schema, Definition, and Presentation Linkbase Documents[256][268] - Certifications from the Chief Executive Officer and Acting Chief Financial Officer are included pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350[257][273] Signatures The report is duly signed on behalf of Coda Octopus Group, Inc. by Annmarie Gayle, Chief Executive Officer, and Gayle Jardine, Acting Chief Financial Officer, on June 14, 2023 - The report is signed by Annmarie Gayle, Chief Executive Officer, and Gayle Jardine, Acting Chief Financial Officer, on June 14, 2023[259][274]