a Octopus (CODA) - 2023 Q3 - Quarterly Report

PART I - Financial Information Item 1: Financial Statements Coda Octopus Group, Inc.'s unaudited consolidated financial statements, covering balance sheets, income, equity, cash flows, and detailed notes Consolidated Balance Sheets Consolidated Balance Sheet Highlights (July 31, 2023 vs. October 31, 2022) | Metric | July 31, 2023 | October 31, 2022 | Change (%) | | :-------------------------- | :-------------- | :--------------- | :--------- | | Total Assets | $51,969,795 | $46,927,458 | 10.7% | | Total Liabilities | $2,132,566 | $3,544,649 | -39.9% | | Total Stockholders' Equity | $49,837,229 | $43,382,809 | 14.9% | | Cash and Cash Equivalents | $24,890,568 | $22,927,371 | 8.6% | | Inventory | $11,647,639 | $10,027,111 | 16.1% | | Unbilled Receivables | $1,742,334 | $602,115 | 189.4% | | Accounts Payable | $1,126,762 | $793,247 | 42.1% | | Accrued Expenses & Other Current Liabilities | $225,787 | $1,731,706 | -87.0% | | Deferred Revenue (Current) | $640,775 | $943,569 | -32.1% | Consolidated Statements of Income and Comprehensive Income Consolidated Income and Comprehensive Income (3 Months Ended July 31) | Metric | 2023 | 2022 | Change (%) | | :---------------------- | :------------ | :------------ | :--------- | | Net Revenues | $4,890,532 | $6,267,409 | -22.0% | | Gross Profit | $3,365,224 | $4,562,644 | -26.3% | | Income from Operations | $862,614 | $2,023,713 | -57.4% | | Net Income | $1,038,780 | $1,768,657 | -41.3% | | Basic EPS | $0.09 | $0.16 | -43.8% | | Diluted EPS | $0.09 | $0.16 | -43.8% | | Comprehensive Income | $1,431,263 | $963,500 | 48.5% | Consolidated Income and Comprehensive Income (9 Months Ended July 31) | Metric | 2023 | 2022 | Change (%) | | :---------------------- | :------------- | :------------- | :--------- | | Net Revenues | $15,788,325 | $17,090,455 | -7.6% | | Gross Profit | $10,741,470 | $11,754,284 | -8.6% | | Income from Operations | $3,063,818 | $3,869,978 | -20.8% | | Net Income | $3,445,114 | $3,597,208 | -4.2% | | Basic EPS | $0.31 | $0.33 | -6.1% | | Diluted EPS | $0.31 | $0.32 | -3.1% | | Comprehensive Income | $5,983,620 | $766,450 | 680.7% | Consolidated Statements of Changes in Stockholders' Equity - Total Stockholders' Equity increased from $43,382,809 as of October 31, 2022, to $49,837,229 as of July 31, 2023[12] - Accumulated Other Comprehensive Loss improved from $(4,737,124) to $(2,198,618) over the nine months, largely due to foreign currency translation adjustments[12][14] - Accumulated Deficit decreased from $(14,176,636) to $(10,731,522) over the nine months, reflecting net income[12] - Employee stock-based compensation contributed $488,764 to additional paid-in capital for the nine months ended July 31, 2023[16][59] Consolidated Statements of Cash Flows Consolidated Cash Flows (9 Months Ended July 31) | Cash Flow Activity | 2023 | 2022 | Change (%) | | :-------------------------- | :------------ | :------------ | :--------- | | Net Cash from Operating | $1,384,897 | $6,282,523 | -77.9% | | Net Cash from Investing | $(509,609) | $(1,195,885) | -57.4% | | Net Cash from Financing | $(17,963) | $(63,559) | -71.7% | | Effect of Currency Translation | $1,105,872 | $(1,399,815) | N/A | | Net Increase in Cash | $1,963,197 | $3,623,264 | -45.8% | | Cash at End of Period | $24,890,568 | $21,370,920 | 16.5% | Notes to Unaudited Consolidated Financial Statements NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - Coda Octopus Group, Inc. operates two distinct business units: Marine Technology Business (Products Segment) and Marine Engineering Business (Services Segment)[23] - The Marine Technology Business sells and rents Echoscope real-time 3D imaging sonar and the new Diver Augmented Vision Display (DAVD) system to subsea and underwater markets, with DAVD being a significant growth area[23] - The Marine Engineering Business is a sub-contractor to prime defense contractors, supplying proprietary sub-assemblies for mission-critical defense systems[23] NOTE 2 – REVENUE RECOGNITION - Revenue is recognized in accordance with Topic 606, when performance obligations are met, which includes product delivery, service performance, or over the subscription/rental period[26][28][30][31] - Fixed-price contracts for services are recognized using the percentage of completion method, measured by the percentage of costs incurred to date[33] - Deferred revenue includes customer prepayments and amounts related to warranty or Through Life Support (TLS) obligations, amortized over the relevant service period[32][48] NOTE 3 – COST OF REVENUES - Cost of Revenues includes materials, direct costs, and commissions paid to sales agents, primarily for the Marine Technology Business[39] Commissions Included in Cost of Revenues | Period | 2023 | 2022 | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | | Three Months Ended July 31 | $120,724 | $33,001 | 265.8% | | Nine Months Ended July 31 | $728,552 | $434,005 | 67.9% | NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of financial instruments (cash, accounts receivable, accounts payable, accrued expenses) approximate fair values due to their short-term nature[40] NOTE 5 – FOREIGN CURRENCY TRANSLATION - Assets and liabilities are translated at prevailing exchange rates at balance sheet dates, while revenues and expenses use weighted average rates[41] - Resulting translation adjustments are recorded as a separate component in stockholders' equity as part of accumulated other comprehensive income or loss[41] NOTE 6 – INVENTORY Inventory Composition (July 31, 2023 vs. October 31, 2022) | Component | July 31, 2023 | October 31, 2022 | | :---------------- | :------------ | :--------------- | | Raw materials and parts | $8,940,798 | $7,219,344 | | Work in progress | $396,359 | $383,427 | | Finished goods | $2,310,482 | $2,424,340 | | Total Inventory | $11,647,639 | $10,027,111 | - Total inventory increased by 16.1% from October 31, 2022, to July 31, 2023, primarily driven by an increase in raw materials and parts[42] NOTE 7 – FIXED ASSETS Property and Equipment, Net (July 31, 2023 vs. October 31, 2022) | Component | July 31, 2023 | October 31, 2022 | | :---------------------------- | :------------ | :--------------- | | Buildings | $5,852,425 | $5,419,946 | | Land | $200,000 | $200,000 | | Office machinery and equipment | $1,888,864 | $1,556,030 | | Rental assets | $2,636,744 | $2,252,292 | | Furniture, fixtures and improvements | $1,214,734 | $1,108,787 | | Totals (Gross) | $11,792,767 | $10,537,055 | | Less: accumulated depreciation | $(5,541,521) | $(4,704,523) | | Total Property and Equipment, net | $6,251,246 | $5,832,532 | - Total Property and Equipment, net, increased by 7.2% from October 31, 2022, to July 31, 2023[44] NOTE 8 – OTHER CURRENT ASSETS Other Current Assets (July 31, 2023 vs. October 31, 2022) | Component | July 31, 2023 | October 31, 2022 | | :---------------------------- | :------------ | :--------------- | | Deposits | $24,664 | $18,631 | | Other Tax Receivables | $172,271 | $151,217 | | Employee Retention Credit Receivables | $173,213 | $173,213 | | Other Receivables | $2,035 | $- | | Total Other Current Assets | $372,183 | $343,061 | - Total Other Current Assets increased by 8.5% from October 31, 2022, to July 31, 2023[45] NOTE 9 – CONTRACTS IN PROGRESS - Unbilled Receivables, representing costs and estimated earnings in excess of billings, increased significantly from $602,115 as of October 31, 2022, to $1,742,334 as of July 31, 2023[46] - Deferred Revenue (billings in excess of costs and warranty obligations) decreased from $790,458 as of October 31, 2022, to $543,991 as of July 31, 2023[47] - Deferred revenue for warranty or Through Life Support (TLS) was $236,026 as of July 31, 2023, compared to $229,238 as of October 31, 2022[48] NOTE 10 – CONCENTRATIONS - For the three months ended July 31, 2023, three customers accounted for 36.1% of net revenues and 41.2% of net receivables[49] - For the nine months ended July 31, 2023, one customer accounted for 11.7% of net revenues and 21.4% of net receivables[51] NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS - There have been no new accounting pronouncements not yet effective that have significance or potential significance to the Consolidated Financial Statements[53] NOTE 12 – EARNINGS PER SHARE Net Income Per Share (3 Months Ended July 31) | Metric | 2023 | 2022 | | :-------- | :---- | :---- | | Basic EPS | $0.09 | $0.16 | | Diluted EPS | $0.09 | $0.16 | Net Income Per Share (9 Months Ended July 31) | Metric | 2023 | 2022 | | :-------- | :---- | :---- | | Basic EPS | $0.31 | $0.33 | | Diluted EPS | $0.31 | $0.32 | NOTE 13 – 2017 STOCK INCENTIVE PLAN - The total stock compensation expense for the nine months ended July 31, 2023, was $488,764[59] - During the nine months ended July 31, 2023, 199,496 options were exercised on a cashless basis, resulting in the issuance of 92,275 shares[58] - As of July 31, 2023, there were 370,682 shares available for issuance under the 2017 Plan and a total of 1,370,682 shares available under both the 2017 and 2021 Plans[58][62] NOTE 14 – SEGMENT ANALYSIS - The Company operates two distinct reportable segments: Marine Technology Business (Products) and Marine Engineering Business (Services), managed separately[63] Segment Performance (3 Months Ended July 31) | Metric | Marine Technology (2023) | Marine Technology (2022) | Marine Engineering (2023) | Marine Engineering (2022) | | :---------------------- | :----------------------- | :----------------------- | :------------------------ | :------------------------ | | Net Revenues | $2,863,251 | $4,004,557 | $2,027,281 | $2,262,852 | | Income from Operations | $911,237 | $2,135,252 | $455,325 | $417,419 | Segment Performance (9 Months Ended July 31) | Metric | Marine Technology (2023) | Marine Technology (2022) | Marine Engineering (2023) | Marine Engineering (2022) | | :---------------------- | :----------------------- | :----------------------- | :------------------------ | :------------------------ | | Net Revenues | $10,270,839 | $11,319,314 | $5,517,486 | $5,771,141 | | Income from Operations | $3,872,766 | $5,587,116 | $1,057,876 | $299,192 | NOTE 15 – DISAGGREGATION OF REVENUE Revenue Disaggregation by Geographical Market (3 Months Ended July 31) | Market | 2023 Total | 2022 Total | Change (%) | | :-------------- | :------------ | :------------ | :--------- | | Americas | $2,606,628 | $3,095,140 | -15.8% | | Europe | $1,245,334 | $1,073,342 | 16.0% | | Australia/Asia | $442,670 | $1,435,637 | -69.2% | | Middle East/Africa | $595,900 | $663,290 | -10.2% | | Total Revenues | $4,890,532 | $6,267,409 | -22.0% | Revenue Disaggregation by Major Goods/Service Lines (3 Months Ended July 31) | Line of Business | 2023 Total | 2022 Total | Change (%) | | :--------------- | :------------ | :------------ | :--------- | | Equipment Sales | $2,224,874 | $3,379,435 | -34.2% | | Equipment Rentals | $303,525 | $380,984 | -20.3% | | Software Sales | $147,453 | $252,204 | -41.5% | | Engineering Parts | $1,377,562 | $999,228 | 37.9% | | Services | $837,118 | $1,255,558 | -33.3% | | Total Revenues | $4,890,532 | $6,267,409 | -22.0% | Revenue Disaggregation by Geographical Market (9 Months Ended July 31) | Market | 2023 Total | 2022 Total | Change (%) | | :-------------- | :------------- | :------------- | :--------- | | Americas | $7,315,039 | $7,360,269 | -0.6% | | Europe | $3,776,269 | $3,511,455 | 7.5% | | Australia/Asia | $3,799,349 | $4,477,178 | -15.1% | | Middle East/Africa | $897,668 | $1,741,553 | -48.4% | | Total Revenues | $15,788,325 | $17,090,455 | -7.6% | Revenue Disaggregation by Major Goods/Service Lines (9 Months Ended July 31) | Line of Business | 2023 Total | 2022 Total | Change (%) | | :--------------- | :------------- | :------------- | :--------- | | Equipment Sales | $7,305,543 | $8,376,415 | -12.8% | | Equipment Rentals | $1,088,855 | $1,726,760 | -36.9% | | Software Sales | $784,046 | $691,422 | 13.4% | | Engineering Parts | $3,598,547 | $2,918,181 | 23.3% | | Services | $3,011,334 | $3,377,677 | -10.9% | | Total Revenues | $15,788,325 | $17,090,455 | -7.6% | NOTE 16 – INCOME TAXES - The effective tax rate for the three months ended July 31, 2023, was 3.6%, down from 13.4% in 2022[79] - The effective tax rate for the nine months ended July 31, 2023, was 0.6%, down from 9.6% in 2022[80] - UK subsidiaries recorded a 0.0% tax rate due to R&D tax credits, while the Danish company had a 22.0% provision[79][80] NOTE 17 – CERTIFIED DEPOSIT INTEREST BEARING ACCOUNTS - The Company established certified deposit interest-bearing accounts in February 2023, classified as 'cash equivalent' for short-term periods not exceeding 3 months[81] Interest-Bearing Accounts as of July 31, 2023 | Currency Denomination | Amount | Bank | Interest Rate | | :-------------------- | :------------ | :--------- | :------------ | | USD | $13,256,709 | HSBC | 5.17% | | GBP | £750,000 | HSBC | 4.80% | | GBP (Unrestricted) | £1,248,151 | N/A | 5.00% | | Euro | €795,000 | Jyske Bank | 1.9% | | British Pound | £414,000 | Jyske Bank | 3.2% | | Danish Kroner | DKK 3,190,000 | Jyske Bank | 1.6% | | USD | $1,094,000 | Jyske Bank | 3.8% | Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations, including business overview, key factors, and financial performance General Overview - The Marine Technology Business provides Echoscope real-time 3D imaging sonar and the CodaOctopusDAVD (Diver Augmented Vision Display) system for underwater defense and commercial markets globally[84][86] - The DAVD system, protected by patent, integrates real-time data into a diver's Head-up Display (HUD), enhancing safety and efficiency in diving operations[86][99] - The Marine Engineering Business is a long-term Department of Defense (DoD) supplier, designing and manufacturing proprietary sub-assemblies for mission-critical integrated systems (MCIS)[90] - Volumetric real-time imaging sonar technology and the DAVD are identified as the most promising products for the Company's near-term growth[91] Factors Affecting our Business in the Current Quarter - Ongoing cumulative supply chain issues, including shortages of key electronic components (e.g., FPGAs), result in lead times up to 12 months and significant price increases, impacting production and project progression[103][108] - Inflation in operating countries (Denmark 3.1%, UK 6.4%, USA 3.2%) increases operational and material costs, and creates pressure on salaries, making it difficult to attract and retain skilled personnel[104][108] - Currency fluctuations, particularly the weakening USD against GBP, EUR, DKK, and INR, can impact consolidated financial results, though it had a positive impact on revenue in the current quarter[105] - Skill shortages in critical areas (sales, marketing, software developers, electronic technicians) coupled with wage pressure pose a risk to business continuity and growth[106] - Long and unpredictable sales cycles in the defense market, particularly for the Services Business and Marine Technology's defense opportunities, affect the timing of orders and quarterly revenues[107] Impact on Revenues and Earnings - The Company is uncertain about the full extent of the impact these factors will have on future financial results[109] Impact on Liquidity, Balance Sheet and Assets - As of July 31, 2023, the Company had cash and cash equivalents of $24,890,568 and believes it has sufficient working capital for the foreseeable future, despite potential adverse impacts from market factors[110] Critical Accounting Policies - Revenue recognition follows Topic 606, with revenues derived from sales and rentals of underwater solutions and engineering services, recognized when performance obligations are met[113][114][115] - Deferred costs on service projects, primarily direct and incremental costs, are recognized in accordance with revenue recognition policies and reviewed quarterly for recoverability[116][117] - Income taxes are accounted for under ASC 740, with deferred tax assets and liabilities recorded for temporary differences between financial and tax reporting bases[119][120] - Intangible assets, including goodwill, customer relationships, and licenses, are evaluated for impairment annually (goodwill) or amortized over 2 to 15 years (finite-lived assets)[122][123] Consolidated Results of Operations - Consolidated revenue for the Current Quarter decreased by 22.0% to $4,890,532 compared to the Previous Quarter, primarily due to falls in both Marine Technology and Services segments[124][135] - Income from operations fell by 57.4%, and net income before taxes decreased by 47.3% to $1,077,166 in the Current Quarter[124] - Currency fluctuations had a positive impact on reported revenue in the Current Quarter, increasing it by 0.4% or $18,633[124][188] Segment Summary Marine Technology Business - Revenue decreased by 28.5% to $2,863,251 in the Current Quarter, contributing 58.5% of consolidated revenues[126] - Gross Profit Margin fell by 4.6% to 82.1% due to increased agent commissions and lower sales of high-margin rentals, software, and customization services[126] - Sales from the Asia region decreased by 69.2% to $442,670 in the Current Quarter, attributed to a slow pace of converting proposals into orders[129] - The defense market application increased to 46.5% of revenues, while construction sector revenue decreased from 37.9% to 10.0%[130][132] - A slowdown in European offshore wind power generation, driven by rising costs and higher interest rates, significantly impacted rental and associated services revenues[128][131] Services Business - Revenue decreased by 10.4% to $2,027,281 in the Current Quarter, contributing 41.5% of consolidated revenues[133] - Gross Profit Margin increased by 1.8% to 50.0%, and total operating expenses fell by 17.0%[133] - The fall in revenue is largely due to significant delays in securing orders from UK customers, whose priorities shifted to supporting Ukraine-related land-based solutions[133] Results of Operations for the Current Quarter compared to the Previous Quarter - Total consolidated revenues decreased by 22.0% to $4,890,532, driven by reduced sales in the Marine Technology Business (Europe, Asia) and delays in orders for the Services Business (UK operations)[135] - Gross Profit Margin weakened to 68.8% (from 72.8%), attributed to a lower percentage of higher-margin Marine Technology sales, increased commission costs, and a less favorable sales mix[136] Marine Technology Business Sales Mix (3 Months Ended July 31) | Category | 2023 | 2022 | Change (%) | | :---------------- | :------------ | :------------ | :--------- | | Equipment Sales | $2,143,203 | $2,928,019 | -26.8% | | Equipment Rentals | $303,525 | $380,984 | -20.3% | | Software Sales | $147,453 | $252,204 | -41.5% | | Services | $269,070 | $443,350 | -39.3% | | Total Net Sales | $2,863,251 | $4,004,557 | -28.5% | - Research and Development (R&D) expenditure slightly decreased by 1.7% to $568,287, aligning with a strategic shift towards business development and marketing[141] - Other Income increased significantly by 986.7% to $214,552, primarily due to $211,704 in interest earned on certified deposit accounts established in February 2023[153] - Net Income decreased by 41.3% to $1,038,780, while Comprehensive Income increased by 48.5% to $1,431,263, reflecting a positive foreign currency translation adjustment[155][156] Results of Operations for the Current Nine Month Period compared to the Previous Nine Month Period - Total consolidated revenues decreased by 7.6% to $15,788,325, primarily due to a fall in Marine Technology Business revenue (Asia sales, rentals) and significant delays in orders for the Services Business UK Operations[157] - Consolidated Gross Profit Margin was lower at 68.0% (vs. 68.8%), influenced by a lower percentage of higher-margin Marine Technology sales, increased commission costs, and a shift towards more hardware sales[158] - Services Business gross profit margins strengthened to 53.1% (from 40.8%) due to an exceptionally low-margin engineering project in the prior period[162] - R&D expenditures decreased by 13.0% to $1,538,684, reflecting a strategic shift from R&D to marketing and business development, with major development projects now completed[164][166] - Other Income increased by 253.4% to $403,693, with $395,161 attributable to interest earned on certified deposit accounts[176] - Net Income decreased by 4.2% to $3,445,114, while Comprehensive Income significantly increased to $5,983,620 (from $766,450), driven by a substantial gain from foreign currency translation adjustments[178][179] Liquidity and Capital Resources Liquidity and Capital Resources (July 31, 2023) | Metric | Amount | | :---------------------- | :------------ | | Accumulated Deficit | $10,731,522 | | Working Capital | $39,738,904 | | Cash and Cash Equivalents | $24,890,568 | | Cash from Operating Activities (9 months) | $1,384,898 | - The Company has a $4,000,000 revolving line of credit with HSBC NA, with a $0 outstanding balance as of July 31, 2023, set to expire on November 26, 2023[181] Inflation and Foreign Currency - The Company's consolidated results are impacted by fluctuations in currency exchange rates as its foreign subsidiaries maintain accounts in native currencies (GBP, DKK, AUD, INR) translated into USD[183][184] Impact of Currency Fluctuations (3 Months Ended July 31, 2023) | Metric | Actual Results | Constant Rates | Total Effect | | :---------- | :------------- | :------------- | :----------- | | Revenues | $2,313,763 | $2,295,130 | $18,633 | | Net profit (losses) | $177,600 | $170,793 | $6,807 | | Net assets | $24,529,308 | $21,979,780 | $2,549,528 | Impact of Currency Fluctuations (9 Months Ended July 31, 2023) | Metric | Actual Results | Constant Rates | Total Effect | | :---------- | :------------- | :------------- | :----------- | | Revenues | $8,521,593 | $8,812,857 | $(291,264) | | Net profit (losses) | $1,928,099 | $1,946,989 | $(18,890) | | Net assets | $24,529,308 | $21,981,835 | $2,547,473 | Off-Balance Sheet Arrangements - The Company does not have any off-balance sheet arrangements[191] Item 3: Quantitative and Qualitative Disclosures about Market Risks This item is not required for smaller reporting companies - Not required for smaller reporting companies[192] Item 4: Controls and Procedures Evaluation of disclosure controls and procedures, including identification and remediation of a material weakness in intercompany eliminations - A material weakness in internal controls over financial reporting, concerning the identification and review of intercompany eliminations, was disclosed in the Form 10-K for the fiscal year ended October 31, 2022[195] - A comprehensive remediation plan was implemented in the first quarter of 2023, including designated codes for intercompany transactions, a standalone 'Elimination Workbook,' and an Error Log for monitoring[196] - Management concluded that the material weakness has been remediated as of July 31, 2023, following monitoring and testing of the new controls[197][199] PART II - Other Information Item 1: Legal Proceedings No legal proceedings are expected to materially adversely affect the company's business, financial condition, or operating results - The Company is not aware of any legal proceedings that are believed to have a material adverse effect on its business, financial condition, or operating results[201] Item 1A: Risk Factors This item is not required for smaller reporting companies - Not required for smaller reporting companies[202] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report during the period - None to report[202] Item 3: Default Upon Senior Securities No defaults upon senior securities to report during the period - None to report[203] Item 4: Mine Safety Disclosures This item is not applicable to the company - Not Applicable[204] Item 5: Other Information No other information is required to be reported under this item - No other information to report[205] Item 6: Exhibits Lists exhibits filed as part of the Form 10-Q, including certifications and Inline XBRL documents - Exhibits include Certifications of the Chief Executive Officer and Acting Chief Financial Officer (31, 32) and various Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[205][206] Signatures The report is duly signed by the registrant's authorized officers - The report was signed by Annmarie Gayle, Chief Executive Officer, and Gayle Jardine, Acting Chief Financial Officer, on September 13, 2023[209]