UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10/A
Amendment
No. 2
Pursuant
to Section 12(b) or (g) of The Securities Exchange Act of 1934
CODA
OCTOPUS GROUP, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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34-200-8348
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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7380
Sand Lake Road, Suite #500, Orlando, FL 32819
(Address
of principal executive offices) (Zip Code)
801-973-9136
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(Registrant’s
telephone number, including area code)
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With
copies to:
Louis
A. Brilleman, Esq.
1140
Avenue of the Americas, 9
th
Floor
New
York, NY 10036
Phone:
212-584-7805
Fax:
646-380-6635
Securities
to be registered pursuant to Section 12(b) of the Act:
Title
of each class to
be
so registered
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Name
of each exchange on which
each
class is to be registered
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Securities
to be registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $ .001
(Title
of class)
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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[ ]
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Accelerated
filer
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[ ]
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Non-accelerated
filer
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[ ]
(Do not check if a smaller reporting company)
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Smaller
reporting company
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[X]
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TABLE
OF CONTENTS
Forward-Looking
Statements
This
Form 10 contains statements that do not relate to historical or current facts, but are “forward looking” statements
within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information
based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to future
events or trends, our future prospects and proposed new products, services, developments, or business strategies, among other
things. These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate,
appear, believe, could, would, estimate, expect, indicate, intend, may, plan, predict, project, pursue, will, continue, and other
similar terms and phrases, as well as the use of the future tense.
Examples
of forward looking statements in this report include, but are not limited to, the following categories of expectations about:
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customer
demand for our products and market prices;
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the
outcome of our ongoing research and developments efforts relating to our products including our patented real time 3D solutions.
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general
economic conditions;
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our
reliance on a few customers for substantially all of our sales;
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the
intensity of competition;
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our
ability to collect outstanding receivables;
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the
amount of liquidity available at reasonable rates or at all for ongoing capital needs;
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our
ability to raise additional capital if necessary to execute our business plan;
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our
ability to attract and retain management, and to integrate and maintain technical information and management information systems;
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the
outcome of legal proceedings affecting our business; and
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our
insurance coverage being adequate to cover the potential risks and liabilities faced by our business.
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Actual
results could differ materially from those expressed or implied in our forward looking statements. Our future financial condition
and results of operations, as well as any forward looking statements, are subject to change and to inherent known and unknown
risks and uncertainties. You should not assume at any point in the future that the forward looking statements in this report are
still valid. We do not intend, and undertake no obligation, to update our forward looking statements to reflect future events
or circumstances, except as required by law.
Reverse
Stock split
On
January 11, 2017, we effected a one for fourteen (1 for 14) reverse stock split of our issued and outstanding common stock. The
total number of shares of common stock that the Company is authorized to issue remains at 150,000,000. As of January 11,
2017, there were 127,415,895 shares of common stock outstanding. Effecting the 1 for 14 reverse split reduced the number
of issued and outstanding shares of common stock to approximately 9,102,192. All historical share numbers in this document
have been adjusted retroactively to account for the reverse stock split.
ITEM
1. DESCRIPTION OF BUSINESS
Overview
Coda
Octopus Group, Inc. (“Coda,” “the Company,” or “we”) designs and manufactures patented real
time 3D sonar solutions and other leading products for sale to the subsea, defense, mining and marine sciences markets, among
others. In addition, we supply marine engineering services to prime defense contractors.
We
operate through two operating business segments: Marine Technology Business (“Products” segment) and Marine Engineering
Business (“Services” segment). Our products are used primarily in the underwater construction market, offshore oil
and gas, wind energy industry, complex dredging, port and harbor security, mining and marine sciences sectors. Our customers include
service providers to major oil and gas companies, law enforcement agencies, ports, mining companies, defense companies, universities
and research institutions.
We
supply our marine engineering services mainly to prime defense contractors. We have been supporting a number of significant defense
programs for over 20 years. We also supply, upgrade and maintain proprietary parts to these programs on an ongoing basis.
Our
subsea marine technology products are sold through our three wholly owned subsidiaries, Coda Octopus Products, Inc. (USA.), Coda
Octopus Products Limited (United Kingdom), and Coda Octopus Products Pty Limited (Australia) and through our appointed agents
globally. Our marine engineering business services are provided through our wholly owned subsidiaries, Coda Octopus Colmek, Inc.
(“Colmek”) based in Salt Lake City, Utah, and Coda Octopus Martech Limited (“Martech”) based in the United
Kingdom.
Our
corporate structure is as follows:
Corporate
History
The
Company began as Coda Technologies Ltd (now operating under the name of Coda Octopus Products Limited), a UK corporation which
was formed in 1994 as a start-up company with its origins as a research group at Herriot-Watt University, Edinburgh, United Kingdom.
Initially, its operations consisted primarily of developing software for subsea mapping and visualization using sidescan sonar,
a technology widely used in commercial offshore geophysical survey and naval mine-hunting to detect objects on, and textures of,
the surface of the seabed. This software was then innovative as it digitised the data, allowed real-time enhancement of the image
data via signal and image processing techniques and enabled digital interpretation, measurements, mosaicking and other advanced
processing. These various capabilities enabled quicker, more accurate and in some cases automated, processing and interpretation
of data.
In
June 2002, we acquired by way of a merger Octopus Marine Systems Ltd, a UK corporation, and changed our name from Coda Technologies
Ltd to Coda Octopus Ltd. At the time of its acquisition, Octopus Marine Systems was producing geophysical products broadly similar
to those of Coda, but targeted at the less sophisticated, easy-to-use, “work-horse” market. It was also finalizing
the development of a new motion sensing device (the “F180”), which was to be employed aboard vessels conducting underwater
surveys to correct sonar measurement by providing precise positioning and compensation for vessel motion.
In
December 2002, Coda Octopus Ltd acquired OmniTech AS, a Norwegian company, which became a wholly-owned subsidiary of the Company
and which now operates under the name Coda Octopus R&D AS (“CORDAS”). Before we acquired OmniTech, it had been
engaged for over ten years in developing revolutionary sonar imaging and visualization technology to produce three-dimensional
underwater images for use in subsea activities such as imaging and construction. Now marketed by us under the product name “Echoscope®”,
this technology is unique in that it generates real time 3D images in low or zero visibility conditions. This technology has been
patented in a number of jurisdictions, including the United States. This technology, which continues to be developed by our Research
and Development team in the United Kingdom and Norway, allowed the Company to start to expand the original focus on hydrographic
and geophysical survey to include the high end sonar market. At the inception of the Marine Technology Business our revenues were
generated solely from our geophysical software product. We added the F180 series in 2002 and our revenues were split over these
two products. With the addition of our real time 3D products, our revenues generated by our Products Segment are now mainly
generated from this suite of products and associated services.
On
July 13, 2004, pursuant to the terms of a share exchange agreement between The Panda Project, Inc., a Florida corporation, and
a now defunct entity affiliated with Coda Octopus Ltd. (“Coda Parent”), Panda acquired the shares of Coda Octopus
Limited, a UK corporation and wholly-owned subsidiary of Coda Parent, in consideration for the issuance of a total of 1,432,143
shares of common stock to Coda Parent and other shareholders of Coda Octopus Limited. The shares issued represented approximately
90.9% of the issued and outstanding shares of Panda. The share exchange was accounted for as a reverse acquisition of Panda by
Coda. Subsequently, Panda was reincorporated in Delaware and changed its name to Coda Octopus Group, Inc.
In
June 2006, we acquired a design and engineering company, Martech Systems (Weymouth) Ltd (“Martech”), which provides
bespoke engineering solutions in the fields of electronic data acquisition, transmission and recording, and which at the time
of acquisition had links into our existing markets. Martech are suppliers to prime defense engineering companies and also is a
key supplier to our Marine Technology Business. This Company changed its name to Coda Octopus Martech Limited in December 2008.
In
April 2007, we acquired Colmek (then Miller & Hilton d/b/a Colmek), a custom engineering service provider of defense engineering
to prime contractors. Colmek has been supporting a number of defense programs since the early 1990’s. Specifically, it supplies
proprietary parts in these programs including providing upgrades to such parts to address either obsolescence issues or advancement
in technology. This Company changed its name to Coda Octopus Colmek Inc. in December 2008.
The
Company is organized under the laws of the State of Delaware as a holding company that conducts its business
through subsidiaries, a number of which are organized under the laws of foreign jurisdictions, including England, Scotland,
Norway, Denmark and Australia. This may have an adverse impact on the ability of U.S. investors to enforce a judgment
obtained in U.S. courts against these entities, or to effect service of process on the officers and directors managing the
foreign subsidiaries.
Marine
Technology Business (“Products Segment”)
Our
Marine Technology Business sells proprietary marine products in a number of worldwide market segments:
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Commercial
marine geophysical survey;
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Oil
& gas;
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Energy
& renewables;
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Underwater
security, law enforcement and naval operations;
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Underwater
construction (asset placements, block placements, mattress placement, cable and pipe lay inspection and the like);
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Environmental
Applications (example mammal research; natural gas seeps; habitat assessment; fisheries); and
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Salvage
and decommissioning.
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In
the commercial marine geophysical survey sector, our products include geophysical data acquisition systems, analysis software
and motion detection equipment that are used primarily by survey companies, research institutions and salvage companies.
We
believe we possess an important and unique sonar technology, which is patented, and which gives us a significant advantage over
our competitors in the market sectors where real time visualization is key and/or low or zero visibility conditions prevail.
Our
product range includes equipment based on our patented Echoscope
®
in combination with our proprietary software
which also includes patented techniques for rendering and tracking. We believe that our products are revolutionizing the sonar
market, particularly as it relates to real time data acquisition, and subsea visualization in low or zero visibility conditions.
This patented technology is the result of more than 20 years of research and development by CORDAS and our software development
team at Coda Octopus Products Limited (Scotland).
Since
the acquisition of CORDAS, we have significantly advanced our research and development with respect to both hardware and software
components and have filed further patents. We have also brought to market our third generation of the Echoscope
®
and the CodaOctopus Underwater Inspection System (UIS) as well as new derivative products, such as our forward looking sonar,
Dimension
®
and our Echoscope C500 (a smaller and lighter variant of the Echoscope
®
) and more recently
our Echoscope® XD variant
We
are focusing our research and development resources and budget on developing our fourth generation of real time 3D solutions for
various market applications and varying price points. We believe this strategy will help to standardize real time 3D solutions
in the subsea market and grow the number of applications for this technology. These are complex products and we
can give no assurance that will be successful in realizing commercially viable products.
We
have also introduced the capabilities of real time 3D sonars to the subsea market. This technology is being adopted for
many oil and gas, renewable energy, subsea asset placements and monitoring (blocks, mattresses and other installations),
decommissioning and leak identification projects. Most of these projects require real time volumetric visualization.
Many
users of our technology in complex operations are reporting significant time savings, and health and safety benefits, which allow
them to out-perform their competitors. For example, in breakwater construction when blocks are laid on the seabed to install
a protective barrier to protect harbors and coastal areas from the force of waves (“Breakwaters”), our
technology is emerging as an important tool as it allows the crane operators to visualize the blocks as they are laid and track
the blocks into position. This market is reporting significant productivity gains in the number of blocks that are placed per
day. The conventional method allows up to 4 blocks to be placed per day. Recently, one of our customers, Van Oord Dredging
and Marine Contractors bv, reported that it was able to place 200 blocks per day using our technology.
We
believe that our real time 3D solutions including the Echoscope
®
, which is being referred to by one of our significant
customers as “[their] underwater eyes”, are making progress in shifting the conservative approach of the sonar market.
Our technology is also used for bespoke and complex underwater construction that requires real time visualization. We believe
that our real time 3D solutions are now being viewed as the products of choice in many complex underwater operations where real
time visualization is critical. We further believe that our next generation of the real time 3D solutions will become the tools
of choice for a much greater number of underwater applications through improved efficiency in work flow process presented by real
time visualization capabilities.
We
believe that our patented technology is the only commercially available sonar that can provide real-time 3D imaging data underwater
even in the most challenging zero visibility conditions. This unique capability provides unparalleled underwater scene awareness
in high frame rates similar to cameras and without reliance on complex and costly positioning and motion reference units or the
need for costly post processing of the underwater data acquired. The resultant scene data can be used for multiple tasks simultaneously
including object detection and avoidance in true 3D, complex scene mapping and augmented reality 3D workspace imaging combining
the real-time 3D data with 3D models, together providing real-time decision making and assessment.
The
Echoscope
®
has a wide range of applications including:
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inspection
of harbor walls;
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inspection
of ship hulls;
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inspection
of bridge pilings;
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block
placements (in the context of breakwater construction)
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subsea
asset placements including landings
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deep
sea mining
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cable
laying, cable pull in operations
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inspection
of offshore installations such as gas and oil rigs and wind turbines;
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Remotely
Operated Vehicle (ROV) navigation (obstacle avoidance);
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Autonomous
Underwater Vehicle (AUV) navigation and target recognition (obstacle avoidance);
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construction
- pipeline touchdown placement and inspection;
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obstacle avoidance navigation;
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bathymetry (measurement of water depth to create
3D terrain models);
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managing underwater construction tasks;
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underwater intruder detection;
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contraband detection;
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locating and identifying objects undersea, including
mines;
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detection and study of individual species in
real time 3D (fish, whales etc.);
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oil and gas leak detection;
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fish school detection and analysis;
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diver tracking and guidance;
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underwater archaeological and salvage site mapping;
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decommissioning;
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offshore renewable energy – cable laying
and burial and pull-in;
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marine salvage operations;
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harbor construction – concrete armoring;
and
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unexploded ordinances survey and intervention.
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Within
these applications, the technology enables real time 3D visualization of static scenes or moving objects from either a static
location or a dynamically moving platform vessel (Autonomous Underwater Vehicle (“AUV”), Remotely Operated
Vehicle (“ROV”)) or a surface vessel. Conventional sonars are capable of producing maps of static scenes only.
The
Echoscope
®
technology is protected by patents, including a number of complementary patents such as a patent which
covers our visualization methodology and our rendering of real time 3D images. For example, one of our recently awarded patents
provides for a new method of using multiple sonar images to produce in real-time 3D a highly detailed image with sharply defined
edges while intelligently discarding “noise” in the image produced by passing fish or floating debris.
We
market the Echoscope
®
both as a stand-alone sonar device and as a fully integrated system, which we market under
the name “CodaOctopus UIS (Underwater Inspection System)”. This system is specifically aimed at the port security
market and has been adopted by a significant number of ports in the United States. Until recently, we have not had any success
with foreign ports. However, in 2015 we introduced the system in one East Asian port where it is now on a program of adoption
and where it will be used for, among other applications, salvage and port and harbor inspection.
Due
to the price point for our real time 3D solutions, we offer these for rent. The equipment is typically supplied with Echoscope
®
engineering (operator) services. The rental option represents an increasingly important market and also provides access
to the technology to a broader range of users and end users who typically do not purchase equipment such as large oil companies.
Products
Our
products are marketed under the “CodaOctopus” brand and consist of three main product lines:
Real
Time 3D Sonar
includes our unique and patented real time 3D sonars and cutting edge software (including patented techniques
for rendering and tracking algorithms) that we believe is shaping the future of subsea operations.
Data
Acquisition Products
includes integrated hardware acquisition devices that feature rich post-processing software for all
levels of geophysical survey work.
Motion
Sensing Products
consists of a range of GPS-aided precision attitude and positioning systems and software for all types
of marine survey and positioning work.
Real
Time 3D Sonar
We
offer five products within the real time 3D sonar: the Echoscope
®
, the Echoscope® C500 (launched in 2014),
Echoscope® XD (launched in January 2017), the Dimension
®
(launched in 2013) and the CodaOctopus Underwater
Inspections System.
Echoscope
®
We believe that our real-time 3D imaging sonar
technology represents the Company’s most promising area for growth in the medium term. Echoscope
®
, developed
over a period of more than 20 years, is a unique, patented technology generating high resolution 3D images of the underwater environment
in low or zero visibility conditions in real time. For each sonar ping that is emitted by the Echoscope
®
, it receives
16,384 pieces of information back. Existing multibeam sonar systems that are currently in use receive back approximately 256 pieces
of information for each sonar ping. This means that the probability of finding an underwater target/object is substantially greater
with the Echoscope
®
than the conventional sonar equipment (such as multibeam or other imaging sonars). We are
unaware of any other product with the capabilities of the Echoscope
®
.
Our
current Echoscope
®
measures approximately 15x11.8x6.3 inches and connects to a powerful laptop capable of handling
high volume of data generated by our sonar. Our Echoscope® C500 variant is much smaller in size.
The recent heightened awareness of terrorist
attacks has resulted in a demand for practical, effective and rapid methods of detecting potential threats (such as explosives
in harbors or on ship hulls). We believe that our real time 3D solutions are ideally suited for this task, as these provide highly
detailed 3D images in real time including in difficult sea conditions where there is low or zero visibility.
The
Echoscope
®
systems will sometimes require additional equipment to form a complete solution allowing us to leverage
existing products and services, such as motion sensors and imaging processing software, into a wider market. This offers further
opportunity for other products from our portfolio, such as our F180
®
positioning systems (Motion Sensing
Product), discussed below.
Our
Software development capability is an important part of the success we have achieved to date with our real time 3D solutions and
our strategy to maintain our lead in designing, manufacturing and selling real time 3D solutions. Our real time 3D solutions are
sold with Coda Octopus proprietary software, Underwater Survey Explorer” (“USE”), and Vantage or Construction
Monitoring System (“CMS). Our Software Package is feature rich and includes patented techniques in a number of our modules.
In general, our Software Package contains significant capabilities that are designed to address subsea challenges by application
particularly in the context of a dynamic subsea setting (as opposed to a static mapping of the seabed as is typical for conventional
sonar technology). Some of our unique features include:
Feature
Description
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Functionality
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Real
Time Measurements
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important
for many types of subsea operations such as block or asset placements or aiding diving operations;
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Models
+ Software Module
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allows
the user to import existing models and engineering drawings into the real time subsea environment
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Edge
Detection Algorithm
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allows
the user to superimpose an edge to easily identify a subsea target
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Rendering
a Noise Free Image
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allows
for a crisp, clear and high resolution photo-like image without any processing (which would be required for conventional sonars)
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Tracking
Algorithm
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Algorithm
is used to track known objects within the real time 3D Data. This is currently utilized in our Construction Monitoring Software
Package (see below)
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The
Echoscope
®
and CodaOctopus Construction Monitoring Software (CMS) have important applications for breakwater construction.
Our CMS package has been recently updated to include patented algorithms for tracking and placement of single layer armor blocks
used in a breakwater construction.
We
believe that our technology
is becoming the preferred solution
for subsea block placements in breakwater solutions because it allows crane operators to visualize in real-time the blocks
while being placed. We believe that our solution has significantly simplified and made safer this area of the workflow process
in breakwater construction. It has also increased significantly the lay-rate for blocks being placed.
We
are not aware of competing technologies that offer real-time visualization and monitoring of construction sites including previously
laid blocks. In addition, the feature rich software package (CMS) which allows the complete workflow for breakwater construction
to be planned within the software, greatly reduces project risks and timing while improving the quality of the projects. Furthermore,
the patented tracking algorithms that have recently been enhanced and strengthened provide opportunity for additional applications
involving placing known objects or structures underwater.
Dimension
®
This
product was launched in 2013 and is aimed at the remotely operated underwater vehicle market (“ROV”)
for obstacle avoidance underwater.
Based
on our patented Echoscope
®
technology and our Vantage software, we believe that the Dimension
®
product
provides unparalleled real-time visualization for subsea vehicle applications. Designed for a wide range of ROVs, Dimension
®
is a unique, real-time 3D sonar that transforms ROV underwater operations.
Echoscope®
C500 (“C500”)
The
C500 was launched in 2014 and is based on our patented Echoscope
®
technology. This sonar device delivers real-time
3D sonar capability and is packaged in a smaller, lighter, ruggedized casing with reduced power requirements. It is suitable
for ROV and autonomous underwater vehicle (“AUV”) based applications as well as vessel deployments.
Fully
integrated with our powerful Underwater Survey Explorer software, the C500 can be used with the full range of functionality available
including the latest Models+ software module allowing control of sonar with augmented 3D models. The C500 allows the acquisition
of full real-time 3D data in a time efficient manner.
As
a result of the reduced size, reduced power consumption requirements and price point, this new product opens new markets
for our real time 3D solutions.
Echoscope®
XD (“XD”)
The
XD was launched in 2017, is based on our patented Echoscope
®
technology and delivers real-time 3D sonar capability.
This latest product delivers a wider area of view (or, imaging area). We believe that this will open the Echoscope®
to a number of new applications including bathymetry survey applications. The new capability can also be accessed by
existing users of our standard system, through upgrades.
Software
Products
All
our sonars are sold with one of three proprietary software applications, Underwater Survey Explorer, Vantage or our Construction
Monitoring System (CMS). Our Software packages are critical to the usability of our real time 3D sonar solutions. Our software
applications are feature rich and are uniquely driven to provide complete functionality in the live environment without the need
to perform post processing and analysis of the data to produce results. There are a number of unique capabilities (some of which
are described above).
Data
Acquisition
We
started our business in 1994 designing and developing the CodaOctopus GeoSurvey software package. For over a decade our GeoSurvey™
has been an industry leading software package on the market for data acquisition and interpretation and provides feature rich
solutions and productivity enhancing tools for the most exacting survey requirements. Designed specifically for side-scan and
sub-bottom data acquisition, CodaOctopus GeoSurvey has been purchased by numerous leading survey companies throughout the world.
This product range includes:
CodaOctopus
GeoSurvey Acquisition Products
These
consist of a range of hardware and software solutions for field acquisition of sidescan sonar and sub-bottom profiler, which includes
analogue and digital interfaces compatible with all geophysical survey systems. This is our original product range that includes
the following products:
DA4G
- 500, Sidescan sonar and sub-bottom profiler simultaneously
DA4G
- 1000, Sidescan sonar and sub-bottom profiler separately
DA4G
- 2000, Sidescan sonar or sub-bottom profiler
CodaOctopus
GeoSurvey Productivity Suite
This
consists of an integrated suite of software that automates the tasks of analyzing, annotating and mosaicing complex data sets,
thus ensuring faster and more precise results.
CodaOctopus
Instruments
These
consist of simple, solid and robust solutions for sidescan sonar and sub-bottom profilers. Used throughout the world by leading
survey companies, navies and academics, CodaOctopus instruments are ideal where minimal training and simple installation
and set-up is paramount. Coupled with intuitive but powerful post processing software, the Octopus range meets the requirements
of survey applications from the smallest inshore survey, rapid deployment naval reconnaissance to large scale site investigations.
This product range includes the following:
The
DA4G™ series of acquisition systems which provide high quality, robust and reliable data acquisition from the latest digital
and analogue sidescan sonar and sub-bottom profiler sensors.
DA4G™
is the 4th generation of our successful DA series and is built on twenty years of knowledge, experience and innovation in supplying
unparalleled products and service to the worldwide geophysical survey sector. These purpose-built, turn-key, systems incorporate
the very latest hardware specifications and are designed and delivered to meet the demanding nature of offshore survey work.
The
DA4G
TM
range consists of a number of options and is backed up (like all our products) with global service and support.
Motion
Sensing Products
The
CodaOctopus F180
®
and the more recently introduced CodaOctopus F170
TM
families have been developed for
the marine environment based on technology originally developed for the extreme world of motor racing. Modifications and enhancements
have resulted in a simple-to-use, off-the-shelf product that brings accurate positioning and motion data into extreme offshore
conditions for precision marine survey applications worldwide. Variants within the F180
®
series include the F190™,
exclusively configured for use ‘inland’, e.g. within ports and harbors, and the F185™, with enhanced precision
positioning to 2 cm accuracy (<1”). Octopus iHeave, an intelligent software product for dealing with long period ocean
swell compensation, is fully integrated within the F180
®
series.
The
F170™ family is designed with ease of use in mind. They are compact, simple to install and produce accurate position and
motion data for the marine industry. Two product variants are available: the F170™ and the F175™. The F175™
allows integration of third-party GNSS systems thus enhancing the accuracy of the outputs and improving the robustness of the
solution.
Our
Motion Sensing Products are sold alone or in conjunction with our real time 3D sonars. We are currently expending a significant
amount of our resources in developing the next generation of our motion sensors. Our newly developed suite of products will focus
on expanding the market into which we sell these devices, including the AUV market which is an expanding market for our products
in general.
Coda
Octopus Products Limited has the requisite accreditation for its business including LRQ accredited to ISO 9001:2008.
Marine
Engineering Businesses (“Service Segment”)
Our
Marine Engineering Businesses (Coda Octopus Martech Limited (based in Portland, Dorset, England) and Coda Octopus Colmek, Inc.
(based in Salt Lake City, Utah)) operate in the defense space.
We
provide engineering services to a wide variety of clients in the defense markets. A significant portion of these services is provided
to defense contractors and is typically intended for prototype productions which typically lead to long term manufacturing contracts.
These arrangements often give us long term preferred/sole supplier status, technology refresh and obsolescence management for
such customers.
In
addition, we are increasingly combining our engineering capabilities with our product offerings, thereby bringing opportunities
to offer systems which are complete with installation and support.
Coda
Octopus Martech Limited (“Martech”)
Martech
operates in the specialized niche of bespoke and manufacturing services mainly to the United Kingdom defense and subsea industries.
Its services are provided on a custom sub-contract basis where high quality and high integrity devices are required in small quantities.
Martech has the requisite accreditation for its business including LRQ accredited to ISO 9001:2008.
An
example of Martech’s design and engineering services is the development of a ruggedized display unit in military vehicles
capable of displaying variables such as wind speed, air temperature and humidity independent of the vehicle’s computer.
In
late 2010 Martech was awarded a significant contract to design and build two pre-production decontamination units the successors
of which have been designated as part of the ground equipment for a major international military aircraft program. The Company
has since started production of these units.
The Company enjoys pre-approvals to allow
it to be short-listed for certain types of government contracts. Much of the more significant business secured by Martech is through
the formal government or government contractor tendering process. Government contracts may be terminated at any time at the
discretion of the government. If the government does terminate a contract, the Company is allowed to recover the costs incurred
up to the date of termination. During the last few years, only one non-material government contract was terminated for convenience.
Martech
is a key supplier of various parts to our marine products business and has been assisting in the further development of a number
of those products.
Coda
Octopus Colmek, Inc. (“Colmek”)
Colmek
is a service provider of defense engineering solutions, particularly in the fields of data acquisition, storage, transmission
and display. It has grown and diversified since beginning its operations in 1977 and now provides services and products to a wide
range of defense, research and exploration organizations in the United States.
Colmek
has the requisite accreditation for its business including LRQ accredited to ISO 9001:2008.
Colmek
designs, manufactures and supports systems that are reliable and effective in multiple military and commercial applications where
ruggedness and reliability under extreme operational conditions are paramount and where lives depend on accurate and precise information.
Colmek
has long standing relationships with a number of prime defense contractors and has been supporting a number of defense programs
for over 30 years including the Close In Weapons Support Program (CIWS) for which it supplies proprietary parts and services
and technical refresh programs for these parts. As a result, Colmek has repeat revenues from these long-standing programs.
Colmek
continues to expand the number of established programs it supplies proprietary parts to.
In
June 2014 Colmek completed the acquisition of the Thermite® Rugged Visual computer line and the Sentiris® AV1 XMC
video card for $1,100,000 in cash. Colmek also acquired hardware and other intellectual property rights (such as, software code
and trademarks pertaining to these products).
The
Thermite® Product fits within established programs with Department of Defense (“DoD”) prime contractors and benefits
from being a single source product under this program. Customers for this item include the US Army, Benchmark, and iRobot’s
Defense and Security Division. Since acquiring these two products in 2014, we have received orders in excess of $2,500,000. We
have just completed our technology refresh of the Thermite®. We believe that this presents a significant opportunity for
Colmek to re-engage with long standing customers of the legacy Thermite® product.
Thermite®
Rugged Visual Computers
|
●
|
Rugged,
graphics-based PCs designed to perform in the most brutal environmental conditions
|
|
|
|
|
●
|
Focus
on graphics-based high-performance computing with integrated accelerated video capture capability
|
|
|
|
|
●
|
Lightweight,
power efficient, conduction-cooled
|
|
|
|
|
●
|
Three
models, optimized for man-wearable, vehicle, and airborne platforms
|
|
|
|
|
●
|
Programs
include dismounted soldier training, mission rehearsal, real-time imaging, robotic control, weapon system control, C4ISR,
sensor processing and display
|
Sentiris®
AV1 XMC
|
●
|
FPGA-based
PCI Express Mezzanine Card designed for video and graphics processing applications
|
|
|
|
|
●
|
Targeted
platforms include MH-47G helicopters, MH-60M Blackhawk helicopters, MC-130H Combat Talon II and CV-22 Tilt-Rotor aircraft
|
Since acquiring the Sentiris®, we have
successfully completed the first article inspection approval phase and are now in the production phase. This is a significant
product for Colmek.
Stinger™
family of Rugged Small-Form-Factor PCs
The
Stinger 1000 is a unique rugged computer that provides a cost effective solution for harsh mobile computing environments. Utilizing
PC-104 architecture and employing creative ruggedization, Colmek has engineered a stable platform which is easily tailored to
any application.
The
Stinger 1000 rugged mobile computer is highly customizable, presenting an inspiring assortment of selectable attributes. The stinger
mobile computer is engineered to meet military requirements. Colmek has successfully deployed Stinger products on Unmanned Aerial
Systems (UAS), and shipboard for satellite-based tracking systems.
RhinoTuff™
family of Rugged Touch Screen Computers
The
robust RhinoTuff™ rugged touch screen computer is built exclusively for reliable operation in the world’s harshest
environments. It is modular and user-definable affording maximum flexibility. This all-weather, all terrain, all-in-one PC thrives
in a field where the average “tough” computer is simply not tough enough, including, mining and construction sites,
oil fields, marine environments, and military battlefields.
Rugged
Chassis/Enclosures
The
chassis and enclosures offered by Coda Octopus Colmek are fully customizable to military/industrial needs. Colmek is a key supplier
on high profile programs including Raytheon’s Phalanx Close-In Weapons System (CIWS) and Northrop Grumman’s airborne
mine hunting sonar AN/AQS-24. We also offer a variety of enclosures technologies.
Other
products offered by Colmek include subsea telemetry & data acquisition systems, rugged workstations, analog-to-digital converters
and rugged LCD displays.
Competition
In our Products Segment, we are exposed
to the following competitive challenges:
Data
Acquisition Products
The
sonar equipment industry is fragmented with several companies occupying niche areas, and we face competition from different companies
with respect to our different products. In the field of geophysical products Triton Imaging Inc., a US-based company, now part
of the ECA Group (Toulon, France), Chesapeake, a US-based company, and Oceanic Imaging Consultants, Hawaii, USA, dominate the
market with an estimated of 25% each of world sales, while we believe that we control approximately 10% of world-wide sales.
Motion
Sensing Products
In
the field of motion sensing equipment, where our product addresses a small part of the overall market, we believe that we have
four principal competitors: TSS (International) Ltd in Watford, England which is focused on the mid-performance segments with
about 25% of the world market; Ixsea, a French company which covers all segments, with about 20% of the market; Kongsberg Seatex,
a Norwegian company (part of Kongsberg Gruppen) which has products across all segments, with about 15% of the market; and Applanix,
a Canadian company, now part of Trimble which has one major product focused on the high end of the market, with about 20% of the
market. We believe that our market share in the field of motion sensing equipment is only about 5%. This market is fiercely
competitive and with the advancement of technology, there are new entrants to the market such as SBG. Due to the price pressure
in this market, we are selling our products more in conjunction with our real time 3D sonars than on a standalone basis.
Real
Time 3D Sonar
In
the field of Real Time 3D imaging, we are unaware of other companies offering a similar product. The entry into this market is
dependent upon specialized marine electronics, acoustic and software development skills. The learning curve, which has resulted
in the advancement of our real time 3D sonar device, is the culmination of two decades of research and development into this field.
We are also aware of a number of high profile and substantial competitors’ real time 3D projects that have failed. Over
the last several years there have been lower grade sonars entering the market for 3D imaging. Companies such as Tritech International
Ltd., United Kingdom, and BlueView Technologies Inc., USA (now a part of Teledyne Technologies Incorporated), are examples, but
none of these sonar offerings are directly comparable or competitors in respect of our real time 3D solutions. Specifically, we
believe that they do not have the same capabilities as our patented Echoscope
®
technology in terms of generating
real time 3D images of submerged objects and environments in low or zero visibility conditions. However, Teledyne has in the last
four years acquired a significant number of subsea companies (examples are Reson and BlueView) along with expertise. Teledyne
has much greater resources and liquidity than the Company. We therefore can give no assurance that companies such as these will
not enter this market.
We
seek to compete on the basis of producing high quality products employing cutting edge technology that is easy to use by operators
without specialized skills in sonar technology. We intend to continue our research and development activities to continually improve
our products, seek new applications for our existing products and to develop new innovative products.
In our Services Segment, we are exposed
to the following competitive challenges:
Marine
Engineering Businesses
Through
our marine engineering operations, Coda Octopus Colmek, Inc. and Coda Octopus Martech Limited, we are involved in custom engineering
for the defense industry in the United States, and in the United Kingdom. Martech competes with larger contractors in the defense
industry. Typical among these are Ultra Electronics, BAE Systems, and Thales, all of whom are also partners on various projects.
In addition, the strongest competitors are often the clients themselves. Because of their size, they often have the option to
proceed with a project in-house instead of outsourcing to a sub-contractor like Martech or Colmek. It is a similar situation
for Colmek.
Intellectual
Property
Our
product portfolio and technologies are protected by intellectual property rights including trademarks, copyrights and patents.
We have a number of fundamental patents including a patent covering the stitching together of acoustic imagery. This covers the
real time acoustic image generation element of what we do, and we believe it provides us with a competitive advantage.
Patents
Our
patented inventions along with our strategy to enhance these inventions are at the heart of the Company’s strategy for growth
and development.
Our
patent portfolio consists of the following:
Patent
Number
|
|
Description
|
|
Expiration
Date
|
US
Patent No. 6,438,071
|
|
Concerns
the “Method for Producing a 3-D Image” and is also recorded in the European Patents Register #EP 1097393 B1; Australia
#55375/99 and Norway #307014. This patent relates to the method for producing a 3D image of a submerged object, e.g. a shipwreck
or the sea bottom.
|
|
June
1, 2019
|
|
|
|
|
|
US
Patent No. 6,532,192
|
|
Concerns
“Subsea Positioning System and Apparatus”
|
|
July
1, 2019
|
|
|
|
|
|
US
Patent No. 7,466,628
|
|
Concerns
a “Method of constructing mathematical representations of objects from reflected sonar signals.”
|
|
August
15, 2026
|
|
|
|
|
|
US
Patent No. 7,489, 592
|
|
Concerns
a “Method of automatically performing a patch test for a sonar system, where data from a plurality of overlapping 3D
sonar scans of a surface, as the platform is moved, are used to compensate for biases in mounting the sonar system on the
platform”.
|
|
January
19, 2027
|
|
|
|
|
|
US
Patent No. 7,898,902
|
|
Concerns
a “method of representation of sonar images” allowing sonar three dimensional data to be represented by a two
dimensional image.
|
|
June
13, 2028
|
|
|
|
|
|
US
Patent No. 8,059,486
|
|
Concerns
a method of rendering volume representation of sonar images.
|
|
April
16, 2028
|
|
|
|
|
|
US
Patent No. 8,854,920
|
|
Concerns
a method of volumetric rendering of three dimensional sonar data sets
|
|
September
5, 2032
|
|
|
|
|
|
US
Patent No. 9,019,795
|
|
Method
of object tracking using sonar imaging
|
|
September
5, 2032
|
Trademarks
We
own the following registered trademarks: Coda®, Octopus
®
, CodaOctopus
®
, Octopus & Design
®
,
F180
®
, F180 4G Series®, Echoscope
®
, Echoscope 4G®, Survey Engine
®
, Dimension
®
,
DAseries
®
, Sentiris
®
and Thermite
®
; CodaOctopus
®
Vantage; CodaOctopus
®
UIS; and CodaOctopus
®
USE.
We
also use the following trademarks: F170™, F175™, F190™, UIS™ TEAM™ and TEAM+™. In addition,
we have registered a number of internet domain names.
Research
and Development
During
the fiscal years ended 2015 and 2016 we spent approximately $1 million annually on developing our technology and we expect this
figure to increase during the current fiscal year to ensure technological advancement of our real time 3D sonar technology. This
investment will be focused primarily on bringing in additional electronic engineering skills and prototyping new real time 3D
products and motion sensing products.
Our
objective is to introduce more competitively priced, application specific products (such as ROV applications) and technologically
advanced products to the market during the Company’s fiscal years 2017 and 2018. The new products are expected
to increase the number of markets in which our technology has application. As part of this effort, in January 2017 we launched
a new sonar which is a multiple “projector” system and which provides a wider field of view (90
o
x40
o
)
for imaging and visualization. This system is aimed at bathymetry survey market. This new sonar, branded under the name of “Echoscope®
XD”, is retrofittable on our existing systems. Therefore, existing customers can upgrade their systems to include this new
capability.
Our
products are complex and therefore we can give no assurance that we will be successful in the above-stated objective. Moreover,
we may incur significant research expenditures without realizing viable products.
Government
Regulation
Because
of the nature of some of our products, they may be subject to United States and other jurisdictions’ export control regimes
and may be exported outside these jurisdictions only with the required level of export license or through an export license exception
or general export authorization / license.
In
addition, as a provider for the US Government, we may be subject to numerous laws and regulations relating to the award, administration
and performance of US Government contracts, including the False Claims Act. Non-compliance found by any one agency could result
in fines, penalties, debarment, or suspension from receiving additional contracts with all US Government agencies. Given our dependence
on US Government business, suspension or debarment could have a material adverse effect on our business and results of operations.
Employees
As
of the date hereof, we employ worldwide approximately 100 people, of which 11 hold management positions. A large majority of our
employees have a background in science, technology and engineering, with a substantial part being educated to degree and PhD level.
None of our employees are employed under a collective agreement and we have not experienced any organized labor difficulties
in the past.
ITEM
1A. RISK FACTORS
Not
required for smaller reporting companies.
ITEM
2 FINANCIAL INFORMATION
Management’s
discussion and analysis of financial condition and results of operations.
Forward-Looking
Statements
The
information herein contains forward-looking statements. All statements other than statements of historical fact made herein are
forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial
position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,”
“estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,”
“expects,” “may,” “will,” or “should” or other variations or similar words. No
assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking
statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly
from management’s expectations.
The
following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion
should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion
reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best
present assessment of our management.
General
Overview
We
design and manufacture patented real time 3D sonar solutions and other leading products for sale to the subsea, defense, mining
and marine sciences markets, among others. In addition, we supply marine engineering business services to prime defense contractors.
We
operate through two operating business segments: Marine Technology Business (“Products” segment) and Marine Engineering
Business (“Services” segment). Our products which are sold by our Products segment are used primarily in the underwater
construction market, offshore oil and gas, wind energy industry, and in the complex dredging, port security, mining and marine
sciences sectors. Our customers include service providers to major oil and gas companies, law enforcement agencies, ports, mining
companies, defense companies and universities.
We
supply our marine engineering business services mainly to prime defense contractors. We have been supporting some significant
defense programs that enable us to supply and maintain proprietary parts through obsolescence management programs.
Historically,
the Marine Technology Business has generated approximately 70% of our revenues. During the last three fiscal years, the Marine
Technology Business has generated closer to 50% of our overall revenues, with the Marine Engineering Business growing at a faster
pace. The slower growth of revenues generated by our Products Segment is largely due to the contraction in the oil and gas (O&G)
industry. Due to the effort by O&G companies to restructure their operations, the climate in which we sell is fiercely competitive.
As a result, sales into this sector have declined and gross profit margins for our Products Segment have weakened.
Nevertheless,
we continue to believe that our unique and patented real time 3D solutions are a significant advancement on the current technology
available in the subsea sonar market. Because of its real time capability providing volumetric data of underwater targets in low
or zero visibility conditions, this technology reduces the operational costs to users as underwater data is provided in real time,
similar to a camera. Furthermore, because the technology provides real time image of the underwater environment, it enhances safety
significantly. In addition, our real time 3D solution is emerging as the preferred solutions for subsea asset placements
(such as Accropodes™, X-Blocs, Antifers block placements, mattress placements and the like). Due to the decline in the price
of oil, many O&G companies are seeking cost effective solutions for their operations. We believe that our real time 3D solution
has the potential to revolutionize the technology used in underwater operations particularly where real time visualization is
required or zero or low visibility conditions prevail.
In
recent years we have made progress in getting our core real time 3D technology, the Echoscope
®
, adopted by a significant
number of ports in the USA (the CodaOctopus Underwater Inspection System – which integrates our Echoscope, motion sensing
product and hydrographic pole) where it is used for port and harbor security. In 2015 we secured the first sale of our Underwater
Inspection System to a foreign port in Asia and in 2016 we sold two additional full system to this port. We hope to sell additional
systems into this port as part of their technology upgrade program for the next three years.
We
have also made progress in expanding the markets (and applications) into which we sell our real time 3D Sonars. Recently, we have
sold a number of systems to mining companies. Increasingly, our customers involved in energy and renewables are adopting the technology
as the primary tool for scour management, subsea cable installation and associated cable protection tasks.
In
addition, in recent years we have started to rent our real time 3D solutions with engineering services. Given the contraction
in the O&G market, rentals are increasingly becoming an important part of the composition of the Company’s revenues.
Furthermore, our rental offering generally yields a higher gross margin for the Company.
Our
business is impacted by a number of factors including:
|
a.
|
the
price of commodities, in particular O&G. The decline in O&G prices has resulted in large scale reductions in capital
and operational expenditures, which directly impact on the sales of our products into these and related markets;
|
|
|
|
|
b.
|
the
allocation of funds to defense procurement by governments in the United States and the United Kingdom;
|
|
|
|
|
c.
|
volatility
of the markets including the currency market;
|
|
|
|
|
d.
|
uncertainty
on the impact of the United Kingdom decision to terminate its current membership of the European Union;
|
|
|
|
|
e.
|
Approximately
46% of the Company revenues are generated by the Company’s subsidiaries in the United Kingdom. Those sales are transacted
in British Pounds. The depreciation of the British Pound against major currencies adversely impacts our revenues as
a whole which are reported in U.S. Dollars. Furthermore, a large part of our assets are held in sterling while the majority
of our liabilities (which comprise our senior secured convertible debentures) is maintained in U.S. Dollars. See
Note 2, paragraph n, of the audited Consolidated Financial Statements October 31, 2016 and 2015 regarding
our Foreign Currency Translation Policy. The continued uncertainty described in paragraph (d) immediately above is likely
to continue the decline in the value of sterling against the U.S.Dollar for the foreseeable future.
|
|
|
|
|
f.
|
In
the event that the United Kingdom does not secure access to the European Union Single Market, this will likely impact our
cost basis as currently we do not pay export duty on products that we sell to customers in the Single Market;
|
|
|
|
|
g.
|
Global-political
uncertainties affecting the markets into which we sell our goods and services;
|
|
|
|
|
h
.
|
Global
trends which make certain geographical regions more competitive in providing engineering solutions because of lower labor
costs (e.g. India and China) are likely to affect our Engineering Businesses in the Group;
|
|
|
|
|
j.
|
The
Company has issued and outstanding Senior Secured Convertible Debentures (See Note 9 of the audited
Consolidated Financial Statements for January 31, 2017 and 2016 more information). These
Debentures are secured by all of the Company’s assets which may complicate its efforts to obtain additional
financings; and
|
|
|
|
|
k.
|
We
lack the financial resources to advance our flagship technology at the pace required to capture new markets and increase our sales
which could facilitate new entrants to the market. For example, Teledyne Technologies Incorporated, a multi-billion company, has
recently acquired a number of subsea companies that may speed up their entry into our market;
|
|
|
|
|
l.
|
The
Company has limited external sources of capital available, and as such is reliant upon its ability to sell its products and
services to provide sufficient working capital for its operations and obligations.
|
The
Company’s operations are split between the United States, United Kingdom, Australia and Norway. A large proportion of our
revenues (approximately 46%) and costs are incurred outside of the USA with a significant part of that in the United Kingdom (“UK”).
In addition, a significant part of our assets (both current and fixed|) are held in sterling by our foreign subsidiaries.
On
June 23, 2016, the United Kingdom voted to exit the European Union. This resulted in significant currency exchange rate fluctuations
and volatility in global stock markets including a sharp fall of sterling against the USD. The British government is expected
to commence negotiations to determine the terms of the exit (so-called Brexit). The United Kingdom’s separation could, among
other things, disrupt trade and the free movement of goods, services and people between the United Kingdom and the European Union
or other countries as well as create legal and global economic uncertainty. Currencies could remain volatile for the foreseeable
future.
Since
the Brexit vote, we have already suffered adverse currency movements affecting our UK Businesses. In summary, since our reporting
currency is the U.S. Dollar, the fall in the British Pound impacts on our revenues, costs and balance sheet valuation. The Financial
Times reported recently that in July 2016 sterling closed at a 31 year low against the USD. See Note 2 paragraph n of Notes to
the Audited Consolidated Financial Statements October 31, 2016 and 2015 regarding our Foreign Currency Translation Policy.
Given
the lack of comparable precedent, the implications of Brexit or how such implications might affect the Company in the medium to
long term are unclear.
Critical
Accounting Policies
This
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements
that have been prepared under accounting principles generally accepted in the United States of America (“GAAP”). The
preparation of financial statements in conformity with US GAAP requires our management to make estimates and assumptions that
affect the reported values of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported levels of revenue and expenses during the reporting period. Actual results could materially
differ from those estimates.
Below
is a discussion of accounting policies that we consider critical to an understanding of our financial condition and operating
results and that may require complex judgment in their application or require estimates about matters which are inherently uncertain.
A discussion of our significant accounting policies, including further discussion of the accounting policies described below,
can be found in Note 2, “Summary of Significant Accounting Policies” of our Consolidated Financial Statements.
Revenue
Recognition
Our
revenue is derived from sales of underwater technologies and equipment for imaging, mapping, defense and survey applications and
from the engineering services which we provide. Revenue is recognized when evidence of a contractual arrangement exists, delivery
has occurred or services have been rendered, the contract price is fixed or determinable, and collectability is reasonably assured.
No right of return privileges are granted to customers after delivery.
For
arrangements with multiple deliverables, we recognize product revenue by allocating the revenue to each deliverable based on the
relative fair value of each deliverable, and recognize revenue when equipment is delivered, and for installation and other services
as they are performed.
Our
contracts sometimes require customer payments in advance of revenue recognition. These amounts are reflected as liabilities and
recognized as revenue when the Company has fulfilled its obligations under the respective contracts.
For
software license sales for which any services rendered are not considered essential to the functionality of the software, we recognize
revenue upon delivery of the software, provided (1) there is evidence of a contractual arrangement for this, (2) collection of
our fee is considered probable and (3) the fee is fixed and determinable.
For
arrangements that are generated from time and material contracts where there is a signed agreement and approved purchase order
in place that specifies the fixed hourly rate and other reimbursable costs to be billed based on material and direct labor hours
incurred, revenue is recognized on these contracts based on material and direct labor hours incurred. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred (materials and direct
labor hours) to date to estimated total services (materials and direct labor hours) for each contract. This method is used as
expenditures for direct materials and labor hours are considered to be the best available measure of progress on these contracts.
Losses on fixed-price contracts are recognized during the period in which the loss first becomes apparent based upon costs incurred
to date and the estimated costs to complete as determined by experience from similar contracts. Variations from estimated contract
performance could result in adjustments to operating results.
Rental
Revenue is recognized monthly over the term of the rental period.
Recoverability
of Deferred Costs
We
defer costs on projects for service revenue. Deferred costs consist primarily of direct and incremental costs to customize and
install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties
and payroll costs for our employees and other third parties.
We
recognize such costs in accordance with our revenue recognition policy by contract. For revenue recognized under the completed
contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer
acceptance. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or
services are provided in accordance with the percentage of completion calculation. For revenue recognized ratably over the term
of the contract, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At
each balance sheet date, we review deferred costs, to ensure they are ultimately recoverable. Any anticipated losses on uncompleted
contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.
Stock
Based Compensation
We
recognize the expense related to the fair value of stock-based compensation awards within the consolidated statements of income
and comprehensive income. We use the fair value method for equity instruments granted to non-employees and use the Black Scholes
model for measuring the fair value. The stock based fair value compensation is determined as of the date of the grant or the date
at which the performance of the services is completed (measurement date) and is recognized over the periods in which the related
services are rendered.
Income
Taxes
The
Company accounts for income taxes in accordance with Accounting Standards Codification 740, Income Taxes (ASC 740). Under ASC
740, deferred income tax assets and liabilities are recorded for the income tax effects of differences between the bases of assets
and liabilities for financial reporting purposes and their bases for income tax reporting. The Company’s differences arise
principally from the use of various accelerated and modified accelerated cost recovery system for income tax purposes versus straight
line depreciation used for book purposes and from the utilization of net operating loss carry-forwards.
Deferred
tax assets and liabilities are the amounts by which the Company’s future income taxes are expected to be impacted by these
differences as they reverse. Deferred tax assets are based on differences that are expected to decrease future income taxes as
they reverse. Correspondingly, deferred tax liabilities are based on differences that are expected to increase future income taxes
as they reverse. Note 7 to the Consolidated Financial Statements discusses the amounts of deferred tax assets and liabilities,
and also presents the impact of significant differences between financial reporting income and taxable income.
For
income tax purposes, the Company uses the percentage of completion method of recognizing revenues on long-term contracts which
is consistent with the Company’s financial reporting under U.S. generally accepted accounting principles.
Intangible
Assets
Intangible
assets consist principally of the excess of cost over the fair value of net assets acquired (or goodwill), customer relationships,
non-compete agreements and licenses. Goodwill was allocated to our reporting units based on the original purchase price allocation.
Goodwill is not amortized and is evaluated for impairment annually or more often if circumstances indicate impairment may exist.
Customer relationships, non-compete agreements, patents and licenses are being amortized on a straight-line basis over periods
of 2 to 10 years. The Company amortizes its limited lived intangible assets using the straight-line method over their estimated
period of benefit. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate that impairment exists.
The
first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit
with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount,
goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure
the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill
with the carrying amount of that goodwill. At the end of each year, we evaluate goodwill on a separate reporting unit basis to
assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount
equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill.
Results
of Operations
Coda
Octopus Group is comprised primarily of two business segments: the Marine Technology Business which is our products business (“Products
Segment”) and the Marine Engineering Business, which is our service business (“Services Segment”).
Our
Marine Technology Business sells its products and associated services to the offshore wind energy, dredging and marine construction,
marine and port security, mining including deep sea mining, marine sciences sector and oil and gas sector. This segment generated
approximately 50% and 51% of our total revenues for the fiscal years ended October 31, 2016 and 2015, respectively.
Our
Marine Engineering Business largely sells its services into prime and sub-prime defense contractors. This segment generated approximately
50% and 49% of our total revenues for the fiscal years ended October 31, 2016 and 2015, respectively. This segment continues to
be an important part of the Group’s revenues plan and, in particular, our subsidiary Coda Octopus Colmek.
Comparison
of fiscal year ended October 31, 2016 (“2016 period”) to fiscal year ended October 31, 2015 (“2015 period”)
Throughout
this discussion, “the 2016 period” means the fiscal year ending October 31, 2016. Similarly, “the 2015 period”
means the fiscal year ending October 31, 2015.
See
Segment information below for a full breakout of the financial performance of each Segment for the 2016 and 2015 periods, respectively.
The
information provided below pertains to the consolidated analysis of both segments operating in our Group.
Revenue:
Total revenues for the 2016 and 2015 periods were $21,118,319 and $19,234,396 respectively,
representing a 9.8% increase. The increase in revenues is attributable to an increase in sales generated by both the Marine Technology
Business and the Marine Engineering Business. We are still adversely affected by the reduction in spending (both capital and operational
expenditures) in the Oil and Gas Sector resulting from the sharp price decline in both oil and gas. The Sector has seen large
reductions in capital and operational expenditures which has resulted in delays or cancellation of projects. This has had an adverse
impact on the growth projections for our Products segment. Nevertheless, the Marine Technology Business has increased its sales
to other sectors such as the mining, port security, wind energy markets and the breakwater construction markets during the 2016
period.
During the year ended October
31, 2016, the Company had two customers, Northrop Grumman and Raytheon, that accounted for approximately 16% and 22% of net revenues,
respectively.
Gross
Margin:
Margins were 59.9% in the 2016 period (gross profit of $12,652,997) compared to 53.8% (gross profit of $10,340,527)
in the 2015 period representing an increase of 6.1%. The increase in gross margin percentage reflects the different mix of sales
in the 2016 period. Within the Products segment a significant portion of our revenues are generated from the rental of our products
as compared to outright sale. Generally, our rental model attracts a higher gross profit.
Research
and Development (R&D):
R&D expenditures increased by 1.5% from $998,270 in the 2015 period to $1,013.125 in the
2016 period and was in keeping with our expectations. We expect this to increase further in this current year as we are investing
significantly in the technological advancement of our real time 3D sonar technology and motion sensing products. This investment
will be in bringing in new electronic engineering skills and incurring significant non-recurring engineering costs (NRE) for prototyping
new real time 3D products and motion sensing products. Our goal will be to bring more competitively priced and technologically
advanced products in this range to the market in the fiscal year late 2017 and 2018. However, these are complex products and we
can give no assurance that we will be successful in the stated goals. Moreover, we may incur significant research expenditures
without realizing viable products.
Selling,
General and Administrative Expenses (SG&A)
: SG&A expenses for the 2016 period decreased to $6,101,227 from $7,482,738
for the 2015 period, a decrease of 18.5 %. The decrease in our SG&A expenditures in FY2016 is attributed to the fact that
in the FY2015 period we had exceptional items of expenditures associated with legal settlements and moving our production from
Bergen, Norway to Edinburgh.
Key
Areas of SG&A Expenditure across the Group for the year ended October 31, 2016 compared to the year ended October 31, 2015
Expenditure
|
|
October
31, 2016
|
|
|
October
31, 2015
|
|
|
Percentage
Change
|
Wages and Salaries
|
|
$
|
4,161,838
|
|
|
$
|
4,230,294
|
|
|
Decrease of 1.6%
|
Legal and Professional Fees (including
accounting, audit and investment banking services)
|
|
$
|
757,405
|
|
|
$
|
1,646,823
|
|
|
Decrease of 54.0%
|
Rent for our various locations
|
|
$
|
251,957
|
|
|
$
|
341,259
|
|
|
Decrease of 26.2%
|
Marketing
|
|
$
|
149,790
|
|
|
$
|
308,342
|
|
|
Decrease of 51.4%
|
The
decrease in our Legal and Professional Fees in the FY2016 is mainly due to extraordinary costs in the FY2015 period.
Operating
Income:
Operating Income for the 2016 period increased
by 197.7% and was $5,538,645 as compared to $1,859,519 in the 2015 period
.
The
increase in Operating Income in the 2016 period compared to the 2015 period is mainly attributed to the factors outlined immediately
below:
|
●
|
The
Company’s revenues generated in the 2016 period have increased by approximately 9.8% over the 2015 period; and
|
|
|
|
|
●
|
Our
Gross Profit Margins have increased by 6.1 percentage point over the 2015 period due to the mix of sales generated in the
2016 period; and
|
|
|
|
|
●
|
Our
SG&A expenditures have fallen by 18.5% in the 2016 period as compared to the 2015 period when we recorded $1,340,000 in
non-recurring exceptional costs. Furthermore, the fall in SG&A in the 2016 period is a reflection of more efficient operations
as a result of some of the strategies the Company has been pursuing over the last three years. These include tight cost controls
and consolidation of operations (moving production of our flagship products to our central operations in Scotland and bringing
in-house the manufacture of key components of our products, such as transducer development). The latter two examples have
allowed us to be more efficient in the manufacturing of our flagship product and in servicing our customers including repairing
their products and improving quality controls at the same time.
|
Interest
Expense:
Interest expense during the 2016 period was $856,432 compared to $1,044,906 during the 2015 period, representing
an overall 18.0% decrease. Interest expense includes interest payments attributable to the Senior Convertible Debentures and interest
payments on mortgage obligations. The decrease reflects the reduction in the principal amount of the Senior Convertible Debentures
by $1,400,000. We continue to be under an obligation to pay 8.5% interest on the principal amount of the Secured Debentures outstanding
($8.6M as of October 31, 2016). Under the Restructuring Agreement between the Debenture Holder and the Company dated October 30,
2015, the Company was under an obligation to reduce the principal amount by $2 million, payable in 10 equal monthly installments
of $200,000 March 1, 2016. As a result, our interest payments on the Senior Convertible Debentures going forward will decrease
proportionally.
Other
Income
:
This category was $172,090 in the 2016 period as compared to $358,808 in the 2015 period. The decrease
in “Other Income” is attributed to an exceptionally high amount of Value Added Tax (equivalent of Sales Tax) rebate
for the 2015 period on stock and other production assets purchased by Coda Octopus Products Limited from our Norwegian Company,
Coda Octopus R&D AS, as part of the transfer of our Production from Norway to Edinburgh.
Net
Income after income tax for the year ended October 31, 2016 compared to the year ended October 31, 2015
Net
Income for the 2016 period was $4,930,548 compared to $1,070,292 for the 2015 period, representing an increase of 360.7%.
The
increase in net income in the 2016 period compared to the 2015 period is mainly attributable to the combination of the increase
in our revenues in the 2016 period by 9.8% in conjunction with a reduction in our SG&A expenditures by 18.5% and our interest
expense by 18.0%.
Comprehensive
Income for the year ended October 31, 2016 compared to the year ended October 31, 2015
Year
Ended October 31, 2016
|
|
|
Year
Ended October 31, 2015
|
|
|
Percentage
Change
|
$
|
2,219,595
|
|
|
$
|
1,544,977
|
|
|
Increase of 43.7%
|
The
increase in comprehensive income in the 2016 period is due to the increase in our revenues and gross margins and decrease in our
cost of sales and SG&A compared to the 2015 period. Notwithstanding, we have suffered a significant loss of $2,710,953 in
foreign currency translation adjustments of the values of our UK assets included in our financial statements due to the depreciation
of the value of the pound sterling. Since the UK decided to leave the European Union the pound sterling has been falling significantly
against the USD (see Note 2 paragraph n of Notes to the audited Consolidated Financial Statements for October 31, 2016
and 2015 for fuller information regarding our Foreign Currency Translation policy).
Segment
Analysis
We
are operating in two reportable segments, which are managed separately based upon fundamental differences in their operations.
Segment operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Overhead
includes general corporate administrative costs.
The
Company evaluates performance and allocates resources based upon operating income. The accounting policies of the reportable segments
are the same as those described in the summary of accounting policies.
There
are inter-segment sales in the table below which have been eliminated from our financial statements. However for the purpose of
segment reporting, these are included in the table below only.
The
following tables summarize certain balance sheet and statement of operations information by reportable segment for the financial
years ending October 31, 2016 and 2015, respectively.
|
|
Marine
Technology Business (Products)
|
|
|
Marine
Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended October 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
10,584,141
|
|
|
$
|
10,534,178
|
|
|
$
|
-
|
|
|
$
|
21,118,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
3,081,892
|
|
|
|
5,383,430
|
|
|
|
-
|
|
|
|
8,465,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
7,502,249
|
|
|
|
5,150,748
|
|
|
|
-
|
|
|
|
12,652,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
1,013,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,013,125
|
|
Selling, General
& Administrative
|
|
|
2,848,809
|
|
|
|
2,785,195
|
|
|
|
467,223
|
|
|
|
6,101,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
3,640,315
|
|
|
|
2,365,553
|
|
|
|
(467,223
|
)
|
|
|
5,538,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
166,449
|
|
|
|
5,641
|
|
|
|
-
|
|
|
|
172,090
|
|
Interest (Expense)
Income
|
|
|
(813,402
|
)
|
|
|
(277,875
|
)
|
|
|
234,845
|
|
|
|
(856,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(646,953
|
)
|
|
|
(272,234
|
)
|
|
|
234,845
|
|
|
|
(684,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
2,993,362
|
|
|
|
2,093,319
|
|
|
|
(232,378
|
)
|
|
|
4,854,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax refund
(expense)
|
|
|
139,619
|
|
|
|
(39,783
|
)
|
|
|
(23,591
|
)
|
|
|
76,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
3,132,981
|
|
|
$
|
2,053,536
|
|
|
$
|
(255,969
|
)
|
|
$
|
4,930,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
11,649,606
|
|
|
$
|
10,883,182
|
|
|
$
|
302,732
|
|
|
$
|
22,835,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,381,048
|
|
|
|
1,019,074
|
|
|
|
10,280,885
|
|
|
|
12,681,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated
from sales above
|
|
|
1,871,801
|
|
|
|
330,098
|
|
|
|
1,164,250
|
|
|
|
3,366,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
503,327
|
|
|
|
293,219
|
|
|
|
12,831
|
|
|
|
809,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
736,982
|
|
|
|
(2,857
|
)
|
|
|
12,470
|
|
|
|
746,595
|
|
|
|
Marine
Technology Business (Products)
|
|
|
Marine
Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended October 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
9,772,151
|
|
|
$
|
9,462,245
|
|
|
$
|
-
|
|
|
$
|
19,234,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
3,647,422
|
|
|
|
5,246,447
|
|
|
|
-
|
|
|
|
8,893,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,124,729
|
|
|
|
4,215,798
|
|
|
|
-
|
|
|
|
10,340,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
998,270
|
|
|
|
-
|
|
|
|
-
|
|
|
|
998,270
|
|
Selling, General
& Administrative
|
|
|
3,856,809
|
|
|
|
2,877,601
|
|
|
|
748,328
|
|
|
|
7,482,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
1,269,650
|
|
|
|
1,338,197
|
|
|
|
(748,328
|
)
|
|
|
1,859,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
358,609
|
|
|
|
117
|
|
|
|
82
|
|
|
|
358,808
|
|
Interest Expense
|
|
|
(503,909
|
)
|
|
|
(285,319
|
)
|
|
|
(255,678
|
)
|
|
|
(1,044,906
|
)
|
Unrealized loss
on sale of investment in marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,031
|
)
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(145,300
|
)
|
|
|
(285,202
|
)
|
|
|
(258,627
|
)
|
|
|
(689,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
1,124,350
|
|
|
|
1,052,995
|
|
|
|
(1,006,955
|
)
|
|
|
1,170,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax refund
(expense)
|
|
|
(76,051
|
)
|
|
|
(24,047
|
)
|
|
|
-
|
|
|
|
(100,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
1,048,299
|
|
|
$
|
1,028,948
|
|
|
$
|
(1,006,955
|
)
|
|
$
|
1,070,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
11,674,637
|
|
|
$
|
10,072,824
|
|
|
$
|
132,770
|
|
|
$
|
21,880,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,477,885
|
|
|
|
718,840
|
|
|
|
15,426,354
|
|
|
|
17,623,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated
from sales above
|
|
|
2,665,615
|
|
|
|
629,629
|
|
|
|
1,150,997
|
|
|
|
4,446,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
182,625
|
|
|
|
254,076
|
|
|
|
12,995
|
|
|
|
449,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
216,560
|
|
|
|
2,003,172
|
|
|
|
-
|
|
|
|
2,219,731
|
|
The
Company’s reportable business segments operate in three geographic locations: United States, Europe and Australia.
All
inter-company sales have been eliminated from our financial statements. For the purposes of Segment Analysis reporting, we are
required to show inter-company sales and therefore the above table discloses this information.
Information
concerning principal geographic areas is presented below according to the area where the activity is taking place for the years
ended October 31, 2016 and 2015 respectively:
External
Revenues by Geographic Locations
|
|
USA
|
|
|
Europe
|
|
|
Australia
|
|
|
Total
|
|
Year ended October 31, 2016
|
|
$
|
11,116,336
|
|
|
$
|
8,398,768
|
|
|
$
|
1,603,215
|
|
|
$
|
21,118,319
|
|
Year ended October 31, 2015
|
|
$
|
9,969,839
|
|
|
$
|
8,308,080
|
|
|
$
|
956,477
|
|
|
$
|
19,234,396
|
|
Comparison
of the three months ended January 31, 2017 (“Current Quarter”) against the three months ended January 31, 2016 (“Previous
Quarter”)
Revenue
:
Total revenues for the Current Quarter and the Previous Quarter were $5,358,203 and $4,775,839 respectively, representing an increase
of 12.2%. The increase in Revenues in the Current Quarter is a reflection of an increase in sales generated by our Services Segment.
Although the Products Segment revenues in the Current Quarter have increased in pound terms, due to the depreciation of the pound
against the US Dollar, the reported US Dollar revenues for the Products Segment have declined by 18% while our Services Segment
revenues have increased in the Current Quarter by 63% over the Previous Quarter. The US Dollar revenues generated in the Current
Quarter by our UK Products Segment is US$1,657,500 applying an average exchange rate of approximately 1.25. In the Previous Quarter
the average exchange rate applied to the UK Products Segment revenues was $1.47 and therefore the pound has declined by approximately
15% against the US Dollars over the two periods.
Gross
Margins:
Margins were stronger in the Current Quarter at 63.0% (gross profit of $3,375,157) compared to 46.8% (gross profit
$2,234,689) in the Previous Quarter. The increase in our Gross Margins is a reflection of the mix of sales generated in the Current
Quarter. In the Current Quarter, a significant part of our revenues was generated from rental of our real time 3D solution through
our Products Segment and sale of equipment in our rental pool (which had previously been fully written down). Despite the increase
in our Gross Margins, it should be noted that our reported revenues from our Products Segment have declined largely due to the
significant depreciation of the pound against the USD. In pound terms, the Products Segment revenues have increased but have declined
in US Dollar terms due to the devaluation of the pound against the US Dollar during the reporting period. See preceding paragraph
for more information on this.
Research
and Development (R&D)
. R&D expenditures in the Current Quarter were $251,230 representing a 10.0% increase over the
Previous Quarter, where these expenditures were $228,300. This area of expenditures has increased in Current Quarter and is in
line with our budgetary plans. In this connection, we expect this to increase further in this current year as we continue to invest
significantly in the technological advancement of our real time 3D sonar technology and motion sensing products. This investment
will involve bringing in new skills and incurring significant non-recurring engineering costs (NRE) for prototyping new real time
3D products and motion sensing products. Our goal will be to bring more competitively priced and technologically advanced products
in this range to the market in the fiscal year late 2017 and 2018. Notwithstanding, these are complex products and we can give
no assurance that we will be successful in the stated goals. Furthermore, we may incur significant research and development expenditures
without realizing viable products.
Selling,
General and Administrative Expenses (SG&A)
. SG&A expenses for the Current Quarter decreased to $1,405,888 from $1,559,539
in the Previous Quarter, a reduction of 9.9%.
Key
Areas of SG&A Expenditure across the Group for the Current Quarter compared to the Previous Quarter are:
Expenditure
|
|
January
31, 2017
|
|
|
January
31, 2016
|
|
|
Percentage
Change
|
Wages and Salaries
|
|
$
|
984,412
|
|
|
$
|
1,099,083
|
|
|
Decrease
of 10.4%
|
Legal and Professional Fees (including
accounting, audit and investment banking services)
|
|
$
|
257,993
|
|
|
$
|
194,814
|
|
|
Increase of
32.4%
|
Rent for our various locations
|
|
$
|
19,449
|
|
|
$
|
118,635
|
|
|
Decrease of
83.6%
|
Marketing
|
|
$
|
64,813
|
|
|
$
|
19,417
|
|
|
Increase of
233.8%
|
Although
in the Current Quarter we have realized a decrease in our SG&A expenditures, (which is largely due to a reduction in our expenditures
on rent) we would expect the category of Legal and Professional Fees to increase to reflect the increased costs associated with
returning to being a SEC Reporting Company under the Securities Exchange Act 1934. In this connection, the Company filed a Form
10 with the SEC on or around February 17, 2017. This will result in increased costs associated with this initial filing and ongoing
maintenance of this status.
Operating
Income
. We had an operating income of $1,718,039 in the Current Quarter against an operating income of $446,850 in the Previous
Quarter, making this an increase of 284.5%. This increase is largely due to an increase in revenues combined with a reduction
in our direct costs of sales, resulting in an increase in our gross profit margins. We also had lower SG&A expenditures in
the Current Quarter (although this category of expenditures is likely to increase over the current fiscal year due to the reasons
disclosed immediately above) and our R&D expenditures will also increase significantly over the year to reflect the investments
we are making in research and development of new products.
Interest
Expense
. Interest expense decreased by 14.7% in the Current Quarter to $195,494 from the $229,222 in the Previous Quarter.
This is largely due to a reduction in the outstanding principal amount of the Senior Secured Convertible Debentures. On or around
December 13 we paid off all loan amounts (an equivalent of $286,017) that were due under the mortgage that was registered against
our business property located in Portland, United Kingdom. The security interest in respect of the property has since been released
by the bank. This category of expenditures is likely to decrease going forward.
Other
Income.
In the Current Quarter, we had Other Income of $49,416 as compared to $71,892 in the Previous Quarter resulting in
a decrease by 31.3%. This category is subject to fluctuations as it usually reflects Value Added Tax rebates in the UK operations
and changes according to the level of purchases we make in the period.
Net
Income.
In the Current Quarter, we had Net Income of $1,571,961 as compared to $289,520 in the Previous Quarter representing
an increase of 443.0% over the Previous Quarter. The increase in Net Income is largely due to the increase in sales and gross
profit margins combined with a reduction in SG&A expenditures and interest expense.
Comprehensive
Income.
In the Current Quarter, our Comprehensive Income was $1,993,121 compared to a Comprehensive Loss in the Previous Quarter
of $(782,557). This is largely due to a significant loss on foreign currency translation adjustments in the Previous Quarter.
Segment
Reporting three months ended January 31, 2017 compared to three months ended January 31, 2016
Due
to the nature of our businesses, we are operating in two reportable segments, which are managed separately based upon fundamental
differences in their operations.
Our
Marine Technology Business sells its products and associated services to the O&G sector, offshore wind energy, dredging and
marine construction, marine and port security, and marine sciences sectors. This Segment generated approximately 46% and 63% of
our total revenues for the three months ended January 31, 2017 and January 31, 2016, respectively.
Our
Marine Engineering Business largely sells its services into prime and second tier defense contractors and generated approximately
54% and 37% of our total revenues for the three months ended January 31, 2017 and January 31, 2016, respectively.
Segment
Analysis
Segment
operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Overhead includes
general corporate administrative costs.
The
Company evaluates performance and allocates resources based upon operating income. The accounting policies of the reportable segments
are the same as those described in the summary of accounting policies in Note 2 to the Consolidated Financial Statements included
herein.
Fair
Value of Financial Instruments
The
Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses
and notes payable. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair values because of the short-term nature of these instruments. The aggregate carrying amount of the notes payable
approximates fair value as they bear interest at a market interest rate based on their term and maturity. The fair value of the
Company’s long-term debt approximates its carrying amount based on the fact that the Company believes it could obtain similar
terms and conditions for similar debt.
Liquidity
and Capital Resources
At
January 31, 2017, the Company had an accumulated deficit of $38,750,639, working capital surplus of $11,000,607 and stockholders’
equity of $11,058,134. For the quarter then ended, the Company generated cash flow from operations of $749,761.
We
believe that our current level of cash and cash generation will be sufficient to meet our future short- and medium-term liquidity
needs. At January 31, 2017, we had cash on hand of approximately $4.1 million and both billed and unbilled receivables of approximately
$6.4 million. Our current cash balance represents approximately one-year of operating expenses. The Company continues to critically
evaluate the level of expenses that we incur and reduce those expenses as appropriate.
Our
three main liquidity issues are the approximately $9.135 million convertible senior secured debentures (the “Debentures”)
that are due on May 1, 2018, funding of our research and development program (“R&D”) and managing our currency
exposure because of our operations in the United States, the United Kingdom and Australia.
The
Company is looking to obtain bank financing to replace the Debentures. If we are unable to obtain that bank financing, we believe
that we can enter a mutually agreeable arrangement with our existing lender to extend the term of the Debentures. We believe that
we have a good relationship with the Debenture holder who has extended the maturity of the Debentures in the past.
Our
Colmek subsidiary received a $1 million loan from the CEO of Coda to fund the purchase of long lead-time inventory that is critical
to a Colmek defense contract. We expect that loan, which bears interest at 4.5% per annum, will be repaid in our current fiscal
year from the proceeds received under billings for that defense contract.
Our
R&D efforts are performed entirely in-house and that arrangement allows us the flexibility to adjust the funding of our R&D
to reflect the amount of cash that we have available to invest in that program at any given time. We do however, put a priority
on our R&D program to ensure that our technology is on the cutting edge of underwater technology. While we can adjust our
spending on our R&D program, we are committed to investing in that program to ensure the future success of the Company.
Substantially
all our properties is owned by the Company and there are no mortgage obligations on that property.
We
have a significant concern about adverse currency fluctuations and the effect that those currency fluctuations have on our operations
and profitability. As mentioned previously, the United Kingdom’s potential exit from the European Union (“Brexit”)
has had a significant negative effect on the value of the British pound versus the U. S. dollar. A significant portion of our
business is in the United Kingdom and the substantial decrease in the value of the British pound is reflected in lower revenues
for our product sales. In addition, all our loans are denominated in U. S. dollars, which means that the dollar value of those
loans has effectively gone up. While we have chosen not to hedge any of our currency exposure, we continue to evaluate the need
to do so and will consider a hedging strategy when, and if, appropriate.
Operating
Activities
Net
cash generated from operating activities for the year ended October 31, 2016 was $4,385,040. We recorded net income for the period
of $4,930,548. Other items in uses of funds from operations included non-cash charges related to depreciation and amortization,
stock based compensation, non-cash interest expense, and allowance for bad debt, which collectively totaled $959,160. Increases
in operating assets decreased net cash from operating activities by $(1,889,622) and increases in operating liabilities increased
net cash from operating activities by $384,954.
Net
cash generated from operating activities for the three months ended January 31, 2017 was $749,761. We recorded net income for
the period of $1,571,961. Other items in uses of funds from operations included non-cash charges related to depreciation and amortization,
stock based compensation, non-cash interest expense, and allowance for bad debt, which collectively totaled $186,899. Increases
in operating assets decreased net cash from operating activities by $(501,924) and decreases in operating liabilities increased
net cash from operating activities by $(507,175)
Investing
Activities
Net
cash used by investing activities for the three months ended January 31, 2017 was $(1,669,455) due to the purchase of fixed assets.
Net
cash used by investing activities for the year ended October 31, 2016 was $(614,024) due to the purchase of fixed assets.
Financing
Activities
Net
cash used in financing activities for the three months ended January 31, 2017 was $(990,303) as a result of the redemption of
the Series C preferred stock.
Net
cash used in financing activities for the year ended October 31, 2016 as $(1,768,990) as a result of paying down the debt of the
Company.
Equity
Offerings
The
Company has financed its activities primarily with cash generated from operations and through the issuance of equity securities.
From 2006, we have raised approximately $24 million through various private equity offerings.
Secured
Convertible Debentures
On
February 21, 2008, we issued to a London based institutional investor freely transferrable senior secured convertible notes
in the principal amount of $12,000,000 (the “Notes”). The Notes which are freely transferrable are currently held
by CCM Holdings LLC a New Jersey corporation, which until recently controlled approximately 22.5% of the issued
and outstanding common stock of the Company.
The
Notes are secured by all of the assets of the Company and its subsidiaries and initially matured 84 months after the date of issuance
at which time they were redeemable at 130% of the face amount of the Notes. The Notes accrue interest at the annual rate of 8.5%,
payable in cash, quarterly in arrears. The Notes are convertible into our common stock at the option of the Noteholders at a conversion
price of $14.70.
Since
its issuance, the Notes have been subject to a number of renegotiations and extensions of the maturity date. The Company
recently restructured the Notes as follows:
|
●
|
The
maturity date of the Notes was extended to May 1, 2018;
|
|
|
|
|
●
|
The
Company agreed to reduce the principal amount outstanding under the Notes by $2,000,000 payable in 10 equal monthly payments
commencing March 31, 2016. Since reaching this agreement the Company has reduced the principal by the agreed $2,000,000.
|
|
|
|
|
●
|
On
March 1, 2016, the Company issued 2,310,477 shares of its common stock in extinguishment of $3,558,136 (representing the redemption
premium) due under the Notes at an effective price per share of $1.54; and
|
|
|
|
|
●
|
The
Company has agreed to start filing reports under the Securities Exchange Act of 1934 before March 1, 2017. The Company was
unconditionally released by the Senior Secured Debenture Holder from this obligation in an agreement dated October 17, 2016.
|
As
of January 31, 2017, the principal balance plus accrued interest under the Notes was $9,135,623, compared to $9,744,123
as of October 31,2016.
Foreign
Currency
The
Company maintains its books in local currency: US Dollars for its US operations, Pounds Sterling for its United Kingdom operations,
Norwegian Kroner for its Norwegian operations and Australian Dollars for its Australian operations, respectively.
For
the fiscal year ended 2016, 53% of the Company’s operations were conducted inside the United States and 47% outside the
United States through its wholly-owned subsidiaries. As a result, fluctuations in currency exchange rates may significantly affect
the Company’s sales, profitability and financial position when the foreign currencies of its international operations are
translated into U.S. dollars for financial reporting. In addition, we are also subject to currency fluctuation risk with respect
to certain foreign currency denominated receivables and payables. Although the Company cannot predict the extent to which currency
fluctuations may affect the Company’s business and financial position, there is a risk that such fluctuations will have
an adverse impact on the Company’s sales, profits and financial position. Because differing portions of our revenues and
costs are denominated in foreign currency, movements could impact our margins by, for example, decreasing our foreign revenues
when the dollar strengthens and not correspondingly decreasing our expenses. The Company does not currently hedge its currency
exposure. In the future, we may engage in hedging transactions to mitigate foreign exchange risk.
The
translation of the Company’s UK operations’ pound sterling denominated balance sheets and results of operations into
US dollars was affected by changes in the average value of the US dollar against the British pound sterling. The average exchange
rate during the 2016 Period was $1.38602 USD to the GBP against $1.54332 during the 2015 Period – a depreciation of the
value of the GBP to the USD of 10.2%.
The
translation of the Company’s Australian operations’ Australian Dollar denominated balance sheets and results of operations
into US dollars was affected by changes in the average value of the US dollar against the Australian Dollar. The average exchange
rate during the 2016 Period was $0.742937 USD to the AUD against $0.713575 during the 2015 Period – an appreciation of the
value of the AUD to the USD of 4.1%.
The
translation of the Company’s Norwegian operation’s Norwegian Kroner (NOK) denominated balance sheets and results of
operations into US dollars has been affected by the currency fluctuations of the US dollar against the NOK from an average rate
of $0.117981 during the 2015 Period, to $0.118902 during the 2016 Period - an appreciation of the value of the NOK to the USD
of 0.8%. These are the values that have been used in the calculations below.
The
impact of these currency fluctuations on the 2016 Period is shown below:
|
|
British
Pounds
|
|
|
Australian
Dollar
|
|
|
Norwegian
Kroner
|
|
|
US
Dollar
|
|
|
|
Actual
|
|
|
Constant
|
|
|
Actual
|
|
|
Constant
|
|
|
Actual
|
|
|
Constant
|
|
|
Total
|
|
|
|
Results
|
|
|
Rates
|
|
|
Results
|
|
|
Rates
|
|
|
Results
|
|
|
Rates
|
|
|
Effect
|
|
Revenues
|
|
|
8,398,768
|
|
|
|
9,351,948
|
|
|
|
1,603,215
|
|
|
|
1,539,854
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(889,819
|
)
|
Costs
|
|
|
(6,908,086
|
)
|
|
|
(7,692,088
|
)
|
|
|
(495,024
|
)
|
|
|
(475,460
|
)
|
|
|
(176,564
|
)
|
|
|
(175,196
|
)
|
|
|
763,070
|
|
Net profit (losses)
|
|
|
1,490,682
|
|
|
|
1,659,860
|
|
|
|
1,108,191
|
|
|
|
1,064,394
|
|
|
|
(176,564
|
)
|
|
|
(175,196
|
)
|
|
|
(126,749
|
)
|
Assets
|
|
|
10,156,806
|
|
|
|
13,018,245
|
|
|
|
916,918
|
|
|
|
883,470
|
|
|
|
118,693
|
|
|
|
120,387
|
|
|
|
(2,829,685
|
)
|
Liabilities
|
|
|
(1,338,235
|
)
|
|
|
(1,715,251
|
)
|
|
|
(53,755
|
)
|
|
|
(51,794
|
)
|
|
|
(7,978
|
)
|
|
|
(8,091
|
)
|
|
|
375,168
|
|
Net assets
|
|
|
8,818,571
|
|
|
|
11,302,994
|
|
|
|
863,163
|
|
|
|
831,676
|
|
|
|
110,715
|
|
|
|
112,296
|
|
|
|
(2,454,517
|
)
|
This
table shows that the effect of constant exchange rates, versus the actual exchange rate fluctuations, decreased net income for
the year by $126,749 and decreased net assets by $2,454,516. In addition, the Company booked transactional exchange rate losses
of $351,562 during the 2016 period. All of these amounts are material to our overall financial results.
The
impact of these currency fluctuations on the three months ended January 31, 2017 is shown below:
|
|
British
Pounds
|
|
|
Australian
Dollars
|
|
|
Norwegian
Kroner
|
|
|
US
Dollar
|
|
|
|
Actual
Results
|
|
|
Constant
rates
|
|
|
Actual
Results
|
|
|
Constant
rates
|
|
|
Actual
Results
|
|
|
Constant
rates
|
|
|
Effect
|
|
Revenues
|
|
|
2,065,192
|
|
|
|
2,432,289
|
|
|
|
592,611
|
|
|
|
577,722
|
|
|
|
48
|
|
|
|
46
|
|
|
|
(352,205
|
)
|
Costs
|
|
|
(1,377,374
|
)
|
|
|
(1,622,208
|
)
|
|
|
(393,074
|
)
|
|
|
(383,198
|
)
|
|
|
(35,142
|
)
|
|
|
(34,053
|
)
|
|
|
233,869
|
|
Net Income (Losses)
|
|
|
687,818
|
|
|
|
810,081
|
|
|
|
199,537
|
|
|
|
194,524
|
|
|
|
(35,094
|
)
|
|
|
(34,007
|
)
|
|
|
(118,336
|
)
|
Assets
|
|
|
10,175,897
|
|
|
|
11,515,524
|
|
|
|
789,439
|
|
|
|
737,769
|
|
|
|
29,237
|
|
|
|
27,769
|
|
|
|
(1,286,490
|
)
|
Liabilities
|
|
|
(486,583
|
)
|
|
|
(550,640
|
)
|
|
|
(8,357
|
)
|
|
|
(7,810
|
)
|
|
|
(4,091
|
)
|
|
|
(3,885
|
)
|
|
|
63,305
|
|
Net Assets
|
|
|
9,689,314
|
|
|
|
10,964,884
|
|
|
|
781,082
|
|
|
|
729,960
|
|
|
|
25,146
|
|
|
|
23,883
|
|
|
|
(1,223,185
|
)
|
This
table shows that the effect of constant exchange rates, versus the actual exchange rate fluctuations, decreased profits for the
Current Quarter by $352,205 and decreased net assets by $1,223,185. In addition, the Company booked transactional exchange rate
losses of $159,329 during the Current Quarter. All of these amounts are material to our overall financial results.
As
a result of the decision by British voters to leave the European Union, we expect economic uncertainty to increase until the negotiations
for the British exit have been completed and the relationship between the UK and the EU has been solidified. This uncertainty
will most likely have a profound effect on the value of the British Pound. Since approximately 40% of our revenues are generated
in that currency, we expect our revenues to be greatly impacted by the resulting currency fluctuations. We also expect our direct
costs of sales for components sourced outside of the UK for our UK operations to increase. Furthermore our balance sheet will
be affected since a significant part of our assets (fixed and current) are held in sterling by our foreign subsidiaries.
Off-Balance
Sheet Arrangements
We
do not have any off balance sheet arrangements.
Inflation
The
effect of inflation on the Company’s operating results was not significant during the 2016 period.
Seasonality
Results
of operations for our products segment are impacted by the offshore drilling season. During the winter months, when less
offshore drilling takes place, demand for our oil and gas related technology is typically at its lowest.
ITEM
3. PROPERTIES
Orlando
,
Florida
Our
corporate offices are co-located with our subsidiary Coda Octopus Products, Inc. in Orlando where we lease premises on a month
to month basis at $1,882 per month.
In addition, Coda
Octopus Products, Inc.,
purchased a property in February
2016 for around $730,000. This property is being used by staff who are assigned or seconded from other parts of our
Organization to our Florida Office to assist with R&D projects and/or to provide training or demonstration of our
products from time to time.
Salt
Lake City, Utah
On
March 21, 2015 Coda Octopus Colmek completed the purchase of new office, production and R&D Facilities comprising 16,000 square
feet in Salt Lake City, Utah for $1,200,000 in cash. These premises were further customized for Colmek’s use at a cost of
approximately $300,000.
Edinburgh,
Scotland
In
order to consolidate our activities which are now spread over three premises in Edinburgh, on or around January 31, 2017, Coda
Octopus Products Ltd purchased a wholly owned property in Edinburgh, comprising manufacturing facilities, research and development
space and offices. The purchase price of the property was the equivalent of $1,512,280 and was paid for in cash. The property
is situated in a business park close to Edinburgh Airport and Port Edgar and the Firth of Forth which is ideally located for conducting
trials and demonstrations of our products. This new facility has 12,070 square feet of net internal. This property will be reconfigured
for our specific use and will take the Company around 4 months to achieve this. In the meantime, we continue to have the other
premises listed below. We intend to surrender the three properties described immediately below. If we do not manage to find
sub-lessees for these property we could incur early termination penalties of approximately $250,000.
Offices
Our
wholly owned United Kingdom subsidiary, Coda Octopus Products Ltd, leases office space comprising 4,099 square feet in Edinburgh,
United Kingdom. These premises are used as offices. The building is located close to the Port of Leith and the Firth of Forth,
which is convenient for conducting trials and demonstrations of our products. The lease for these premises expires February 28,
2019. The annual rent is fixed for the duration of the lease at the British Pounds equivalent of $54,130 (the rent is stated in
British Pounds and is therefore subject to exchange rate fluctuations).
R
& D Test Facilities
The
Company owns a R&D test facility in Edinburgh, Scotland. These premises comprise 917 square feet and are located immediately
adjacent to this business’ principal place of business. The premises were acquired on February 6, 2015 for a purchase price
of £130,000 (equivalent to $199,318) and have been equipped with an acoustic test tank for the development and testing of
our products and are also utilized for our training activities.
Production
and Repair Services Facilities
In
keeping with its strategy to develop its own core patented flagship technology (its Real Time 3D Sonar Technology), Coda Octopus
Products Ltd is leasing manufacturing and service facilities in Edinburgh comprising 2,450 square feet and located a few hundred
yards from the Company’s corporate offices at Anderson House. These new facilities have been equipped with a test tank and
will be used to manufacture and service our Echoscope
®
products. Our flagship product is produced at this newly
leased facility. The lease expires September 1, 2018. The annual rent is the British Pounds equivalent of $26,950 (the rent is
stated in British Pounds and is therefore subject to exchange rate fluctuations). The rent is fixed for the duration of the lease.
Portland,
Dorset, England
Martech
leases premises owned by Coda Octopus Products Limited. These premises are located in the Marine Center in Portland, Dorset, United
Kingdom, and comprise 9,890 square feet that were acquired by Coda Octopus Products Limited in September 2013. The building comprises
both office space and manufacturing and testing facilities. The lease, which is for a period of 5 years, provides for an annual
rent of the equivalent of $51,000 (the rent is stated in British Pounds and is therefore subject to exchange rate fluctuations).
These premises give easy access to marine facilities such as testing vessels etc.
Bergen,
Norway
Our wholly owned Norwegian subsidiary, Coda
Octopus R&D AS, re-located its facilities on November 30, 2016 and now leases a much smaller facility comprising approximately
300 square feet of office space in a business center. We pay $2,350 on an annual basis (the rent is stated in Norwegian Kroner
and is therefore subject to exchange rate variation). This is as a result of the transfer of the production and servicing of the
Echoscope® to Edinburgh, UK. The facility now serves as a research and development center for hardware development of our
flagship product utilizing our purpose-built laboratories.
All
non-US Dollar denominated rents are stated according to prevailing exchange rates as of the date of each respective lease agreement.
ITEM
4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The
following table sets forth information as of March 23, 2017 regarding the beneficial ownership of our Common Stock, based
on information provided by (i) each of our executive officers and directors; (ii) all executive officers and directors as a group;
and (iii) each person who is known by us to beneficially own more than 5% of the outstanding shares of our Common Stock. The percentage
ownership in this table is based on 9,102,192 shares issued and outstanding as of March 23, 2017. All numbers in the table
have been adjusted to account for a 1 for 14 reverse stock split that was completed on January 11, 2017.
Unless
otherwise indicated, we believe that all persons named in the following table have sole voting and investment power with respect
to all shares of Common Stock that they beneficially own.
Name
and Address of Beneficial Owner
(1)
|
|
Amount
and Nature of Beneficial Ownership of Common Stock
|
|
|
Percent
of
Common
Stock
|
|
Michael Hamilton
|
|
|
7,143
|
|
|
|
*
|
|
Annmarie Gayle
(2)
|
|
|
13,037
|
|
|
|
*
|
|
Michael Midgley
|
|
|
7,143
|
|
|
|
*
|
|
Blair Cunningham
|
|
|
24,297
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Francis Rogers
|
|
|
7,143
|
|
|
|
*
|
|
Niels Sondergaard
Carit
Etlars Vej 17A
8700 Horsens
Denmark
|
|
|
2,213,485
|
|
|
|
24.4
|
%
|
BKF
Asset Holding Inc.
(4)
31248
Oak Crest Drive, Suite 110
Westlake
Village, CA 91361
|
|
|
669,447
|
|
|
|
7.4
|
%
|
G.
Tyler Runnels
(5)
2049
Century Park East, Suite 320
Los
Angeles, CA 90067
|
|
|
1,310,946
|
|
|
|
14.4
|
%
|
J.
Steven Emerson
(6)
1522
Ensley Avenue
Los
Angeles, CA 90024
|
|
|
1,099,408
|
|
|
|
12.1
|
%
|
Bryan
Ezralow
(7)
23622
Calabasas Rd. Suite 200
Calabasas,
CA 91302
|
|
|
1,163,410
|
|
|
|
12.8
|
%
|
All Directors
and Executive Officers as a Group (five persons):
|
|
|
58,763
|
|
|
|
*
|
|
*
)
Less than 1%.
1)
|
Unless
otherwise indicated, the address of all individuals and entities listed below is c/o Coda Octopus Group, Inc. 7380 Sand
Lake Road, Suite #500, Orlando, FL 32819.
|
2)
|
Does
not include 2,213,485 shares beneficially owned by Ms. Gayle’s domestic partner. Ms. Gayle disclaims any beneficial
ownership in those shares.
|
3)
|
The
Company has been advised that this entity is the registered owner of the shares and that they are being held for the benefit
of a number of parties. The Company has been further advised that it has sole voting and dispositive power over these shares
through John W. Galuchi, Jr., its managing member.
|
4)
|
The
Company has been advised that Steven N. Bronson has voting and dispositive power over the shares held by this entity.
|
5)
|
Includes
1,002,852 shares held by the G. Tyler Runnels and Jasmine Niklas Runnels TTEES of The Runnels Family Trust DTD
1-11-2000 of which Mr. Runnels is a trustee; 244,300 shares held by T.R. Winston; 25,140 shares held by High
Tide LLC; 24,368 shares held by TRW Capital Growth Fund, Ltd.; and 14,286 shares held by Pangaea Partners. The Company has
been advised that Mr. Runnels has voting and dispositive power with respect to all of these shares.
|
6)
|
Includes
the following: 138,776 held by IRA R/O II; 112,755 shares held by Roth IRA; 49
,328
shares held by the Brian Emerson IRA; 330,161 shares held by Emerson Partners; 8,286
shares held by the Alleghany Meadows IRA; and 8,286 shares held by the Jill Meadows IRA.
The Company has been advised that Mr. Emerson has voting and dispositive power
with respect to all of these shares.
|
7)
|
Consists
of 986,369 shares held by the Bryan Ezralow 1994
Trust u/t/d 12/22/1994; and 177,041 shares held by EZ MM&B Holdings, LLC.
The Company has been advised that Mr. Ezralow has voting and dispositive power with respect
to these shares.
|
ITEM
5. DIRECTORS AND EXECUTIVE OFFICERS.
The
following persons are the executive officers and directors as of the date hereof:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Annmarie
Gayle
|
|
50
|
|
Chief
Executive Officer and Chairman
|
|
|
|
|
|
Michael Midgley
|
|
64
|
|
Acting
Chief Financial Officer, Chief Executive Officer of Coda Octopus Colmek, Inc.
|
|
|
|
|
|
Blair Cunningham
|
|
47
|
|
President
of Technology and Chief Executive Officer of Coda Octopus Products Inc.
|
|
|
|
|
|
Michael Hamilton
|
|
69
|
|
Director
|
|
|
|
|
|
Francis D (Chuck)
Rogers
|
|
74
|
|
Director
|
Annmarie
Gayle
has been our Chairman since March 2017 and our Chief Executive Officer and a member of the Board of Directors
since 2011. Prior thereto, she spent two years assisting with the restructuring of our Company. She previously served with the
Company as Senior Vice President of Legal Affairs between 2006 and 2007. Earlier in her career she worked for a major London law
practice, the United Nations and the European Union. Ms. Gayle has a strong background in restructuring and has spent more than
12 years in a number of countries where she has been the lead adviser to a number of transitional administrations on privatizing
banks and reforming state owned assets in the CEE countries including banking, infrastructure, mining and telecommunications assets.
Ms. Gayle has also managed a number of large European Union funded projects. Ms. Gayle holds a Law degree gained at the University
of London and a Masters of Law degree from Cambridge University. She is qualified to practice as a solicitor in England &
Wales. Because of her wealth of experience in corporate governance, large scale project management, restructuring, strategy, structuring
and managing corporate transactions, we believe that she is highly qualified to act as our Chief Executive Officer and Chairman
of the Board.
Michael Midgley
has
been our Acting Chief Financial Officer since 2013. He has also been Chief Executive Officer of Colmek since 2010, which he joined
in 2008. He is a qualified CPA and has had his own practice as well as working for regional accounting firms, specializing in
SEC and Tax practice areas. Mr. Midgley attended the University of Utah. Due to Mr. Midgley’s expertise in financial reporting
and discharging his role of Divisional Chief Executive Officer for our wholly owned subsidiary, Colmek, we believe that he is
highly qualified to serve as the Company’s Chief Financial Officer.
Blair
Cunningham
has been with the Company since July 2004 and has had a number of roles including President of Technology and
CEO of Coda Octopus Products, Inc. (current position), Chief Technology Officer and Head of R& D Operations of Coda Octopus
Group, Inc. since 2005 and Technical Manager of Coda Octopus Products Ltd between July 2004 and July 2005. Mr. Cunningham received
an HND in Computer Science in 1989 from Moray College of Further Education, Elgin, Scotland. Because of Mr. Cunningham’s
expertise in software development and technology, the Company believes that he is highly qualified to serve in his current roles.
Michael
Hamilton
was our Chairman of the Board of Directors from June 2010 to March 2017, when he resigned as Chairman but continues
as a Director. Since 2014, Mr. Hamilton has provided accounting and valuation services for a varied list of clients. He was Senior
Vice President of Powerlink Transmission Company from 2011 through 2014. From 1988 to 2003, he was an audit partner at PriceWaterhouseCoopers.
He holds a Bachelor of Science in Accounting from St. Frances College and is a certified public accountant and is accredited in
business valuation. Because of Mr. Hamilton’s background in auditing, strategic corporate finance solutions, financial management
and financial reporting, we believe that he is highly qualified to act as a director.
Francis
D (Chuck) Rogers
has been a member of our Board of Directors since July 2016. Since 2014, he has been affiliated with
Score and KMDR, LLC, a California based financial and business consultancy firm. Mr. Rogers was President and Chief Executive
Officer of three diverse businesses from 1998 to 2014; the most significant was the ASC Group, Inc., an electronics systems integrator
serving the defense and aerospace market worldwide. He holds a B.S. in Ceramic Engineering from Alfred University and an MA in
Economics and Finance from St. Mary’s University. Because of his experience in running large companies and financial expertise,
we believe that Mr. Rogers is highly qualified to be a member of our Board of Directors.
Board
Committees
We
have established an audit committee consisting of two directors: Michael Hamilton (chairman) and Francis Rogers. The Board has
determined that:
|
●
|
Mr.
Hamilton qualifies as an “audit committee financial expert,” as defined by the SEC in Item 407(d)(5) of Regulation
S-K; and
|
|
|
|
|
●
|
All
members of the Audit Committee (i) are “independent” under the independence requirements of Marketplace Rule 5605(a)(2)
of the NASDAQ Stock Market, Inc., (ii) meet the criteria for independence as set forth in the Exchange Act, (iii) have not
participated in the preparation of our financial statements at any time during the past three years and (iv) are financially
literate and have accounting and finance experience.
|
The
designation of Mr. Hamilton as an “audit committee financial expert” will not impose on him any duties, obligations
or liability that are greater than those that are generally imposed on him as a member of our Audit Committee and our Board, and
his designation as an “audit committee financial expert” will not affect the duties, obligations or liability of any
other member of our Audit Committee or Board.
Employment
Agreements
Annmarie
Gayle
Pursuant
to the terms of an employment agreement dated March 16, 2017, the Company employs Ms Gayle
as its Chief Executive Officer on a full-time basis and a member of its Board of Directors. The annual salary is $230,000
payable on a monthly basis. Ms. Gayle is also entitled to an annual performance bonus of up to $100,000,
upon achieving certain targets that are to be defined on an annual basis. The agreement provides for 30 days of paid holidays
in addition to public holidays observed in Scotland.
The
agreement has no definitive term and may be terminated only upon twelve months’ prior written notice by
Ms. Gayle. In the event that the Company terminates her at any time without cause, she is entitled to a payment equal to
her annual salary as well as a separation bonus of $150,000. The Company may terminate the agreement for cause, immediately
and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated breach of the agreement
and negligence and incompetence as reasonably determined by the Company’s Board. The agreement includes a 12-month non-compete
and non-solicitation provision.
The
agreement may be terminated only upon twelve months’ prior written notice without cause. The Company may terminate
the agreement for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious
or repeated breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The
agreement includes a 12-month non-compete and non-solicitation provision.
Blair
Cunningham
Under
the terms of an employment contract dated January 1, 2013, our wholly owned subsidiary Coda Octopus Products, Inc. employs Blair
Cunningham as its Chief Executive Officer and President of Technology. He is being paid an annual base salary of $160,000, subject
to review by the Company’s Chief Executive Officer. Mr. Cunningham is entitled to 25 vacation days in addition to any public
holiday.
The
agreement may be terminated only upon twelve months’ prior written notice without cause. The Company may terminate
the agreement for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious
or repeated breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The
agreement includes a 18-month non-compete and non-solicitation provision.
Michael
Midgley
Pursuant
to the terms of an employment agreement dated June 1, 2011, Mike Midgley was appointed the Chief Executive Officer of our wholly
owned subsidiary Coda Octopus Colmek, Inc. He is being paid an annual salary of $200,000 subject to an annual review by Colmek’s
Board of Directors and the Company’s Chief Executive Officer. Mr. Midgley is entitled to 20 vacation days in addition to
any public holiday.
The
agreement may be terminated at any time upon 4 months’ prior written notice. The Company may terminate the agreement
for cause, immediately and without notice. Among others, “for cause” includes gross misconduct, a serious or repeated
breach of the agreement and negligence and incompetence as reasonably determined by the Company’s Board. The agreement includes
a 12-month non-compete and non-solicitation provision.
On
May 16, 2016, the Company’s Board of Directors ratified Mr. Midgley’s position as the Company’s acting Chief
Financial Officer.
ITEM
6. EXECUTIVE COMPENSATION
The
following table sets forth the compensation for our fiscal years ended October 31, 2015 and 2016 earned by or awarded to, as applicable,
our principal executive officer, principal financial officer and our other most highly compensated executive officers.
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards ($)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
Annmarie Gayle,
|
|
2015
|
|
|
230,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,004
|
|
Chief Executive Officer
|
|
2016
|
|
|
230,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,004
|
|
Michael Midgley,
|
|
2015
|
|
|
166,499
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
16,356
|
|
|
|
197,855
|
|
Chief Financial Officer
|
|
2016
|
|
|
184,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,805
|
|
|
|
201,278
|
|
Blair Cunningham
|
|
2015
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,356
|
|
|
|
166,356
|
|
President of Technology
|
|
2016
|
|
|
158,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,278
|
|
|
|
175,740
|
|
Geoff Turner
|
|
2015
|
|
|
156,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,000
|
|
Deputy Executive Officer
(1)
|
|
2016
|
|
|
156,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,000
|
|
|
(1)
|
Mr
Turner no longer occupies that position.
|
There
were no equity awards outstanding as of October 31, 2016.
DIRECTOR
COMPENSATION
The
following table sets forth the compensation paid to each of our directors (who are not also officers of the Company) for the fiscal
year ended October 31, 2016, in connection with their services to the company. In accordance with the Commission’s rules,
the table omits columns showing items that are not applicable. Except as set forth in the table, no persons were paid any compensation
for director services.
Name
|
|
Fees
Earned or Paid in Cash ($)
|
|
|
Stock
Awards ($)
|
|
|
Total
($)
|
|
Michael
Hamilton
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Francis
(Chuck) Rogers
|
|
|
10,000
|
|
|
|
15,290
|
|
|
|
25,290
|
|
ITEM
7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
On
or around February 21, 2008 we issued senior secured convertible debentures in the principal amount of $12,000,000 (the “Debentures”).
The Company recently restructured the Debentures as follows:
|
1.
|
The
maturity date of the debentures was extended to May 1, 2018;
|
|
|
|
|
2.
|
The
Company agreed to reduce the principal amount outstanding under the Debentures by $2,000,000 payable in 10 equal payments
commencing March 31, 2016. Since reaching this agreement the Company has reduced the principal outstanding by the agreed
$2,000,000.
|
|
|
|
|
3.
|
On
March 1, 2016, the Company issued 2,310,447 shares of its common stock in extinguishment of $3,558,136 (the 130% redemption
premium) due under the Notes at an effective price of $1.54; and
|
|
|
|
|
4.
|
The
Company has agreed to return to filing reports under the Securities Exchange Act of 1934 before March 1, 2017 (the holder
of the Debentures has since unconditionally released the Company from this requirement).
|
As
a result of the restructuring, as of January 31, 2017, the principal balance plus accrued interest and accrued conversion
premium under the Debentures was $9,135,623. The Debentures are secured by all our assets.
The
Debentures are held by CCM Holdings, LLC, a New Jersey entity. CCM Holdings was the registered holder of 22.5% of the Company’s
issued and outstanding shares of common stock at the time the Debenture terms were amended as set forth above.
On
or around December 12, 2016 the Company’s Chief Executive Officer loaned one of our subsidiaries $1,000,000 for working
capital. The loan has a term of one year and carries an interest rate of 4.5%.
Review,
Approval or Ratification of Transactions with Related Parties
We
recently created an audit committee. Our audit committee charter provides that the audit committee will be responsible for reviewing
and approving in advance any related party transaction. Transactions requiring such pre-approval include, with certain exceptions
set forth in Item 404 of Regulation S-K, any transaction, arrangement or relationship, or any series of similar transactions,
arrangements or relationships in which we were or are to be a participant, where the amount involved exceeds $120,000 and a related
person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services
by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness
and employment by us of a related person.
ITEM
8. LEGAL PROCEEDINGS.
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may harm our business. We are currently not aware of any such legal proceedings that we believe will have, individually
or in the aggregate, a material adverse effect on our business, financial condition or operating results.
ITEM
9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our
common stock has been quoted on the OTCQX under the symbol “
COGI” since February 8,
2017 and from January 19, 2017 until that date under the symbol “CDOCD”. Prior thereto, it was quoted on the OTC Pink
under the symbol “CDOC”. The following table sets forth the range of high and low bid prices of our common stock as
reported and summarized on the OTC Pink or OTCQX, as applicable, for the periods indicated. These prices are based on inter-dealer
bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions. All prices
have been adjusted retroactively for the 1 for 14 reverse stock split that was implemented on January 11, 2017.
Year
Ended October 31, 2017
|
|
HIGH
|
|
|
LOW
|
|
First
Quarter
|
|
$
|
6.74
|
|
|
$
|
1.40
|
|
Year Ended
October 31, 2016
|
|
HIGH
|
|
|
LOW
|
|
First Quarter
|
|
$
|
1.54
|
|
|
$
|
1.26
|
|
Second Quarter
|
|
$
|
1.54
|
|
|
$
|
1.12
|
|
Third Quarter
|
|
$
|
2.80
|
|
|
$
|
1.18
|
|
Fourth Quarter
|
|
$
|
4.70
|
|
|
$
|
1.40
|
|
Year
Ended October 31, 2015
|
|
HIGH
|
|
|
LOW
|
|
First Quarter
|
|
$
|
1.12
|
|
|
$
|
0.70
|
|
Second Quarter
|
|
$
|
0.98
|
|
|
$
|
0.84
|
|
Third Quarter
|
|
$
|
1.68
|
|
|
$
|
0.84
|
|
Fourth Quarter
|
|
$
|
1.40
|
|
|
$
|
0.98
|
|
We
have not declared or paid any cash dividends on our common stock, and we currently intend to retain future earnings, if any, to
finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision
whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend
on our financial condition, operating results, capital requirements and other factors that the board of directors considers significant.
As of February 15, 2017, we had 292 stockholders of record.
ITEM
10. RECENT SALES OF UNREGISTERED SECURITIES.
On
June 30, 2015, the Company and the holder of 6,087 shares of Series A Preferred Stock entered into an Exchange Agreement.
Under the terms of the Exchange Agreement, the parties agreed to exchange 6,087 units of Series A Preferred Stock (and
which under the Certificate of Designation provided for dividends and voting rights) for 1,100 units of Series C Preferred Stock.
These shares of Series C Preferred Stock each had a nominal value of $0.001 and a stated value of $1,000. The 6,087 units
of Series A Preferred Stock were surrendered to and cancelled by the Company. The Series C Preferred Stock was redeemed on
December 31, 2016 and has since been eliminated.
On
October 26, 2015, the Company issued 7,143 shares of common stock to one of its then directors, Robert Ethrington, in accordance
with the terms of his election which provided for these shares of common stock to be issued subject to serving at least one year
on the Company’s board.
On
December 15, 2015, the Company purchased the remaining issued and outstanding 200 shares of Series A Preferred Stock and
these have been surrendered and retired. The Series A Preferred Stock was subsequently eliminated.
Pursuant
to the terms of a Restructuring Agreement between the Company and the Senior Secured Debenture Holder, on March 1, 2016 the Company
issued 2,310,477 shares of Common Stock in full and final satisfaction of $3,558,136 representing the Terminal Conversion Premium
outstanding on the Senior Secured Debentures.
During
May, June and August 2016, the Company issued 7,143 to each of six members of the Board of Directors for their services performed
as directors.
On
June 16 August 25 and August 30, 2016, the Company issued an aggregate of 24, 107 shares of common stock to two individuals
for services rendered.
In
November 8, 2016, the Company issued 8,036 shares to a consultant in exchange for services.
All
securities were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended,
under Section 4(2) thereunder as they were issued in reliance on the recipients’ representation that they were accredited
(as such term is defined in Regulation D), without general solicitation and represented by certificates that were imprinted with
a restrictive legend. In addition, all recipients were provided with sufficient access to Company information. Similar restrictions
and conditions also apply to the non-freely transferable shares that were issued prior to the last two financial years.
ITEM
11. DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED.
The
Company’s certificate of incorporation authorizes 150,000,000 shares, par value $0.001 per share of common stock and 5,000,000
shares of preferred stock. As of February 15, 2017, there were 9,102,192 shares of common stock issued and outstanding.
Common
Stock
Each
holder of common stock is entitled to one vote per share on all matters for which such stockholder has voting power as well as
dividends if and where declared by the Company’s Board of Directors. There are no preemptive rights. In the event of liquidation,
dissolution or winding up of the Company’s business, holders of common stock will be entitled to receive, pro rata, all
of the Company’s remaining assets available for distribution, after satisfaction of all of the Company’s debts and
liabilities.
Preferred
Stock
The
Company is authorized to issue 5,000,000 shares of preferred stock none of which have been designated.
ITEM
12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our
Certificate of Incorporation, as amended, provides to the fullest extent permitted by Delaware law, that our directors or officers
shall not be personally liable to us or our stockholders for damages for breach of such director’s or officer’s fiduciary
duty, except: (A) for any breach of the director’s duty of loyalty, (B) for acts or omissions that are not in good faith
or that involve intentional misconduct or a knowing violation of law, (C) for the unlawful payments of dividends, for stock purchases
or in connection with redemptions and (D) for any transaction from which the director derived any improper personal benefit. The
effect of this provision of our Certificate of Incorporation, as amended, is to eliminate our rights and our stockholders (through
stockholders’ derivative suits on behalf of our company) to recover damages against a director or officer for breach of
the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior),
except under certain situations defined by statute. We believe that the indemnification provisions in our Certificate of Incorporation,
as amended, are necessary to attract and retain qualified persons as directors and officers.
Section
145 of the Delaware General Corporation Law provides that a corporation may indemnify a director, officer, employee or agent made
a party to an action by reason of that fact that he or she was a director, officer, employee or agent of the corporation or was
serving at the request of the corporation against expenses actually and reasonably incurred by him or her in connection with such
action if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests
of the corporation and with respect to any criminal action, had no reasonable cause to believe his or her conduct was unlawful.
ITEM
13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
financial statements of the Company appear at the end of this report beginning with the Index to Financial Statements on page
F-1.
ITEM
14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There
are not and have not been any disagreements between the Company and its accountant on any matter of accounting principles, practices,
or financial statement disclosure that bare required to be disclosed herein.
ITEM
15. FINANCIAL STATEMENTS AND EXHIBITS.
|
(a)
|
List
separately all financial statements filed as part of the registration statement.
|
The
financial statements attached to this Registration Statement are listed under the Index to Financial Statements attached hereto.
Exhibit
Number
|
|
Description
|
2.1
|
|
Plan
and Agreement of Merger dated July 12, 2004 by and between Panda and Coda Octopus *
|
3.1
|
|
Restated
Certificate of Incorporation**
|
3.2
|
|
By-Laws
*
|
10.16
|
|
Subscription
Agreement dated February 21, 2008, between the Company and The Royal Bank of Scotland***
|
10.17
|
|
Form
of Loan Note Instrument dated February 21, 2008***
|
10.18
|
|
Form
of Loan Note Certificate***
|
10.19
|
|
Security
Agreement dated February 21, 2008***
|
10.20
|
|
Floating
Charge executed by Coda Octopus R&D Limited dated February 21, 2008***
|
10.21
|
|
Floating
Charge executed by Coda Octopus Products Limited dated February 21, 2008***
|
10.22
|
|
Form
of Guarantee***
|
10.24
|
|
Debenture
issued by Martech Systems (Weymouth) Limited***
|
10.25
|
|
Deed
of Amendment to Loan Note Transaction Documents dated October 31, 2015 by and between the Company and CCM Holdings LLC***
|
10.26
|
|
[Reserved]
|
10.27
|
|
Employment
Contract between Coda Octopus Colmek, Inc. and Mike Midgley****
|
10.28
|
|
Consultancy
Agreement dated June 15, 2013 between the Company and Taktos Limited****
|
10.29
|
|
Employment
Contract dated January 1, 2013 between Coda Octopus Products, Inc. and Blair Cunningham****
|
10.30
|
|
Deed
of Amendment to Loan Note Transaction Documents dated October 17, 2016 by and between the Company and CCM Holdings LLC**
|
10.31
|
|
Deed
of Amendment to Loan Note Transaction Documents dated November 1, 2016 by and between the Company and CCM Holdings LLC
|
10.32
|
|
Employment
Contract dated March 16, 2017 between the Company and Annmarie Gayle
|
*
|
|
Incorporated
by reference to the Company’s Registration Statement on Form SB-2 (SEC File No.143144)
|
**
|
|
Previously
filed
|
***
|
|
Incorporated
by reference to the Company’s Annual Report on Form 10-KSB for the year ended October 31, 2007
|
****
|
|
Incorporated
by reference to the Company’s Annual Report on Form 10-KSB for the year ended October 31, 2010
|
SIGNATURES
Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
CODA
OCTOPUS GROUP, INC.
|
Date:
March 29, 2017
|
|
|
|
|
|
|
|
By:
|
/s/
Annmarie Gayle
|
|
|
(Signature)
Chief Executive Officer
|
Consolidated
Financial Statements
Three
Months Ended January 31, 2017
Years
Ended October 31, 2016 and 2015
CODA
OCTOPUS GROUP, INC.
INDEX
TO FINANCIAL STATEMENTS
Years
Ended October 31, 2016 and 2015
CODA
OCTOPUS GROUP, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
January
31, 2017 (UNAUDITED) AND OCTOBER 31, 2016
|
|
2017
|
|
|
2016
|
|
|
|
Unaudited
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
4,112,930
|
|
|
$
|
5,601,767
|
|
Restricted Cash
|
|
|
-
|
|
|
|
13,694
|
|
Accounts Receivables,
Net
|
|
|
1,902,218
|
|
|
|
3,274,204
|
|
Inventory
|
|
|
2,797,648
|
|
|
|
2,598,925
|
|
Unbilled Receivables
|
|
|
4,521,300
|
|
|
|
3,406,693
|
|
Other Current Assets
|
|
|
667,689
|
|
|
|
140,954
|
|
Prepaid
Expenses
|
|
|
146,726
|
|
|
|
112,883
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
14,148,511
|
|
|
|
15,149,121
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
|
|
|
|
|
|
|
Property and Equipment,
net
|
|
|
5,361,581
|
|
|
|
3,840,500
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deferred Tax Asset
|
|
|
99,413
|
|
|
|
96,374
|
|
Goodwill
and Other Intangibles, net
|
|
|
3,732,156
|
|
|
|
3,749,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,831,569
|
|
|
|
3,845,899
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
23,341,661
|
|
|
$
|
22,835,520
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable,
trade
|
|
$
|
1,130,106
|
|
|
$
|
1,396,475
|
|
Accrued Expenses
and Other Current Liabilities
|
|
|
596,258
|
|
|
|
794,067
|
|
Loans and Note Payable,
current
|
|
|
1,000,000
|
|
|
|
846,994
|
|
Deferred
Revenues
|
|
|
421,540
|
|
|
|
464,541
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,147,904
|
|
|
|
3,502,077
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and Note Payable, long term
|
|
|
9,135,623
|
|
|
|
9,178,930
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
12,283,527
|
|
|
|
12,681,007
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock,
Series C, $.001 par value; 5,000,000 shares authorized, 0 and 1,100 issued and outstanding, as of January 31, 2017 and October
31, 2016, respectively
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Common stock, $.001 par value; 150,000,000 shares
|
|
|
|
|
|
|
|
|
authorized, 9,102,192 and 9,094,156 shares issued and outstanding
as of January 31, 2017 and October 31, 2016, respectively
|
|
|
9,102
|
|
|
|
9,094
|
|
Additional paid-in capital
|
|
|
51,715,948
|
|
|
|
52,805,455
|
|
Accumulated other comprehensive loss
|
|
|
(1,916,277
|
)
|
|
|
(2,337,437
|
)
|
Accumulated deficit
|
|
|
(38,750,639
|
)
|
|
|
(40,322,600
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders'
Equity
|
|
|
11,058,134
|
|
|
|
10,154,513
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
and Stockholders' Equity
|
|
$
|
23,341,661
|
|
|
$
|
22,835,520
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CODA
OCTOPUS GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE THREE MONTHS ENDED JANUARY 31, 2017 AND 2016
(UNAUDITED)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
5,358,203
|
|
|
$
|
4,775,839
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
1,983,046
|
|
|
|
2,541,150
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,375,157
|
|
|
|
2,234,689
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
251,230
|
|
|
|
228,300
|
|
Selling,
General & Administrative
|
|
|
1,405,888
|
|
|
|
1,559,539
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
1,657,118
|
|
|
|
1,787,839
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
1,718,039
|
|
|
|
446,850
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
49,416
|
|
|
|
71,892
|
|
Interest
Expense
|
|
|
(195,494
|
)
|
|
|
(229,222
|
)
|
|
|
|
|
|
|
|
|
|
Total
Other Expense
|
|
|
(146,078
|
)
|
|
|
(157,330
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE INCOME TAXES
|
|
|
1,571,961
|
|
|
|
289,520
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX (EXPENSE)
BENEFIT
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,571,961
|
|
|
$
|
289,520
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,101,493
|
|
|
|
6,741,330
|
|
Diluted
|
|
|
9,101,493
|
|
|
|
8,941,330
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,571,961
|
|
|
$
|
289,520
|
|
Other Comprehensive
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
421,160
|
|
|
|
(1,072,077
|
)
|
|
|
|
|
|
|
|
|
|
Total
Other Comprehensive Income (Loss)
|
|
|
421,160
|
|
|
|
(1,072,077
|
)
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
$
|
1,993,121
|
|
|
$
|
(782,557
|
)
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CODA
OCTOPUS GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE THREE MONTS ENDED JANUARY 31, 2017
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
Series
C
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Other
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
(Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31,
2016 Audited
|
|
|
1,100
|
|
|
$
|
1
|
|
|
|
9,094,156
|
|
|
$
|
9,094
|
|
|
$
|
52,805,455
|
|
|
$
|
(2,337,437
|
)
|
|
$
|
(40,322,600
|
)
|
|
$
|
10,154,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Issued to Consultant
|
|
|
-
|
|
|
|
-
|
|
|
|
8,036
|
|
|
|
8
|
|
|
|
10,492
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,500
|
|
Redemption of Series C Preferred Stock
|
|
|
(1,100
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,099,999
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,100,000
|
)
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
421,160
|
|
|
|
-
|
|
|
|
421,160
|
|
Net Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,571,961
|
|
|
|
1,571,961
|
|
Balance, January 31, 2017 Unaudited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
9,102,192
|
|
|
$
|
9,102
|
|
|
$
|
51,715,948
|
|
|
$
|
(1,916,277
|
)
|
|
$
|
(38,750,639
|
)
|
|
$
|
11,058,134
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CODA
OCTOPUS GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2017 AND 2016
(UNAUDITED)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,571,961
|
|
|
$
|
289,520
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
176,399
|
|
|
|
179,165
|
|
Financing costs
|
|
|
-
|
|
|
|
(212,500
|
)
|
Stock compensation
|
|
|
10,500
|
|
|
|
-
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,371,984
|
|
|
|
478,573
|
|
Inventory
|
|
|
(198,724
|
)
|
|
|
570,165
|
|
Prepaid expenses
|
|
|
(33,842
|
)
|
|
|
(64,991
|
)
|
Unbilled receivables
|
|
|
(1,114,606
|
)
|
|
|
620,789
|
|
Other assets
|
|
|
(526,736
|
)
|
|
|
23,237
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
and other current liabilities
|
|
|
(464,175
|
)
|
|
|
189,840
|
|
Deferred
revenues
|
|
|
(43,000
|
)
|
|
|
81,180
|
|
Net Cash Provided
by Operating Activities
|
|
|
749,761
|
|
|
|
2,154,978
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property
and equipment
|
|
|
(1,680,111
|
)
|
|
|
121,989
|
|
Restricted cash
|
|
|
13,695
|
|
|
|
864
|
|
Deferred
tax asset
|
|
|
(3,039
|
)
|
|
|
(3,210
|
)
|
Net Cash (Used in)
Provided by Investing Activities
|
|
|
(1,669,455
|
)
|
|
|
119,643
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds (Payments)
- loans and notes payable
|
|
|
109,697
|
|
|
|
(48,591
|
)
|
Redemption
of Series C preferred stock
|
|
|
(1,100,000
|
)
|
|
|
-
|
|
Net Cash (Used in)
Financing Activities
|
|
|
(990,303
|
)
|
|
|
(48,591
|
)
|
EFFECT OF CURRENCY
EXCHANGE RATE CHANGES ON CASH
|
|
|
421,160
|
|
|
|
(1,072,077
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
(1,488,837
|
)
|
|
|
1,153,953
|
|
|
|
|
|
|
|
|
|
|
CASH AT THE BEGINNING
OF THE PERIOD
|
|
|
5,601,767
|
|
|
|
6,310,694
|
|
|
|
|
|
|
|
|
|
|
CASH AT THE END
OF THE PERIOD
|
|
$
|
4,112,930
|
|
|
$
|
7,464,647
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
203,994
|
|
|
$
|
425,000
|
|
Non-cash transactions
|
|
|
|
|
|
|
|
|
Common stock issued
for terminal conversion premium
|
|
$
|
-
|
|
|
$
|
3,558,136
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CODA
OCTOPUS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION
The
accompanying unaudited interim consolidated financial statements have been prepared based upon U.S. Securities and Exchange Commission
rules that permit reduced disclosure for interim periods. Therefore, they do not include all information and footnote disclosures
necessary for a complete presentation of Coda Octopus Group, Inc.’s financial position, results of operations and cash flows,
in conformity with generally accepted accounting principles. Coda Octopus Group, Inc. (the Company, Coda Octopus,” “we,”
or “us”) filed audited consolidated financial statements as of and for the fiscal years ended October 31, 2016 and
2015 which included all information and notes necessary for such complete presentation in conjunction with its report on Form
10. The results of operations for the interim period ended January 31, 2017 are not necessarily indicative of the results to be
expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year ended October 31, 2016, which are contained in the Company’s
report on Form 10. The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of
normal recurring items) which are, in the opinion of management, necessary for a fair statement of the Company’s financial
position as of January 31, 2017 and the results of operations, comprehensive income and cash flows for the interim periods ended
January 31, 2017 and 2016. The unaudited interim consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company uses
the US dollar as the reporting currency for financial reporting. The financial position and results of operations of the Company’s
UK-based operations are measured using the British Pound Sterling, Australian based operations are measured using Australian Dollars
and Norwegian based operations are measured using Norwegian Kroner as the functional currencies. Foreign currency translation
gains and losses are recorded as a change in the category of other comprehensive income. Transaction gains and losses generated
from the re-measurement of assets and liabilities denominated in currencies other than the functional currency of our foreign
operations are also included in the category of other comprehensive income.
NOTE
2 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company’s short term financial instruments consist of cash and cash equivalents, receivables, accounts payable and the line
of credit. The Company adjusts the carrying value of financial assets and liabilities denominated in other currencies such as
cash, receivables, accounts payable and the lines of credit using the appropriate exchange rates at the balance sheet date. The
Company believes that the carrying values of these short term financial instruments approximate their estimated fair values.
NOTE
3 – FOREIGN CURRENCY TRANSLATION
The
financial position and results of operations of the Company’s foreign subsidiaries are measured using the local currency
as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into U.S. dollars
at exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted average exchange
rates during the year. The resulting translation gains and losses on assets and liabilities are recorded in accumulated other
comprehensive income (loss), and are excluded from net income until realized through a sale or liquidation of the investment.
NOTE
4 – INVENTORY
Inventory
is stated at the lower of cost (first-in first-out method) or market. Inventory consisted of the following components:
|
|
January
31, 2017
|
|
|
October
31, 2016
|
|
|
|
|
|
|
|
|
Raw materials and parts
|
|
$
|
1,894,974
|
|
|
$
|
1,734,798
|
|
Work in progress
|
|
|
261,849
|
|
|
|
88,682
|
|
Demo goods
|
|
|
457,398
|
|
|
|
324,752
|
|
Finished goods
|
|
|
183,428
|
|
|
|
450,693
|
|
Total Inventory
|
|
$
|
2,797,648
|
|
|
$
|
2,598,925
|
|
NOTE
5 – OTHER CURRENT ASSETS
Other
current assets consisted of the following at January 31, 2017 and October 31, 2016:
|
|
January
31, 2017
|
|
|
October
31, 2016
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
50,278
|
|
|
$
|
(349
|
)
|
Other receivables
|
|
|
261,585
|
|
|
|
35,543
|
|
Value added tax
(VAT) receivable
|
|
|
355,827
|
|
|
|
105,760
|
|
Total Other Current
Assets
|
|
$
|
667,689
|
|
|
$
|
140,954
|
|
NOTE
6 – ESTIMATES
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues including unbilled and deferred revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant estimates include costs and earnings in excess
of billings, billings in excess of costs and estimated earnings and the valuation of goodwill.
NOTE
7 – CONTRACTS IN PROGRESS
Costs
and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have
not been invoiced to customers as of the date of the balance sheet. These amounts are stated on the consolidated balance sheets
as Unbilled Receivables of $4,521,300 and $3,406,693 as of January 31, 2017 and October 31, 2016, respectively.
Our
Deferred Revenue of $421,540 and $464,541 as of January 31, 2017 and October 31, 2016, respectively, consists of billings in excess
of costs and revenues received as part of our warranty obligations upon completing a sale – elaborated further in the last
paragraph of this note.
Billings
in excess of cost and estimated earnings on uncompleted contracts represent project invoices billed to customers that have not
been earned as of the date of the balance sheets. These amounts are stated on the balance sheets as a component of Deferred Revenue
of $0 as of January 31, 2017 and October 31, 2016, respectively.
Revenue
received as part of sales of equipment includes a provision for warranty and is treated as deferred revenue, along with extended
warranty sales, and Through Life Support with these amounts amortized over 12 months, our stated warranty period, from the date
of sale and 60 months for Through Life Support. These amounts are stated on the balance sheets as a component of Deferred Revenue
of $421,540 and $464,541 as of January 31, 2017 and October 31, 2016, respectively.
NOTE
8 – CONCENTRATIONS
Significant
Customers
During
the three months ended January 31, 2017, the Company had two customers from whom it generated sales greater than 10% of net revenues.
Revenues from these customers were $1,935,662, or 36% of net revenues during the period. Total accounts receivable from these
customers at January 31, 2017 were $129,969 or 7% of accounts receivable.
During
the three months ended January 31, 2016 , the Company had two customers from whom it generated sales greater than 10% of net revenues.
Revenues from these customers were $1,539,725, or 32% of net revenues during the period. Total accounts receivable from these
customers at January 31, 2016 was $186,111 or 12% of accounts receivable.
NOTE
9 – LOANS AND NOTES PAYABLE
Loans
and notes payable consisted of the following at January 31, 2017 and October 31, 2016:
|
|
January
31, 2017
|
|
|
October
31, 2016
|
|
On February 21, 2008
the Company issued a convertible senior secured debenture with a face value of $12 million (“Secured Debentures”). The
Secured Debentures under its original terms matured on February 21, 2015 and has been subject to a series of extension. The
Latest Deed of Amendment extends the Maturity Date to May 1, 2018. The Secured Debentures attracts interest of 8.5% annually
and this is payable sixty days after the end of the Company’s financial quarter. Since the date of issuance
of the Secured Debentures the Company has redeemed 40 Debentures (each having a face value of $100,000). The current face
value of the Secured Debentures is $8 million. The Secured Debentures had Terminal Conversion Balance of $3,558,136. This
amount was converted into the Company’s common stock as of January 31, 2016. During the term, the Secured
Debenture is convertible into shares of our common stock, at the option of the Debenture holder, at a conversion price of
$14.70. We may also force the conversion of these Notes into our common stock after two years in the event that we obtain
a listing on a national exchange and our stock price closes on 40 consecutive trading days at or above $35.00 between the
second and third anniversaries of this agreement; $40.60 between the third and fourth anniversaries of this agreement; and
$49.00 after the fourth anniversary of this agreement or where the daily volume weighted average price of our stock as quoted
on the Over The Counter Bulletin Board or any other US National Exchange on which our securities are then listed has, for
at least 40 consecutive trading days closed at the agreed price. Balance includes principal and accrued interest. This secured
debenture is secured by all assets and undertakings of the company and is held by a shareholder which controlled approximately
22.5% of the issued and outstanding common stock of the Company at the time the most recent amendments to the Secured Debentures
were agreed to.
|
|
$
|
9,135,623
|
|
|
$
|
9,744,123
|
|
|
|
|
|
|
|
|
|
|
One of the subsidiaries, has a working
capital loan from the CEO of the Group for working capital. The note is due on November 1, 2017 and carries an interest rate
of 4.5%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
The Company
had a 10 year secured mortgage for $527,675, secured by a building in the UK that requires monthly principal payments of $4,018
along with interest at 2.75%, and was due to mature in October 2023. The conversion rate varies according to exchange rates
fluctuations. This mortgage is secured by our building, located in Portland UK. This mortgage was paid in full on December
13, 2016.
|
|
|
-
|
|
|
|
281,801
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,135,623
|
|
|
|
10,025,924
|
|
Less: current
portion
|
|
|
(1,000,000
|
)
|
|
|
(846,994
|
)
|
Total Long-Term
Loans and Notes Payable
|
|
$
|
9,135,623
|
|
|
$
|
9,178,930
|
|
NOTE
10 – ACCUMULATED OTHER COMPREHENSIVE INCOME
|
|
January
31, 2017
|
|
|
October
31, 2016
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
(2,337,437
|
)
|
|
$
|
373,516
|
|
Total other comprehensive
income (loss) for the year - foreign currency translation adjustment
|
|
|
421,160
|
|
|
|
(2,710,953
|
)
|
Balance, end of period
|
|
$
|
(1,916,277
|
)
|
|
$
|
(2,337,437
|
)
|
NOTE
11 – RECENT ACCOUNTING PRONOUNCEMENTS
On
May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount
of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard
will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the
retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts
with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning
after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date.
We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related
disclosures.
On
February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability
on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified
as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to
align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type
leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and
interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective
transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We are
currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
On
March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies various
aspects related to the accounting and presentation of share-based payments. The amendments require entities to record all tax
effects related to share-based payments at settlement or expiration through the income statement and the windfall tax benefit
to be recorded when it arises, subject to normal valuation allowance considerations. All tax-related cash flows resulting from
share-based payments are required to be reported as operating activities in the statement of cash flows. The updates relating
to the income tax effects of the share-based payments including the cash flow presentation must be adopted either prospectively
or retrospectively. Further, the amendments allow the entities to make an accounting policy election to either estimate forfeitures
or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted
using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings. The effective
date of the new standard for public companies is for fiscal years beginning after December 15, 2016 and interim periods within
those fiscal years. Early adoption is permitted. We have evaluated the effects of this updated standard and determined that it
will not have a significant impact on our consolidated financial statements and related disclosures.
With
the exception of the updated standards discussed above, there have been no new accounting pronouncements not yet effective that
have significance, or potential significance, to our Consolidated Financial Statements.
NOTE
12 – EARNINGS PER COMMON SHARE
|
|
Three
Months
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
January
31, 2017
|
|
|
January
31, 2016
|
|
Fiscal Period
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Earnings
from Continuing Operations
|
|
$
|
1,571,961
|
|
|
$
|
289,520
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
outstanding
|
|
|
9,101,493
|
|
|
|
6,741,330
|
|
Conversion
of Series C Preferred Stock
|
|
|
-
|
|
|
|
2,200,000
|
|
Diluted outstanding
shares
|
|
|
9,101,493
|
|
|
|
8,941,330
|
|
Earnings from continuing
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.03
|
|
NOTE
13 – SEGMENT ANALYSIS
We
are operating in two reportable segments, which are managed separately based upon fundamental differences in their operations.
Coda Octopus Martech and Coda Octopus Colmek operate as contractors, and the balance of our operations are comprised of product
sales.
Segment
operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Corporate includes
general corporate administrative costs.
The
Company evaluates performance and allocates resources based upon operating income. The accounting policies of the reportable segments
are the same as those described in the summary of accounting policies.
There
are inter-segment sales which have been eliminated in our financial statements but are disclosed in the tables below for information
purposes.
The
following table summarizes segment asset and operating balances by reportable segment for the three months ended January 31, 2017
and 2016 respectively.
The
Company’s reportable business segments operate in three geographic locations. Those geographic locations are:
*
United States
*
Europe
*
Australia
Information
concerning principal geographic areas is presented below according to the area where the activity has taken place for the three
months ended January 31, 2017 and 2016 respectively:
|
|
Marine
Technology Business (Products)
|
|
|
Marine
Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended January 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
2,450,599
|
|
|
$
|
2,907,604
|
|
|
$
|
-
|
|
|
$
|
5,358,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
730,020
|
|
|
|
1,253,025
|
|
|
|
-
|
|
|
|
1,983,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,720,578
|
|
|
|
1,654,579
|
|
|
|
-
|
|
|
|
3,375,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
251,230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
251,230
|
|
Selling, General
& Administrative
|
|
|
574,648
|
|
|
|
686,411
|
|
|
|
144,829
|
|
|
|
1,405,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
894,701
|
|
|
|
968,168
|
|
|
|
(144,829
|
)
|
|
|
1,718,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
49,416
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,416
|
|
Interest Expense
|
|
|
(350,334
|
)
|
|
|
(124,221
|
)
|
|
|
279,061
|
|
|
|
(195,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(300,918
|
)
|
|
|
(124,221
|
)
|
|
|
279,061
|
|
|
|
(146,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
593,783
|
|
|
|
843,947
|
|
|
|
134,232
|
|
|
|
1,571,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax refund (expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
593,783
|
|
|
$
|
843,947
|
|
|
$
|
134,232
|
|
|
$
|
1,571,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
10,586,262
|
|
|
$
|
12,249,349
|
|
|
$
|
506,050
|
|
|
$
|
23,341,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
843,107
|
|
|
|
1,716,788
|
|
|
|
9,723,632
|
|
|
|
12,283,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated
from sales above
|
|
|
172,853
|
|
|
|
59,899
|
|
|
|
118,875
|
|
|
|
351,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
101,463
|
|
|
|
71,725
|
|
|
|
3,211
|
|
|
|
176,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
1,645,460
|
|
|
|
22,181
|
|
|
|
12,470
|
|
|
|
1,680,111
|
|
|
|
Marine
Technology Business (Products)
|
|
|
Marine
Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended January 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
2,991,622
|
|
|
$
|
1,784,217
|
|
|
$
|
-
|
|
|
$
|
4,775,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
1,360,503
|
|
|
|
1,180,647
|
|
|
|
-
|
|
|
|
2,541,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,631,119
|
|
|
|
603,570
|
|
|
|
-
|
|
|
|
2,234,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
228,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
228,300
|
|
Selling, General
& Administrative
|
|
|
652,485
|
|
|
|
785,323
|
|
|
|
121,731
|
|
|
|
1,559,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
750,334
|
|
|
|
(181,753
|
)
|
|
|
(121,731
|
)
|
|
|
446,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
65,917
|
|
|
|
5,975
|
|
|
|
-
|
|
|
|
71,892
|
|
Interest Expense
|
|
|
(171,186
|
)
|
|
|
(57,328
|
)
|
|
|
(708
|
)
|
|
|
(229,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(105,269
|
)
|
|
|
(51,353
|
)
|
|
|
(708
|
)
|
|
|
(157,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
645,065
|
|
|
|
(233,106
|
)
|
|
|
(122,439
|
)
|
|
|
289,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax refund (expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
645,065
|
|
|
$
|
(233,106
|
)
|
|
$
|
(122,439
|
)
|
|
$
|
289,520
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
11,474,041
|
|
|
$
|
8,981,178
|
|
|
$
|
649,179
|
|
|
$
|
21,104,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,447,232
|
|
|
|
922,675
|
|
|
|
11,701,859
|
|
|
|
14,071,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated
from sales above
|
|
|
134,392
|
|
|
|
170,948
|
|
|
|
125,125
|
|
|
|
430,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
84,457
|
|
|
|
91,354
|
|
|
|
3,354
|
|
|
|
179,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
(153,962
|
)
|
|
|
31,973
|
|
|
|
-
|
|
|
|
(121,989
|
)
|
External
Revenues by Geographic Locations
|
|
|
USA
|
|
|
|
Europe
|
|
|
|
Australia
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January
31, 2017
|
|
$
|
2,749,767
|
|
|
$
|
2,017,036
|
|
|
$
|
591,399
|
|
|
$
|
5,358,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, 2016
|
|
$
|
1,664,421
|
|
|
$
|
2,646,728
|
|
|
$
|
464,690
|
|
|
$
|
4,775,839
|
|
NOTE
14: ACQUISITION OF NEW OFFICE AND MANUFACTURING FACILITY
Our
flagship products business, Coda Octopus Products Limited conducts most of its operations in Edinburgh, Scotland. It currently
operates over 3 independent premises, which does not facilitate efficiency or economies of scale. In order to consolidate our
activities and accommodate fully our recently transitioned Production capability of our flagship real time 3D imaging sonar, on
or around January 31, 2017 Coda Octopus Products Limited (a wholly owned subsidiary of the Company) acquired business premises
which comprise manufacturing facilities, research and development space and offices. The purchase price of the property was the
equivalent of $1,512,280 and was paid for in cash. The property is situated in a business park close to Edinburgh Airport and
Port Edgar and the Firth of Forth which is ideally located for conducting trials and demonstrations of our products. This new
facility has 12,070 square feet of net internal space. This property will be reconfigured for our specific use and will take the
Company around 4 months to achieve this. In the meantime, we continue to have our currently occupied premises. We intend to surrender
the three properties which we currently utilize. We may incur one off costs for early termination associated with our lease agreement
for our main offices in Edinburgh although we are trying to minimize these by seeking to sub-let for these premises.
NOTE
15— SUBSEQUENT EVENTS
Subsequent
events were evaluated through March 15, 2017.
On
or around March 8, 2017 Michael Hamilton, Chairman of our Board of Directors resigned as Chairman and Annmarie Gayle was appointed
to this position. Michael Hamilton continues to serve on the Board of Directors and the Audit Committee.
On
or around March 8, 2017 Blair Cunningham, Michael Midgley and Geoff Turner resigned from the Board of Directors.
There
are no adverse circumstances leading to these resignations. The Company has filed a Form 10 with the Securities Exchange Commission
and this is part of the process of the Company preparing for becoming a SEC Reporting Company.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Coda Octopus Group, Inc.
Lakeland,
Florida
We
have audited the accompanying consolidated balance sheets of Coda Octopus Group, Inc. (the “Company”) as of October
31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, changes in stockholders’
equity, and cash flows for the years ended October 31, 2016 and 2015. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Coda Octopus Group, Inc. as of October 31, 2016 and 2015, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the United States of America.
/s/
Frazier & Deeter, LLC
|
|
January
30, 2017
Tampa,
Florida
A
Member of American Institute of Certified Public Accountants, the AICPA Alliance for CPA Firms, Public Company Accounting Oversight
Board, CPAmerica International and PKF North America.
CODA
OCTOPUS GROUP, INC.
Consolidated
Balance Sheets
October
31, 2016 and 2015
ASSETS
|
|
2016
|
|
|
2015
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
5,601,767
|
|
|
$
|
6,310,694
|
|
Restricted Cash
|
|
|
13,694
|
|
|
|
-
|
|
Accounts Receivables
, Net
|
|
|
3,274,204
|
|
|
|
2,063,295
|
|
Inventory
|
|
|
2,598,925
|
|
|
|
3,781,311
|
|
Unbilled Receivables
|
|
|
3,406,693
|
|
|
|
1,479,874
|
|
Other Current Assets
|
|
|
140,954
|
|
|
|
319,481
|
|
Prepaid
Expenses
|
|
|
112,884
|
|
|
|
126,504
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
15,149,121
|
|
|
|
14,081,159
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
|
|
|
|
|
|
|
Property and Equipment,
net
|
|
|
3,840,500
|
|
|
|
3,935,520
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deferred Tax Asset
|
|
|
96,374
|
|
|
|
-
|
|
Restricted Cash
|
|
|
-
|
|
|
|
13,890
|
|
Goodwill
and Other Intangibles, net
|
|
|
3,749,525
|
|
|
|
3,849,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,845,899
|
|
|
|
3,863,552
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
22,835,520
|
|
|
$
|
21,880,231
|
|
The
accompanying notes are an integral part of these consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Consolidated
Balance Sheets (Continued)
October
31, 2016 and 2015
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
2016
|
|
|
2015
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable, trade
|
|
$
|
1,396,475
|
|
|
$
|
1,032,673
|
|
Accrued Expenses
and Other Current Liabilities
|
|
|
794,067
|
|
|
|
705,927
|
|
Loans and Note Payable,
current
|
|
|
846,994
|
|
|
|
2,050,930
|
|
Deferred
Revenues
|
|
|
464,541
|
|
|
|
495,566
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,502,077
|
|
|
|
4,285,096
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liability
|
|
|
-
|
|
|
|
35,963
|
|
Loans
and Note Payable, long term
|
|
|
9,178,930
|
|
|
|
13,302,120
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
12,681,007
|
|
|
|
17,623,179
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock,
Series A, $.001 par value; 50,000 shares authorized, 0 and 200 issued and outstanding, as of October 31, 2016 and October
31, 2015, respectively
|
|
|
-
|
|
|
|
-
|
|
Preferred stock,
Series C, $.001 par value; 50,000 shares authorized, 1,100 issued and outstanding, as of October 31, 2016 and October 31,
2015, respectively
|
|
|
1
|
|
|
|
1
|
|
Common stock, $.001 par value; 150,000,000
shares authorized, 9,094,156 and 6,716,714 shares issued and outstanding as of October 31, 2016 and October 31, 2015, respectively
|
|
|
9,094
|
|
|
|
6,717
|
|
Additional paid-in
capital
|
|
|
52,805,455
|
|
|
|
49,129,966
|
|
Accumulated other
comprehensive income (loss)
|
|
|
(2,337,437
|
)
|
|
|
373,516
|
|
Accumulated
deficit
|
|
|
(40,322,600
|
)
|
|
|
(45,253,148
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
10,154,513
|
|
|
|
4,257,052
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
22,835,520
|
|
|
$
|
21,880,231
|
|
The
accompanying notes are an integral part of these consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Consolidated
Statements of Income and Comprehensive Income
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
October
31, 2016
|
|
|
October
31, 2015
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
21,118,319
|
|
|
$
|
19,234,396
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
8,465,322
|
|
|
|
8,893,869
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
12,652,997
|
|
|
|
10,340,527
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
1,013,125
|
|
|
|
998,270
|
|
Selling,
General & Administrative
|
|
|
6,101,227
|
|
|
|
7,482,738
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
7,114,352
|
|
|
|
8,481,008
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
5,538,645
|
|
|
|
1,859,519
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
172,090
|
|
|
|
358,808
|
|
Interest Expense
|
|
|
(856,432
|
)
|
|
|
(1,044,906
|
)
|
Unrealized loss
on investment in marketable securities
|
|
|
-
|
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
Total
Other Expense
|
|
|
(684,342
|
)
|
|
|
(689,129
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE INCOME TAXES
|
|
|
4,854,303
|
|
|
|
1,170,390
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX (EXPENSE)
BENEFIT
|
|
|
76,245
|
|
|
|
(100,098
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
4,930,548
|
|
|
$
|
1,070,292
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.60
|
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,282,988
|
|
|
|
6,708,535
|
|
Diluted
|
|
|
10,482,988
|
|
|
|
6,758,535
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
4,930,548
|
|
|
$
|
1,070,292
|
|
Other Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(2,710,953
|
)
|
|
|
474,685
|
|
|
|
|
|
|
|
|
|
|
Total
Other Comprehensive Income
|
|
|
(2,710,953
|
)
|
|
|
474,685
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
2,219,595
|
|
|
$
|
1,544,977
|
|
The
accompanying notes are an integral part of these consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Consolidated
Statement of Changes in Stockholders’ Equity
For
the Years Ended October 31, 2016 and 2015
|
|
Preferred
Stock Series A
|
|
|
Preferred
Stock Series C
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
Other Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
(Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31,
2014
|
|
|
6,287
|
|
|
$
|
6
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
6,709,571
|
|
|
$
|
6,710
|
|
|
$
|
49,120,968
|
|
|
$
|
(101,169
|
)
|
|
$
|
(46,323,440
|
)
|
|
$
|
2,703,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
474,685
|
|
|
|
-
|
|
|
|
474,685
|
|
Stock exchange from Series A to Series
C
|
|
|
(6,087
|
)
|
|
|
(6
|
)
|
|
|
1,100
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock issued for compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,143
|
|
|
|
7
|
|
|
|
8,993
|
|
|
|
|
|
|
|
|
|
|
|
9,000
|
|
Net Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,070,292
|
|
|
|
1,070,292
|
|
Balance, October 31, 2015
|
|
|
200
|
|
|
|
-
|
|
|
|
1,100
|
|
|
|
1
|
|
|
|
6,716,714
|
|
|
|
6,717
|
|
|
|
49,129,966
|
|
|
|
373,516
|
|
|
|
(45,253,148
|
)
|
|
|
4,257,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of Series A Preferred Stock
|
|
|
(200
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock issued for terminal conversion
Premium
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,310,477
|
|
|
|
2,310
|
|
|
|
3,555,826
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,558,136
|
|
Stock Issued to Directors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42,858
|
|
|
|
43
|
|
|
|
88,187
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88,230
|
|
Stock Issued to Consultant
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,107
|
|
|
|
24
|
|
|
|
31,476
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,500
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,710,953
|
)
|
|
|
-
|
|
|
|
(2,710,953
|
)
|
Net Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,930,548
|
|
|
|
4,930,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,100
|
|
|
$
|
1
|
|
|
|
9,094,156
|
|
|
$
|
9,094
|
|
|
$
|
52,805,455
|
|
|
$
|
(2,337,437
|
)
|
|
$
|
(40,322,600
|
)
|
|
$
|
10,154,513
|
|
The
accompanying notes are an integral part of these consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Consolidated
Statements of Cash Flows
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
October
31, 2016
|
|
|
October
31, 2015
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
4,930,548
|
|
|
$
|
1,070,292
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
809,377
|
|
|
|
449,696
|
|
Financing costs
|
|
|
-
|
|
|
|
328,520
|
|
Stock compensation
|
|
|
119,730
|
|
|
|
9,000
|
|
Unrealized loss
on investments
|
|
|
-
|
|
|
|
3,031
|
|
Bad debt allowance
|
|
|
30,053
|
|
|
|
-
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,240,962
|
)
|
|
|
1,968,328
|
|
Inventory
|
|
|
1,182,386
|
|
|
|
279,041
|
|
Prepaid expenses
|
|
|
13,620
|
|
|
|
62,371
|
|
Unbilled receivables
|
|
|
(1,926,819
|
)
|
|
|
(251,103
|
)
|
Other assets
|
|
|
178,527
|
|
|
|
(99,158
|
)
|
Deferred tax asset
|
|
|
(96,374
|
)
|
|
|
133,233
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
and other current liabilities
|
|
|
451,942
|
|
|
|
(701,931
|
)
|
Deferred tax liablities
|
|
|
(35,963
|
)
|
|
|
35,963
|
|
Deferred
revenues
|
|
|
(31,025
|
)
|
|
|
(35,015
|
)
|
Net Cash Provided
by Operating Activities
|
|
|
4,385,040
|
|
|
|
3,252,268
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property
and equipment
|
|
|
(614,220
|
)
|
|
|
(2,068,053
|
)
|
Restricted cash
|
|
|
196
|
|
|
|
4,028
|
|
Purchases
of intangible assets
|
|
|
-
|
|
|
|
(151,678
|
)
|
Net Cash Used in
Investing Activities
|
|
|
(614,024
|
)
|
|
|
(2,215,703
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments
made on loans and notes payable
|
|
|
(1,768,990
|
)
|
|
|
(492,983
|
)
|
Net Cash Used in
Financing Activities
|
|
|
(1,768,990
|
)
|
|
|
(492,983
|
)
|
EFFECT OF CURRENCY
EXCHANGE RATE CHANGES ON CASH
|
|
|
(2,710,953
|
)
|
|
|
474,685
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(708,927
|
)
|
|
|
1,018,267
|
|
|
|
|
|
|
|
|
|
|
CASH AT THE BEGINNING
OF THE PERIOD
|
|
|
6,310,694
|
|
|
|
5,292,427
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
5,601,767
|
|
|
$
|
6,310,694
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,094,432
|
|
|
$
|
716,387
|
|
Cash paid for taxes
|
|
$
|
100,098
|
|
|
$
|
125,096
|
|
Non-cash transactions
|
|
|
|
|
|
|
|
|
Common stock issued
for terminal conversion premium
|
|
$
|
3,558,136
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Coda
Octopus Group, Inc. (
“we
”
,“us”
“
the Company
” or
“Coda”
). We are developers of underwater technologies and equipment for imaging, mapping, defense and survey applications. We are
based in Florida, with research and development, sales and manufacturing facilities located in the United Kingdom, Australia and
Norway. We also have engineering operations in the state of Utah, and the United Kingdom. We hold significant patents relating
to our real time 3D sonars and associated software.
The
consolidated financial statements include the accounts of Coda Octopus Group, Inc. and our domestic and foreign subsidiaries.
All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.
NOTE
2 - SUMMARY OF ACCOUNTING POLICIES
a.
Basis of Presentation
The
Company has adopted the Financial Accounting Standards Board (FASB) Codification (Codification). The Codification is the single
official source of authoritative accounting principles generally accepted in the United States of America (U.S. GAAP) recognized
by the FASB to be applied by nongovernmental entities, and all of the Codification’s content carries the same level of authority.
b.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
At times such investments may be in excess of federal deposit insurance limits.
c.
Trade Accounts Receivable
Trade
accounts receivable are recorded net of the allowance for doubtful accounts. The Company provides for an allowance for doubtful
collections that is based upon a review of outstanding receivables, historical collection information, and existing economic conditions.
Balances still outstanding after the Company has used reasonable collection efforts are written off though a charge to the valuation
allowance and a credit to trade accounts receivable. The allowance for doubtful accounts was $30,053 and $0 as of October 31,
2016 and 2015, respectively.
d.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Expenditures for minor replacements, maintenance and repairs which
do not increase the useful lives of the property and equipment are charged to operations as incurred. Major additions and improvements
are capitalized. Depreciation and amortization are computed using the straight-line method over their estimated useful lives which
is typically three to four years.
e.
Advertising
Coda
follows the policy of charging the costs of advertising to expense as incurred, which aggregated $130 and $4,242 for the years
ended October, 31 2016 and 2015, respectively.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
f.
Inventory
Inventory
is stated at the lower of cost (first-in first-out method) or market. Inventory consisted of the following components:
|
|
October
31, 2016
|
|
|
October
31, 2015
|
|
|
|
|
|
|
|
|
Raw materials and parts
|
|
$
|
1,734,798
|
|
|
$
|
2,605,262
|
|
|
|
|
|
|
|
|
|
|
Work in progress
|
|
|
88,682
|
|
|
|
54,750
|
|
Demo goods
|
|
|
324,752
|
|
|
|
685,015
|
|
Finished goods
|
|
|
450,693
|
|
|
|
436,284
|
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
2,598,925
|
|
|
$
|
3,781,311
|
|
g.
Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues including unbilled and deferred revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant estimates include costs and earnings in excess
of billings, billings in excess of costs and estimated earnings and the valuation of goodwill.
h.
Revenue Recognition
Our
revenue is derived from sales of underwater technologies and equipment for imaging, mapping, defense and survey applications and
from the engineering services which we provide. Revenue is recognized when evidence of a contractual arrangement exists, delivery
has occurred or services have been rendered, the contract price is fixed or determinable, and collectability is reasonably assured.
No right of return privileges are granted to customers after delivery.
For
arrangements with multiple deliverables, we recognize product revenue by allocating the revenue to each deliverable based on the
relative fair value of each deliverable, and recognize revenue when equipment is delivered, and for installation and other services
as they are performed.
Our
contracts sometimes require customer payments in advance of revenue recognition. These amounts are reflected as liabilities and
recognized as revenue when the Company has fulfilled its obligations under the respective contracts.
For
software license sales for which any services rendered are not considered essential to the functionality of the software, we recognize
revenue upon delivery of the software, provided (1) there is evidence of a contractual arrangement for this, (2) collection of
our fee is considered probable and (3) the fee is fixed and determinable.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
h.
Revenue Recognition (continued)
For
arrangements that are generated from time and material contracts where there is a signed agreement and approved purchase order
in place that specifies the fixed hourly rate and other reimbursable costs to be billed based on material and direct labor hours
incurred, revenue is recognized on these contracts based on material and direct labor hours incurred. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred (materials and direct
labor hours) to date to estimated total services (materials and direct labor hours) for each contract. This method is used as
expenditures for direct materials and labor hours are considered to be the best available measure of progress on these contracts.
Losses on fixed-price contracts are recognized during the period in which the loss first becomes apparent based upon costs incurred
to date and the estimated costs to complete as determined by experience from similar contracts. Variations from estimated contract
performance could result in adjustments to operating results.
Rental
revenue is recognized monthly over the term of the rental period.
i.
Concentrations of Risk
Credit
losses, if any, have been provided for in the consolidated financial statements and are based on management’s expectations.
The Company’s accounts receivable are subject to potential concentrations of credit risk, since a significant part of the
Company’s sales are to a small number of companies and, even though these are generally established businesses, market fluctuations
such as the price of oil may affect our customers’ ability to meet their obligations to us.
The
Company’s bank deposits are held with financial institutions both in and out of the USA. At times, such amounts may be in
excess of applicable government mandated insurance limits. The Company has not experienced any losses in such accounts or lack
of access to its cash, and believes it is not exposed to significant risk of loss with respect to cash.
j.
Contracts in Progress (Unbilled Receivables and Deferred Revenue)
Costs
and estimated earnings in excess of billings on uncompleted contracts represent accumulated project expenses and fees which have
not been invoiced to customers as of the date of the balance sheet. These amounts are stated on the consolidated balance sheets
as Unbilled Receivables of $3,406,693 and $1,479,874 as of October 31, 2016 and 2015, respectively.
Our
Deferred Revenue of $464,541 and $495,566 as of October 31, 2016 and 2015, respectively, consists of billings in excess of costs
and revenues received as part of our warranty obligations upon completing a sale – elaborated further in the last paragraph
of this note.
Billings
in excess of cost and estimated earnings on uncompleted contracts represent project invoices billed to customers that have not
been earned as of the date of the balance sheets. These amounts are stated on the balance sheets as a component of Deferred Revenue
of $0 and $3,437 as of October 31, 2016 and 2015, respectively.
Revenue
received as part of sales of equipment includes a provision for warranty and is treated as deferred revenue, along with extended
warranty sales, with these amounts amortized over 12 months, our stated warranty period, from the date of sale. These amounts
are stated on the balance sheets as a component of Deferred Revenue of $464,541 and $492,129 as of October 31, 2016 and 2015,
respectively.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
k.
Income Taxes
The
Company accounts for income taxes in accordance with Accounting Standards Codification 740,
Income Taxes
(ASC 740). Under
ASC 740, deferred income tax assets and liabilities are recorded for the income tax effects of differences between the bases of
assets and liabilities for financial reporting purposes and their bases for income tax reporting. The Company’s differences
arise principally from the use of various accelerated and modified accelerated cost recovery systems for income tax purposes versus
straight line depreciation used for book purposes and from the utilization of net operating loss carry-forwards.
Deferred
tax assets and liabilities are the amounts by which the Company’s future income taxes are expected to be impacted by these
differences as they reverse. Deferred tax assets are based on differences that are expected to decrease future income taxes as
they reverse. Correspondingly, deferred tax liabilities are based on differences that are expected to increase future income taxes
as they reverse. Note 7 below discusses the amounts of deferred tax assets and liabilities, and also presents the impact of significant
differences between financial reporting income and taxable income.
For
income tax purposes, the Company uses the percentage of completion method of recognizing revenues on long-term contracts which
is consistent with the Company’s financial reporting under U.S. generally accepted accounting principles.
l.
Intangible Assets
Intangible
assets consist principally of the excess of cost over the fair value of net assets acquired (or goodwill), customer relationships,
non-compete agreements and licenses. Goodwill was allocated to our reporting units based on the original purchase price allocation.
Goodwill is not amortized and is evaluated for impairment annually or more often if circumstances indicate impairment may exist.
Customer relationships, non-compete agreements, patents and licenses are being amortized on a straight-line basis over periods
of 2 to 10 years. The Company amortizes its limited lived intangible assets using the straight-line method over their estimated
period of benefit. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate that impairment exists.
The
first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit
with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount,
goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure
the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill
with the carrying amount of that goodwill. At the end of each year, we evaluate goodwill on a separate reporting unit basis to
assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount
equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. There were no impairment
charges recognized during the years ended October 31, 2016 and 2015.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
m.
Fair Value of Financial Instruments
The
Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses
and notes payable. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair values because of the short-term nature of these instruments. The aggregate carrying amount of the notes payable
approximates fair value as they bear interest at a market interest rate based on their term and maturity. The fair value of the
Company’s long-term debt approximates its carrying amount based on the fact that the Company believes it could obtain similar
terms and conditions for similar debt.
n.
Foreign Currency Translation
Assets
and liabilities are translated at the prevailing exchange rates at the balance sheet dates, related revenue and expenses are translated
at weighted average exchange rates in effect during the period and stockholders’ equity, fixed assets and long-term investments
are recorded at historical exchange rates. Resulting translation adjustments are recorded as a separate component in stockholders’
equity as part of accumulated other comprehensive income or (loss) as may be appropriate. Foreign currency transaction gains and
losses are included in the consolidated statements of income and comprehensive income.
o.
Long-Lived Assets
Long-lived
assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and eventual disposal of the asset. Long-lived assets to be disposed
of are reported at the lower of carrying amount or fair value less cost to sell. No impairment loss was recognized during the
years ended October 31, 2016 and 2015
, respectively.
p.
Research and Development
Research
and development costs consist of expenditures for the development of present and future patents and technology, which are not
capitalizable. Under current legislation, we are eligible for UK and Norway tax credits related to our qualified research and
development expenditures.
Tax
credits are classified as a reduction of research and development expense. During
the years
ended October 31, 2016 and 2015
, we had $0 and $24,997, respectively.
q.
Stock Based Compensation
We
recognize the expense related to the fair value of stock-based compensation awards within the consolidated statements of income
and comprehensive income.
We use the fair value method for equity
instruments granted to non-employees and use the Black Scholes model for measuring the fair value. The stock based fair value
compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement
date) and is recognized over the periods in which the related services are rendered. F
or
the years ended October 31, 2016 and 2015
,
we
have included compensation expense (when applicable) for unvested stock-based compensation awards that were outstanding as of
October 31, 2016 and 2015, for which the requisite service was rendered during the year.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
r.
Comprehensive Income
Comprehensive
income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.
Comprehensive income includes gains and losses on foreign currency translation adjustments and is included as a component of stockholders’
equity.
s.
Earnings Per Share
We
compute basic earnings per share by dividing the income attributable to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per share include the dilutive effect, if any, from the potential exercise of stock
options and warrants.
Following
is a reconciliation of earnings from continuing operations and weighted average common shares outstanding for purposes of calculating
basic and diluted earnings per share:
|
|
Year
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
Fiscal Period
|
|
October
31, 2016
|
|
|
October
31, 2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Earnings
from Continuning Operations
|
|
$
|
4,930,548
|
|
|
$
|
1,070,292
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
outstanding
|
|
|
8,282,988
|
|
|
|
6,708,535
|
|
Conversion of Series
C Preferred Stock (See Note 14)
|
|
|
2,200,000
|
|
|
|
50,000
|
|
Dilutive
effect of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Diluted outstanding
shares
|
|
|
10,482,988
|
|
|
|
6,758,535
|
|
Earnings from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.60
|
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.16
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
t.
Restricted Cash
The
Company is required to have a specific cash account to guarantee a lease in Norway whereby the lessor has access to withdraw on
the account upon default on the lease. The amount required to be held in the account was $13,694 and $13,890 as of October 31,
2016 and 2015, respectively, and is shown as a short term asset as of October 31, 2016 and as a long-term asset as of October
31, 2015.
u.
Recent Accounting Pronouncements
There
have been no new accounting pronouncements made effective during fiscal 2016 that have significance, or potential significance,
to our Consolidated Financial Statements.
Recent
Accounting Pronouncements Not Yet Effective
On
May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount
of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard
will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the
retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts
with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning
after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date.
We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related
disclosures.
On
February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability
on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified
as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to
align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type
leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and
interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective
transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We are
currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
u.
Recent Accounting Pronouncements (Continued)
On
March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies various
aspects related to the accounting and presentation of share-based payments. The amendments require entities to record all tax
effects related to share-based payments at settlement or expiration through the income statement and the windfall tax benefit
to be recorded when it arises, subject to normal valuation allowance considerations. All tax-related cash flows resulting from
share-based payments are required to be reported as operating activities in the statement of cash flows. The updates relating
to the income tax effects of the share-based payments including the cash flow presentation must be adopted either prospectively
or retrospectively. Further, the amendments allow the entities to make an accounting policy election to either estimate forfeitures
or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted
using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings. The effective
date of the new standard for public companies is for fiscal years beginning after December 15, 2016 and interim periods within
those fiscal years. Early adoption is permitted. We are currently evaluating the effect that the updated standard will have on
our consolidated financial statements and related disclosures.
With
the exception of the updated standards discussed above, there have been no new accounting pronouncements not yet effective that
have significance, or potential significance, to our Consolidated Financial Statements.
V.
Liquidity
The
Company is dependent upon its ability to generate revenue from the sale of its products and services to generate cash to cover
its operations and obligations.
The
Company has approximately $9.7 million in debt which matures on November 1, 2017. The Company is in the process of negotiating
the refinancing of the debt with an institution. However, there can be no assurance that the negotiations will be successful or
at terms acceptable to the Company. The Company does not currently have the cash on hand or operations to be able to generate
the cash to repay the debt when it is due. In the event that the Company does not raise the funds necessary to refinance the debt,
it would have to re-negotiate the terms with the debtholder. However, there can be no assurance that we will secure a further
extension of the maturity date and in such event our failure to pay this amount when due could have a material adverse effect
on the Company’s financial condition and results of operations.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE 3
- INTANGIBLE ASSETS AND GOODWILL
Goodwill
and Other Intangible Assets are evaluated on an annual basis. If there is reason to believe that their values have been diminished
or impaired, Write-downs, if any, will be included in results from operations.
The
identifiable intangible assets acquired and their carrying value as of: October 31, 2016 and 2015, are as follows:
|
|
October
31, 2016
|
|
|
October
31, 2015
|
|
Customer relationships (weighted average life
of 10 years)
|
|
$
|
886,164
|
|
|
$
|
872,269
|
|
Non-compete agreements (weighted average life of 3 years)
|
|
|
198,911
|
|
|
|
198,911
|
|
Patents and other
(weighted average life of 10 years)
|
|
|
294,175
|
|
|
|
328,939
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
- gross carrying value
|
|
|
1,379,250
|
|
|
|
1,400,119
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated
amortization
|
|
|
(1,011,833
|
)
|
|
|
(932,565
|
)
|
|
|
|
|
|
|
|
|
|
Total intangible
assets, net
|
|
$
|
367,417
|
|
|
$
|
467,554
|
|
Future
estimated annual amortization expenses as of October 31, 2016 as follows:
Years
Ending October 31,
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
72,458
|
|
2018
|
|
|
40,595
|
|
2019
|
|
|
40,595
|
|
2020
|
|
|
40,595
|
|
2021
|
|
|
40,595
|
|
Thereafter
|
|
|
132,579
|
|
|
|
|
|
|
Totals
|
|
$
|
367,417
|
|
Amortization
of patents, customer relationships, non-compete agreements and licenses included as a charge to income amounted to $46,986 and
$137,546 for the years ended October 31, 2016 and 2015, respectively. Goodwill is not being amortized.
As
a result of the acquisitions of Coda Octopus Martech, Ltd., Coda Octopus Colmek, Inc., Coda Octopus Products, Ltd., and Dragon
Design, Ltd., the Company has goodwill in the amount of $3,382,108 as of October 31, 2016 and 2015, respectively. The carrying
amount of goodwill as of October 31, 2016 and 2015, respectively are recorded below:
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
3 - INTANGIBLE ASSETS AND GOODWILL (Continued)
|
|
2016
|
|
|
2015
|
|
Breakout of Goodwill:
|
|
|
|
|
|
|
Coda Octopus Colmek, Inc.
|
|
$
|
2,038,669
|
|
|
$
|
2,038,669
|
|
Coda Octopus Products, Ltd
|
|
|
62,315
|
|
|
|
62,315
|
|
Coda Octopus Martech, Ltd
|
|
|
998,591
|
|
|
|
998,591
|
|
Coda Octopus
Martech, Ltd (from Dragon Design Ltd Acquisition)
|
|
|
282,533
|
|
|
|
282,533
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill
|
|
$
|
3,382,108
|
|
|
$
|
3,382,108
|
|
Considerable
management judgment is necessary to estimate fair value of goodwill. We enlisted the assistance of an independent valuation consultant
to determine the values of our intangible assets and goodwill at the dates of acquisition and by management for the dates thereafter.
Based
on various market factors and projections used by management, actual results could vary significantly from management’s
estimates.
The
Company’s policy is to test its goodwill balances for impairment on an annual basis, in the fourth quarter of each year,
or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The
goodwill assets of the Company arise chiefly from the acquisition of two wholly owned subsidiaries that comprise the Company’s
services segments – Colmek and Martech. The goodwill impairment evaluation was conducted at the end of the financial year
2016 and management’s opinion is that the carrying values are reasonable.
Based
on these evaluations, the fair value of goodwill exceeds its carrying value. As such no impairment was recorded by management.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following
as of October 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
2,777,364
|
|
|
$
|
2,170,862
|
|
Land
|
|
|
200,000
|
|
|
|
200,000
|
|
Office machinery and
equipment
|
|
|
1,679,207
|
|
|
|
1,868,514
|
|
Furniture, fixtures
and improvements
|
|
|
812,807
|
|
|
|
855,574
|
|
Totals
|
|
|
5,469,378
|
|
|
|
5,094,950
|
|
Less: accumulated
depreciation
|
|
|
(1,628,878
|
)
|
|
|
(1,159,430
|
)
|
|
|
|
|
|
|
|
|
|
Property and Equipment
– Net
|
|
$
|
3,840,500
|
|
|
$
|
3,935,520
|
|
Depreciation
expense for the years ended October 31, 2016 and 2015 was $721,156 and $312,150, respectively.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
5 - OTHER CURRENT ASSETS
Other
current assets consisted of the following at October 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
(349
|
)
|
|
$
|
19,240
|
|
Other receivables
|
|
|
35,543
|
|
|
|
123,733
|
|
Value added tax
(VAT) receivable
|
|
|
105,760
|
|
|
|
176,508
|
|
|
|
|
|
|
|
|
|
|
Total Other Current
Assets
|
|
$
|
140,954
|
|
|
$
|
319,481
|
|
NOTE 6
- CAPITAL STOCK
Common
Stock
The
Company is authorized to issue 150,000,000 shares of common stock with a par value of $0.001 per share.
During
the year ended October 31, 2015, the Company issued 7,143 shares of our common stock to a non-executive director as remuneration
for being a member of the Company’s Board of Directors. These shares were valued at their approximate trading price of $9,000
which was charged to operations.
On
March 1, 2016, the Company issued 2,310,477 shares of its common stock to CCM Holdings, LLC to extinguish the $3,558,136 terminal
conversion premium which accrued under the Senior Secured Convertible Debentures.
On
May 25 and June 16, 2016, the Company issued 28,572 shares to four members of the Board of Directors for their services performed
as directors. These shares were valued at their approximate trading price of $57,650 which was charged to operations.
On
June 16, 2016 the Company issued an aggregate of 8,036 shares to two individuals for services rendered. These shares were valued
at their approximate trading price of $10,500 which was charged to operations.
On
August 1, 2016 the Company issued 14,285 to two members of the Board of Directors for their services performed as directors. These
shares were valued at their approximate trading price of $30,580 which was charged to operations.
On
August 25 and August 30, 2016 the Company issued an aggregate of 16,071 shares to two individuals for services rendered. These
shares were valued at their approximate trading price of $21,000 which was charged to operations.
Preferred
Stock
The
Company is also authorized to issue 5,000,000 shares of preferred stock with a par value of $0.001 per share. We have designated
50,000 preferred shares as Series A preferred stock and 50,000 preferred shares as Series C preferred stock. The remaining 4,900,000
shares of preferred stock are not designated.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
6 – CAPITAL STOCK (Continued)
Preferred
Stock (continued)
Series
A Preferred Stock
Pursuant
to an Exchange Agreement concluded on June 30, 2015 between the Company and the Holder of 6,087 units of Series A Preferred, these
units of Series A Preferred were cancelled, retired, and a new Series C preferred stock was created of which 1,100 units were
issued, each unit having a stated value equal to $1,000. Series C Preferred Stock is convertible by the Holder or the Company
subject to the Conversion Conditions being met and, if not converted, are redeemable at a fixed price of $1,100,000 on or before
December 31, 2016 (See below).
On
December 15, 2015 the Company purchased the 200 shares of Series A Preferred Stock that were outstanding at the end of the fiscal
year ended October 31, 2015, for $37,070 and these have been surrendered and retired.
As
of the date of this report, the Company has no shares of Series A Preferred Stock outstanding and this class has been eliminated
and the appropriate Certificate of Elimination has been filed in Delaware.
Series
B Preferred Stock
On
June 30, 2015, the Company cancelled the Series B Preferred Stock as a class.
Series
C Preferred Stock
On
or around June 30, 2015 the Company created a new class of Series C Preferred Stock.
The
Series C Preferred stock has a par value of $0.001 per share and a stated value equal to $1,000. The Series C Preferred stock
does not have any voting rights and no dividends are payable on these shares but the holder is entitled to receive value prior
to holders of common stock in case of liquidating the Company. Series C Preferred Stock is convertible by the Holder or the Company
subject to the Conversion Conditions being met and, if not converted, are redeemable at a fixed price of $1,100,000 on or before
December 31, 2016.
As
of October 31, 2016 there are 1,100 shares of Series C Preferred Stock issued and outstanding. See Note 14 (Subsequent Events).
NOTE
7 - INCOME TAXES
The
Company files federal income tax returns in the U.S. and state income tax returns in the applicable states on a consolidated basis.
The Company’s subsidiaries also file in the appropriate foreign jurisdictions as applicable, most notably the United Kingdom.
The
Company is required to determine whether it is more likely than not that a tax position will be sustained upon examination based
upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position
to determine the amount to recognize in the financial statements. The Company has no significant unrecognized tax benefit during
the years ended October 31, 2016 and 2015. The Company also estimates that the unrecognized tax benefit will not change significantly
within the next twelve months.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
7 - INCOME TAXES (Continued)
There
are no material tax positions included in the accompanying consolidated financial statements at October 31, 2016 and 2015 for
which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility
period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier
period.
The
Company uses an asset and liability approach to financial accounting and reporting for income taxes. The difference between the
financial statement and tax bases of assets and liabilities is determined annually. Deferred income tax assets and liabilities
are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply
to the periods in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax asset to the amount that will more likely than not be realized. Income tax expense is the current income tax
payable or refundable for the period plus or minus the net change in the deferred tax assets and liabilities.
For
income tax reporting purposes, the Company’s aggregate U.S. unused net operating losses approximate $12,051,000 as of October
31, 2016, which expire beginning in 2026 through 2029, subject to limitations of Section 382 of the Internal Revenue Code, as
amended. The deferred tax asset related to the U.S. tax carry-forward is approximately $4,699,900 as October 31, 2016. The Company
has provided a valuation reserve against the full amount of the net operating loss benefit. For the years ended October 31, 2016
and 2015, respectively the Company had an Alternative Minimum Tax of $65,129 and $30,952 due.
For
income tax reporting purposes, the Company’s aggregate UK and Norway unused net operating losses approximate $1,018,819
with no expiration. The deferred tax asset related to the UK and Norway tax carry-forwards is approximately $142,635. The Company
has provided a valuation reserve against a portion of the net operating loss benefit, because in the opinion of management which
is based upon the earning history of the Company, it is more likely than not that the benefits allowed will not be fully realized.
Those remaining and not allowed are recorded by the Company and are expected to be used in the near future.
Components
of deferred tax assets as of October 31, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
benefit
|
|
$
|
4,842,535
|
|
|
$
|
6,777,151
|
|
Valuation allowance
|
|
|
(4,746,161
|
)
|
|
|
(6,813,114
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred
tax (liability) asset
|
|
$
|
96,374
|
|
|
$
|
(35,963
|
)
|
The
company did receive tax refunds, net of any benefits, in the amount of $24,997 for financial purposes in one of its foreign subsidiaries
as of the year ended October 31, 2015.
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
7 - INCOME TAXES (Continued)
The
Company did not incur any income tax expense for financial purposes in its U.S. entities and other foreign entities not included
above, as we have been able to use net operating loss carry-forwards and other timing differences during the current and prior
year to offset any tax liabilities in the various tax jurisdictions. The use of these income tax benefits in the current and prior
year have been adjusted for and offset by a valuation allowance as noted above. The Company believes the future use and benefit
of these tax assets is still uncertain and may not be realized.
The
Company’s income tax returns are subject to audit by taxing authorities for the years beginning November 1, 2011.
A
reconciliation between the amounts of income tax benefit determined by applying applicable U.S. statutory tax rate to pre-tax
income is as follows:
|
|
2016
|
|
|
2015
|
|
Federal statutory rate of
35%
|
|
$
|
1,725,692
|
|
|
$
|
376,472
|
|
|
|
|
|
|
|
|
|
|
Alternative Minimum Tax
|
|
|
65,129
|
|
|
|
30,952
|
|
|
|
|
|
|
|
|
|
|
Foreign tax expense (benefit)
|
|
|
(141,374
|
)
|
|
|
69,146
|
|
|
|
|
|
|
|
|
|
|
Use of NOL losses
on consolidated tax returns
|
|
|
(1,725,692
|
)
|
|
|
(376,472
|
)
|
|
|
|
|
|
|
|
|
|
Total income
tax expense (Benefit)
|
|
$
|
(76,245
|
)
|
|
$
|
100,098
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
8 - LOANS AND NOTES PAYABLE
Loans
and notes payable consisted of the following at October 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
On February 21, 2008
the Company issued a convertible senior secured debenture with a face value of $12million (“Secured Debenture”).
The Secured Debenture under its original terms matured on February 21, 2015. The Secured Debentures term has been
extended under a Deed of Amendment dated October 30, 2015 and the revised maturity date is November 1, 2017. The
Secured Debentures accrues interest of 8.5% annually payable within 60 days of the end of the Company’s financial quarters. The
Company redeemed 20 Debentures (each having a face value of $100,000) on or around September 18, 2014. The revised
face value of the Debentures currently is $8.6 million. During the term, the Secured Debenture is convertible into shares
of our common stock, at the option of the Debenture holder, at a conversion price of $1.05. We may also force the conversion
of these Notes into our common stock after two years in the event that we obtain a listing on a national exchange and our
stock price closes on 40 consecutive trading days at or above $2.50 between the second and third anniversaries of this agreement;
$2.90 between the third and fourth anniversaries of this agreement; and $3.50 after the fourth anniversary of this agreement
or where the daily volume weighted average price of our stock as quoted on the Over The Counter Bulletin Board or any other
US National Exchange on which our securities are then listed has, for at least 40 consecutive trading days closed at the agreed
price. Balance includes principal, accrued interest and with respect to 2015, accrued terminal conversion balance. The terminal
conversion premium in the amount of $3,558,136 was converted into common stock as of January 31, 2016. This secured debenture
is secured by all assets and undertakings of the company and is held by a shareholder which controls approximately 22.5% of
the issued and outstanding common stock of the Company.
|
|
$
|
9,744,123
|
|
|
$
|
14,940,258
|
|
|
|
|
|
|
|
|
|
|
The Company
has a 10 year secured mortgage for $527,675, secured by a building in the UK that requires monthly principal payments of $4,018
along with interest at 2.75%, and matures in October 2023. The conversion rate varies according to exchange rates fluctuations.
This mortgage is secured by our building, located in Portland UK.
|
|
|
281,801
|
|
|
|
412,792
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,025,924
|
|
|
|
15,353,050
|
|
Less: current
portion
|
|
|
(846,994
|
)
|
|
|
(2,050,930
|
)
|
Total Long-Term
Loans and Notes Payable
|
|
$
|
9,178,930
|
|
|
$
|
13,302,120
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
8 - LOANS AND NOTES PAYABLE (Continued)
A
reconciliation of the convertible senior secured debenture is as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Bond Principal
|
|
$
|
8,600,000
|
|
|
$
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
Accrued Interest
|
|
|
1,144,123
|
|
|
|
1,382,122
|
|
|
|
|
|
|
|
|
|
|
Accrued Terminal
Conversion Premium **
|
|
|
-
|
|
|
|
3,558,136
|
|
|
|
|
|
|
|
|
|
|
Total Bond Payable
|
|
$
|
9,744,123
|
|
|
$
|
14,940,258
|
|
**The
terminal conversion premium in the amount of $3,558,136 was converted into common stock as of January 31, 2016.
Principal
maturities as of October 31, 2016 are as follows:
Years
Ending October 31,
|
|
Amount
|
|
2017
|
|
$
|
846,994
|
|
2018
|
|
|
8,991,117
|
|
2019
|
|
|
46,994
|
|
2020
|
|
|
46,994
|
|
2021
|
|
|
46,994
|
|
Thereafter
|
|
|
46,831
|
|
|
|
|
|
|
Totals
|
|
$
|
10,025,924
|
|
NOTE
9 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Other
comprehensive income (loss) consists of foreign currency translation adjustments. Total other comprehensive income (loss) was
$(2,710,953) and $474,685 for the years ended October 31, 2016 and 2015, respectively.
A
reconciliation of the other comprehensive income (loss) in the stockholders’ equity section of the consolidated balance
sheets is as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
373,516
|
|
|
$
|
(101,169
|
)
|
Total other comprehensive
income (loss) for the year - foreign currency translation adjustment
|
|
|
(2,710,953
|
)
|
|
|
474,685
|
|
Balance, end of period
|
|
$
|
(2,337,437
|
)
|
|
$
|
373,516
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
10 –- CONCENTRATIONS
Significant
Customers
During
the year ended October 31, 2016 , the Company had two customers from whom it generated sales greater than 10% of net revenues.
Revenues from these customers were $8,016,453, or 38% of net revenues during the period. Total accounts receivable from these
customers at October 31, 2016 were $331,126 or 10% of accounts receivable.
During
the year ended October 31, 2015, the Company had two customers from whom it generated sales greater than 10% of net revenues.
Revenues from these customers were $6,723,176, or 35% of net revenues during the year. Total accounts receivable from these customers
at October 31, 2015 was $617,066 or 30% of accounts receivable.
NOTE
11 - EMPLOYEE BENEFIT PLANS
The
Company’s U.S. subsidiaries maintain a matching 401(k) retirement plan. The plan allows the Company to make matching contributions
of 10 cents per dollar of employee contributions. U.S. employees who have at least nine months of service with the Company are
eligible. In addition, the Company’s UK subsidiaries operate pension schemes which provide for the payment of the full contribution
by the Company. These schemes in the UK operate on a defined contribution money purchase basis and the contributions are charged
to operations as they arise. Finally, the Company is obligated to provide pension funding according to Norwegian legislation for
its subsidiary located in Norway. The Company has an arrangement that fulfills this requirement. Employee benefit costs for the
years ended October 31, 2016 and 2015 were $82,523 and $75,695, respectively.
NOTE
12 - OPERATING LEASES
The
Company occupies various office and warehouse facilities pursuant to both term and month-to-month leases. The leases expire at
various times through February 28, 2017. The following schedule summarized the future minimum lease payments on the term operating
leases:
Rent
expense for the for the years ended October 31, 2016 and 2015, was $279,072 and $365,184, respectively
Years
Ending October 31,
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
100,921
|
|
2018
|
|
|
43,060
|
|
|
|
|
|
|
Totals
|
|
$
|
143,981
|
|
Rent
expense for the for the years ended October 31, 2016 and 2015, was $279,072 and $365,184 respectively
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
13 - SEGMENT ANALYSIS
We
are operating in two reportable segments, which are managed separately based upon fundamental differences in their operations.
Coda Octopus Martech and Coda Octopus Colmek operate as contractors, and the balance of our operations are comprised of product
sales.
Segment
operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Corporate includes
general corporate administrative costs.
The
Company evaluates performance and allocates resources based upon operating income. The accounting policies of the reportable segments
are the same as those described in the summary of accounting policies.
There
are inter-segment sales which have been eliminated in our financial statements but are disclosed in the tables below for information
purposes.
The
following table summarizes segment asset and operating balances by reportable segment for the years ended October 31, 2016 and
2015 respectively.
The
Company’s reportable business segments operate in three geographic locations. Those geographic locations are:
*
United States
*
Europe
*
Australia
The
Company evaluates performance and allocates resources based upon operating income. The accounting policies of the reportable segments
are the same as those described in the summary of accounting policies. There are inter-segment sales which have been removed upon
consolidation and for the purposes of the information shown below.
Information
concerning principal geographic areas is presented below according to the area where the activity has taken place for the years
ended October 31, 2016 and 2015 respectively:
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
13 - SEGMENT ANALYSIS (Continued)
|
|
Marine
Technology Business (Products)
|
|
|
Marine
Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
10,584,141
|
|
|
$
|
10,534,178
|
|
|
$
|
-
|
|
|
$
|
21,118,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
3,081,892
|
|
|
|
5,383,430
|
|
|
|
-
|
|
|
|
8,465,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
7,502,249
|
|
|
|
5,150,748
|
|
|
|
-
|
|
|
|
12,652,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
1,013,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,013,125
|
|
Selling, General
& Administrative
|
|
|
2,848,809
|
|
|
|
2,785,195
|
|
|
|
467,223
|
|
|
|
6,101,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
3,640,315
|
|
|
|
2,365,553
|
|
|
|
(467,223
|
)
|
|
|
5,538,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
166,449
|
|
|
|
5,641
|
|
|
|
-
|
|
|
|
172,090
|
|
Interest (Expense)
Income
|
|
|
(813,402
|
)
|
|
|
(277,875
|
)
|
|
|
234,845
|
|
|
|
(856,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(646,953
|
)
|
|
|
(272,234
|
)
|
|
|
234,845
|
|
|
|
(684,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
2,993,362
|
|
|
|
2,093,319
|
|
|
|
(232,378
|
)
|
|
|
4,854,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax refund
(expense)
|
|
|
139,619
|
|
|
|
(39,783
|
)
|
|
|
(23,591
|
)
|
|
|
76,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
3,132,981
|
|
|
$
|
2,053,536
|
|
|
$
|
(255,969
|
)
|
|
$
|
4,930,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
11,649,606
|
|
|
$
|
10,883,182
|
|
|
$
|
302,732
|
|
|
$
|
22,835,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,381,048
|
|
|
|
1,019,074
|
|
|
|
10,280,885
|
|
|
|
12,681,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated
from sales above
|
|
|
1,871,801
|
|
|
|
330,098
|
|
|
|
1,164,250
|
|
|
|
3,366,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
503,327
|
|
|
|
293,219
|
|
|
|
12,831
|
|
|
|
809,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
736,982
|
|
|
|
(2,857
|
)
|
|
|
12,470
|
|
|
|
746,595
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
13 - SEGMENT ANALYSIS (Continued)
|
|
Marine
Technology Business (Products)
|
|
|
Marine
Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
9,772,151
|
|
|
$
|
9,462,245
|
|
|
$
|
-
|
|
|
$
|
19,234,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
3,647,422
|
|
|
|
5,246,447
|
|
|
|
-
|
|
|
|
8,893,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,124,729
|
|
|
|
4,215,798
|
|
|
|
-
|
|
|
|
10,340,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
998,270
|
|
|
|
-
|
|
|
|
-
|
|
|
|
998,270
|
|
Selling, General
& Administrative
|
|
|
3,856,809
|
|
|
|
2,877,601
|
|
|
|
748,328
|
|
|
|
7,482,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
1,269,650
|
|
|
|
1,338,197
|
|
|
|
(748,328
|
)
|
|
|
1,859,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
358,609
|
|
|
|
117
|
|
|
|
82
|
|
|
|
358,808
|
|
Interest Expense
|
|
|
(503,909
|
)
|
|
|
(285,319
|
)
|
|
|
(255,678
|
)
|
|
|
(1,044,906
|
)
|
Unrealized gain
on sale of investment in marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,031
|
)
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(145,300
|
)
|
|
|
(285,202
|
)
|
|
|
(258,627
|
)
|
|
|
(689,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
1,124,350
|
|
|
|
1,052,995
|
|
|
|
(1,006,955
|
)
|
|
|
1,170,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(76,051
|
)
|
|
|
(24,047
|
)
|
|
|
-
|
|
|
|
(100,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
1,048,299
|
|
|
$
|
1,028,948
|
|
|
$
|
(1,006,955
|
)
|
|
$
|
1,070,292
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
11,674,637
|
|
|
$
|
10,072,824
|
|
|
$
|
132,770
|
|
|
$
|
21,880,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,477,885
|
|
|
|
718,940
|
|
|
|
15,426,354
|
|
|
|
17,623,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated
from sales above
|
|
|
2,665,615
|
|
|
|
629,629
|
|
|
|
1,150,997
|
|
|
|
4,446,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
182,625
|
|
|
|
254,076
|
|
|
|
12,995
|
|
|
|
449,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
216,560
|
|
|
|
2,003,172
|
|
|
|
-
|
|
|
|
2,219,732
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Consolidated Financial Statements
October
31, 2016 and 2015
NOTE
13 - SEGMENT ANALYSIS (Continued)
|
|
USA
|
|
|
Europe
|
|
|
Australia
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Revenues by Geographic
Locations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2016
|
|
$
|
11,116,336
|
|
|
$
|
8,398,768
|
|
|
$
|
1,603,215
|
|
|
$
|
21,118,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2015
|
|
$
|
9,969,839
|
|
|
$
|
8,308,080
|
|
|
$
|
956,477
|
|
|
$
|
19,234,396
|
|
NOTE 14
- SUBSEQUENT EVENTS
|
1.
|
On
or around December 31, 2016 the Company redeemed the 1,100 units of Series C Preferred Stock in full (See Note 6). These shares
have now been surrendered and cancelled.
|
|
|
|
|
2.
|
On
or around December 13, 2016 the Company paid off the secured mortgage described in Note 8 to these Financials. The mortgage
has now been fully discharged.
|
|
|
|
|
3.
|
On
or around December 12, 2016 the Group CEO loaned one of the Subsidiaries $1,000,000 for
working capital. The loan has a term of one year and carries an interest rate of 4.5%.
|
|
4.
|
On
or around November 8, 2016, the Company issued 8,036 shares to a consultant in exchange for services.
|
|
|
|
|
5.
|
The
Company effected a one for fourteen reverse stock split of the Company’s common stock. The reverse stock split became
effective on January 11, 2017. The total number of common shares that Coda is authorized to issue remains at 150,000,000.
|
|
|
|
|
|
All
share and per share balances have been retroactively restated to reflect this reverse stock split.
|
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