Item
1. Financial Statements
Condensed
Consolidated Financial
Statements
For
the Three and Nine Months Ended July 31, 2017 and 2016
Contents
CODA
OCTOPUS GROUP, INC.
Condensed
Consolidated Balance Sheets
July
31, 2017 and October 31, 2016
ASSETS
|
|
|
2017
|
|
|
2016
|
|
|
|
Unaudited
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
6,996,329
|
|
|
$
|
5,601,767
|
|
Restricted Cash
|
|
|
-
|
|
|
|
13,694
|
|
Accounts Receivables,
Net
|
|
|
2,533,470
|
|
|
|
3,274,204
|
|
Inventory
|
|
|
2,897,767
|
|
|
|
2,598,925
|
|
Unbilled Receivables
|
|
|
3,733,116
|
|
|
|
3,406,693
|
|
Other Current Assets
|
|
|
381,997
|
|
|
|
140,954
|
|
Prepaid
Expenses
|
|
|
205,180
|
|
|
|
112,884
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
16,747,859
|
|
|
|
15,149,121
|
|
|
|
|
|
|
|
|
|
|
FIXED ASSETS
|
|
|
|
|
|
|
|
|
Property and Equipment,
net
|
|
|
5,459,517
|
|
|
|
3,840,500
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
10,663
|
|
|
|
96,374
|
|
Goodwill
and Other Intangibles, net
|
|
|
3,704,725
|
|
|
|
3,749,525
|
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
3,715,388
|
|
|
|
3,845,899
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
25,922,764
|
|
|
$
|
22,835,520
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Condensed
Consolidated Balance
Sheets (Continued)
July
31, 2017 and October 31, 2016
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Unaudited
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
1,525,523
|
|
|
$
|
1,396,475
|
|
Accrued Expenses
and Other Current Liabilities
|
|
|
545,272
|
|
|
|
794,067
|
|
Loans and Note Payable,
current
|
|
|
3,187,932
|
|
|
|
846,994
|
|
Deferred
Revenues
|
|
|
267,369
|
|
|
|
464,541
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
5,526,096
|
|
|
|
3,502,077
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue,
long term
|
|
|
48,511
|
|
|
|
-
|
|
Loans
and Note Payable, long term
|
|
|
5,453,792
|
|
|
|
9,178,930
|
|
|
|
|
|
|
|
|
|
|
Total
Long-Term Liabilities
|
|
|
5,502,303
|
|
|
|
9,178,930
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
11,028,399
|
|
|
|
12,681,007
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock,
Series C, $.001 par value; 5,000,000 shares authorized 1,000 and 1,100 issued and outstanding, as of July 31, 2017 and October
31, 2016, respectively
|
|
|
1
|
|
|
|
1
|
|
Common stock, $.001
par value; 150,000,000 shares authorized, 9,122,728 and 9,094,156 shares issued and outstanding as of July 31, 2017 and October
31, 2016, respectively
|
|
|
9,122
|
|
|
|
9,094
|
|
Additional paid-in capital
|
|
|
52,792,357
|
|
|
|
52,805,455
|
|
Accumulated other comprehensive loss
|
|
|
(1,556,243
|
)
|
|
|
(2,337,437
|
)
|
Accumulated deficit
|
|
|
(36,350,872
|
)
|
|
|
(40,322,600
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
14,894,365
|
|
|
|
10,154,513
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
25,922,764
|
|
|
$
|
22,835,520
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Condensed
Consolidated Statements of Income and Comprehensive Income
For
the Periods Indicated
Unaudited
|
|
Three Months Ended July 31,
|
|
|
Nine Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
5,043,590
|
|
|
$
|
4,278,660
|
|
|
$
|
15,680,551
|
|
|
$
|
14,800,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
1,982,761
|
|
|
|
1,432,673
|
|
|
|
5,979,746
|
|
|
|
6,210,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,060,829
|
|
|
|
2,845,987
|
|
|
|
9,700,805
|
|
|
|
8,589,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
200,118
|
|
|
|
292,855
|
|
|
|
699,106
|
|
|
|
708,146
|
|
Selling, General & Administrative
|
|
|
1,717,264
|
|
|
|
1,284,916
|
|
|
|
4,741,968
|
|
|
|
4,448,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,917,382
|
|
|
|
1,577,771
|
|
|
|
5,441,074
|
|
|
|
5,156,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
1,143,447
|
|
|
|
1,268,216
|
|
|
|
4,259,731
|
|
|
|
3,433,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
89,931
|
|
|
|
50,115
|
|
|
|
204,914
|
|
|
|
155,777
|
|
Interest Expense
|
|
|
(112,089
|
)
|
|
|
(217,471
|
)
|
|
|
(496,430
|
)
|
|
|
(616,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(22,158)
|
|
|
|
(167,356
|
)
|
|
|
(291,516
|
)
|
|
|
(460,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE INCOME TAXES
|
|
|
1,121,289
|
|
|
|
1,100,860
|
|
|
|
3,968,215
|
|
|
|
2,972,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
3,513
|
|
|
|
-
|
|
|
|
3,513
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,124,802
|
|
|
$
|
1,100,860
|
|
|
$
|
3,971,728
|
|
|
$
|
2,972,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.43
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,110,674
|
|
|
|
6,741,330
|
|
|
|
9,104,890
|
|
|
|
6,741,330
|
|
Diluted
|
|
|
9,310,674
|
|
|
|
8,941,330
|
|
|
|
9,304,890
|
|
|
|
8,941,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,124,802
|
|
|
$
|
1,100,860
|
|
|
$
|
3,971,728
|
|
|
$
|
2,972,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
13,307
|
|
|
|
(1,107,355
|
)
|
|
|
781,194
|
|
|
|
(1,879,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income (Loss)
|
|
|
13,307
|
|
|
|
(1,107,355
|
)
|
|
|
781,194
|
|
|
|
(1,879,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
1,138,109
|
|
|
$
|
(6,495
|
)
|
|
$
|
4,752,922
|
|
|
$
|
1,093,358
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Condensed
Consolidated Statement of Changes in Stockholders' Equity
For
the Nine Months Ended July 31, 2017
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Series C
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
14,286
|
|
|
|
14
|
|
|
|
25,486
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,500
|
|
Stock Issued to Board
of Directors
|
|
|
-
|
|
|
|
-
|
|
|
|
14,286
|
|
|
|
14
|
|
|
|
61,416
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,430
|
|
Redemption of Series
C Preferred stock
|
|
|
(1,100
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,099,999
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,100,000
|
)
|
Issuance of Series C
Preferred Stock
|
|
|
1,000
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
999,999
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Foreign currency translation
adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
781,194
|
|
|
|
-
|
|
|
|
781,194
|
|
Net
Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,971,728
|
|
|
|
3,971,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31,
2017 (Unaudited)
|
|
|
1,000
|
|
|
$
|
1
|
|
|
|
9,122,728
|
|
|
$
|
9,122
|
|
|
$
|
52,792,357
|
|
|
$
|
(1,556,243
|
)
|
|
$
|
(36,350,872
|
)
|
|
$
|
14,894,365
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Condensed
Consolidated Statements of Cash Flows
For
the Periods Indicated
Unaudited
|
|
Nine
Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,971,728
|
|
|
$
|
2,972,914
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
631,062
|
|
|
|
512,714
|
|
Stock compensation
|
|
|
86,930
|
|
|
|
77,000
|
|
Realized gain on
the sale of fixed assets
|
|
|
(81,494
|
)
|
|
|
-
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
740,734
|
|
|
|
(276,218
|
)
|
Inventory
|
|
|
(298,842
|
)
|
|
|
870,773
|
|
Unbilled receivables
|
|
|
(326,421
|
)
|
|
|
262,068
|
|
Other current assets
|
|
|
(241,044
|
)
|
|
|
-
|
|
Prepaid expenses
|
|
|
(92,296
|
)
|
|
|
(13,942
|
)
|
Deferred tax asset
|
|
|
85,712
|
|
|
|
(5,524
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
and other current liabilities
|
|
|
(119,748
|
)
|
|
|
(224,429
|
)
|
Deferred
revenues
|
|
|
(148,661
|
)
|
|
|
(46,359
|
)
|
Net Cash Provided
by Operating Activities
|
|
|
4,207,660
|
|
|
|
4,128,997
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property
and equipment
|
|
|
(2,649,060
|
)
|
|
|
(668,524
|
)
|
Restricted cash
|
|
|
13,695
|
|
|
|
4,328
|
|
Proceeds
from the sale of fixed assets
|
|
|
525,275
|
|
|
|
-
|
|
Net Cash Used in
Investing Activities
|
|
|
(2,110,090
|
)
|
|
|
(664,196
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments - loans
and notes payable
|
|
|
(384,202
|
)
|
|
|
(1,121,406
|
)
|
Redemption
of Series C preferred stock
|
|
|
(1,100,000
|
)
|
|
|
-
|
|
Net Cash Used in
Financing Activities
|
|
|
(1,484,202
|
)
|
|
|
(1,121,406
|
)
|
EFFECT OF CURRENCY
EXCHANGE RATE CHANGES
ON CASH
|
|
|
781,194
|
|
|
|
(1,879,556
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
|
1,394,562
|
|
|
|
463,839
|
|
|
|
|
|
|
|
|
|
|
CASH AT THE BEGINNING
OF THE PERIOD
|
|
|
5,601,767
|
|
|
|
6,310,694
|
|
|
|
|
|
|
|
|
|
|
CASH AT THE END
OF THE PERIOD
|
|
$
|
6,996,329
|
|
|
$
|
6,774,533
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
464,705
|
|
|
$
|
889,145
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Common
stock issued for terminal conversion premium
|
|
$
|
-
|
|
|
$
|
3,558,136
|
|
Preferred
stock issued for accrued interest
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
Repayment
of secured debt directly with proceeds of
note payable
|
|
$
|
8,000,000
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
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 condensed consolidated financial position, results of operations,
comprehensive income 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 registration statement on Form 10/A (the “Form 10”). The condensed consolidated
results of operations for the interim period ended July 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 Form 10. The
accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring
items) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as
of July 31, 2017 and the results of operations, comprehensive income and cash flows for the interim periods ended July 31, 2017
and 2016. The unaudited interim condensed 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, Australian based operations are measured using Australian Dollars, Danish based
operations are measured using Danish Kroners and Norwegian based operations are measured using Norwegian Kroners as the functional
currencies. Foreign currency translation gains and losses are recorded as a change in 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 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 notes
payable. 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. The carrying
value of our long-term debt approximates its fair value based on the terms and conditions which we would currently obtain.
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
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:
|
|
July
31,2017
|
|
|
October
31, 2016
|
|
|
|
|
|
|
|
|
Raw materials and parts
|
|
$
|
2,259,228
|
|
|
$
|
1,734,798
|
|
Work in progress
|
|
|
184,661
|
|
|
|
88,682
|
|
Demo goods
|
|
|
296,391
|
|
|
|
324,752
|
|
Finished goods
|
|
|
157,487
|
|
|
|
450,693
|
|
Total Inventory
|
|
$
|
2,897,767
|
|
|
$
|
2,598,925
|
|
NOTE
5 – OTHER CURRENT ASSETS
Other
current assets consisted of the following at July 31, 2017 and October 31, 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
11,240
|
|
|
$
|
(349
|
)
|
Other receivables
|
|
|
40,056
|
|
|
|
35,543
|
|
Value added tax
(VAT) receivable
|
|
|
330,701
|
|
|
|
105,760
|
|
|
|
|
|
|
|
|
|
|
Total Other Current
Assets
|
|
$
|
381,997
|
|
|
$
|
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.
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
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 $3,733,116 and $3,406,693 as of July 31, 2017 and October 31, 2016, respectively.
Our
Deferred Revenue of $315,880 and $464,541 as of July 31, 2017 and October 31, 2016, respectively, consists of billings in excess
of costs and revenues received as part of our warranty and Through Life Support obligations upon completing a sale of
our products– 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 July 31, 2017 and October 31, 2016, respectively.
Revenue
received as part of sales of equipment includes a provision for warranty and is recorded as deferred revenue and Through Life
Support (a support package offering three and five years hardware, software and technical support of products purchased). These
amounts are amortized according to the contractual period in question which is over 12 months for warranty obligations and
36 months or 60 months for Through Life Support obligations, according to the package purchased by our customers. The short-term
portions of the deferred revenues were $267,369 and $464,541 as of July 31, 2017 and October 31, 2016, respectively. The long-term
portions of the deferred revenues were $48,511 and $0 as of July 31, 2017 and October 31, 2016 respectively.
NOTE
8 – CONCENTRATIONS
Significant
Customers
During
the three months ended July 31, 2017, the Company had a customer from whom it generated sales greater than 10% of net revenues.
Revenue from this customer was $1,107,723, or 22% of net revenues during the period. Total accounts receivable from this customer
at July 31, 2017 was $605,831 or 24% of accounts receivable.
During
the three months ended July 31, 2016, the Company had two customers from whom it generated sales greater than 10% of net revenues.
Revenues from these customers were $2,780,925, or 65% of net revenues during the period. Total accounts receivable from
these customers at July 31, 2016 was $627,299 or 26% of accounts receivable.
During
the nine months ended July 31, 2017, the Company had a customer from whom it generated sales greater than 10% of net revenues.
Revenue from this customer was $3,961,648, or 25% of net revenues during the period. Total accounts receivable from this customer
at July 31, 2017 was $605,831 or 24% of accounts receivable.
During
the nine months ended July 31, 2016, the Company had two customers from whom it generated sales greater than 10% of net revenues.
Revenues from these customers were $3,893,432, or 26% of net revenues during the period. Total accounts receivable from
these customers at July 31, 2016 was $627,299 or 26% of accounts receivable.
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
NOTE
9 – LOANS AND NOTES PAYABLE
Loans
and notes payable consisted of the following at July 31, 2017 and October 31, 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
On April 28, 2017, the Company repaid in full all
outstanding amounts due under the Secured Debentures which was issued on February 21, 2008 and all security interest
was released. The Secured Debentures were paid using the $8,000,000 proceeds of the Secured Loan from HSBC Bank NA (see below
for further information) and the accrued and unpaid interest under the Debentures of approximately $1,133,261 was satisfied
through the issuance to CCM of 1,000 shares of Series C Convertible Preferred Stock, par value $0.001, with a stated value
of $1,000 each (the “Preferred Stock”). The Company paid the balance in cash.
|
|
$
|
-
|
|
|
$
|
9,744,123
|
|
|
|
|
|
|
|
|
|
|
Secured note in the principal amount of $8,000,000 payable
to HSBC with interest payable on the 28
th
day of each month at 4.56% per annum. The Company is required to make
monthly principal and interest payment of $149,350. Additionally, within 150 days of the end of each fiscal year the Company
is required to pay an amount of $700,000 which will be applied to reduce the principal outstanding under the Secured Loan.
The loan is scheduled to mature on April 28, 2022. However, based on the payment schedule under the Loan Agreement
it is expected that the Loan will be repaid in full in approximately 45 months from May 28, 2017 (when the first scheduled
payment was made).
|
|
|
7,641,724
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
One of the subsidiaries has an unsecured working capital loan from the CEO of the Group.
The note is due on May 31st, 2018 and carries an annual 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 required monthly principal payments of $4,018 along with interest at 2.75%, and was due to mature
in October 2023. The conversion rate varied according to exchange rates fluctuations. This mortgage was secured by our building,
located in Portland UK. This mortgage was repaid in full on December 13, 2016 and all security interest was released
by the Bank.
|
|
|
-
|
|
|
|
281,801
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,641,724
|
|
|
|
10,025,924
|
|
Less: current portion
|
|
|
(3,187,932
|
)
|
|
|
(846,994
|
)
|
Total Long-Term Loans and Notes Payable
|
|
$
|
5,453,792
|
|
|
$
|
9,178,930
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
NOTE
10– ACCUMULATED OTHER COMPREHENSIVE INCOME
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
(2,337,437
|
)
|
|
$
|
373,516
|
|
Total other comprehensive
income (loss) for the year - foreign currency translation adjustment
|
|
|
781,194
|
|
|
|
(1,879,556
|
)
|
Balance, end of period
|
|
$
|
(1,556,243
|
)
|
|
$
|
(1,506,040
|
)
|
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 do
not believe that the adoption of this standard will have a material effect on our financial statement.
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.
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
NOTE
11– RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
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
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
Fiscal Period
|
|
July
31,2017
|
|
|
July
31 2016
|
|
|
July
31, 2017
|
|
|
July
31, 2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
1,124,802
|
|
|
$
|
1,100,860
|
|
|
$
|
3,971,728
|
|
|
$
|
2,972,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common
shares outstanding
|
|
|
9,110,674
|
|
|
|
6,741,330
|
|
|
|
9,104,890
|
|
|
|
6,741,330
|
|
Conversion
of Series C Preferred
Stock
|
|
|
200,000
|
|
|
|
2,200,000
|
|
|
|
200,000
|
|
|
|
2,200,000
|
|
Diluted outstanding
shares
|
|
|
9,310,674
|
|
|
|
8,941,330
|
|
|
|
9,304,890
|
|
|
|
8,941,330
|
|
Earnings from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.43
|
|
|
$
|
0.33
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
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 engineering 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, as outlined in the October 31, 2016 financial statements.
There
are inter-segment sales which have been eliminated in our financial statements but are disclosed in the tables below for information
purposes.
The
Company’s reportable business segments operate in three geographic locations. Those geographic locations are:
*
United States
*
Europe
*
Australia
The following
tables summarize segment asset and operating balances by reportable segment for the three months and nine months ended July 31,
2017 and 2016 respectively.
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
NOTE
13 – SEGMENT ANALYSIS (continued)
|
|
Marine Technology Business (Products)
|
|
|
Marine Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
3,439,587
|
|
|
$
|
1,604,003
|
|
|
$
|
-
|
|
|
$
|
5,043,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
1,054,369
|
|
|
|
928,392
|
|
|
|
-
|
|
|
|
1,982,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
2,385,218
|
|
|
|
675,611
|
|
|
|
-
|
|
|
|
3,060,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
200,118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,118
|
|
Selling, General & Administrative
|
|
|
781,908
|
|
|
|
637,465
|
|
|
|
297,891
|
|
|
|
1,717,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
982,026
|
|
|
|
637,465
|
|
|
|
297,891
|
|
|
|
1,917,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
1,403,192
|
|
|
|
38,146
|
|
|
|
(297,891
|
)
|
|
|
1,143,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
89,670
|
|
|
|
261
|
|
|
|
-
|
|
|
|
89,931
|
|
Interest Expense
|
|
|
(5,947
|
)
|
|
|
(15,451
|
)
|
|
|
(90,691
|
)
|
|
|
(112,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
83,723
|
|
|
|
(15,190
|
)
|
|
|
(90,691
|
)
|
|
|
(22,158)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,486,915
|
|
|
|
22,956
|
|
|
|
(388,582
|
)
|
|
|
1,121,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
3,513
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,490,428
|
|
|
$
|
22,956
|
|
|
$
|
(388,582
|
)
|
|
$
|
1,124,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
12,300,376
|
|
|
$
|
12,529,169
|
|
|
$
|
1,093,219
|
|
|
$
|
25,922,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,103,023
|
|
|
|
1,638,002
|
|
|
|
8,287,374
|
|
|
|
11,028,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated from sales above
|
|
|
1,002,339
|
|
|
|
36,030
|
|
|
|
369,625
|
|
|
|
1,407,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
130,048
|
|
|
|
101,442
|
|
|
|
3,211
|
|
|
|
234,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
252,653
|
|
|
|
45,841
|
|
|
|
-
|
|
|
|
298,494
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
NOTE
13 – SEGMENT ANALYSIS (continued)
|
|
Marine
Technology Business (Products)
|
|
|
Marine
Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
2,427,570
|
|
|
$
|
1,851,090
|
|
|
$
|
-
|
|
|
$
|
4,278,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
622,195
|
|
|
|
810,478
|
|
|
|
-
|
|
|
|
1,432,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,805,375
|
|
|
|
1,040,612
|
|
|
|
-
|
|
|
|
2,845,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
292,855
|
|
|
|
-
|
|
|
|
-
|
|
|
|
292,855
|
|
Selling, General
& Administrative
|
|
|
422,096
|
|
|
|
578,297
|
|
|
|
284,523
|
|
|
|
1,284,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
714,951
|
|
|
|
578,297
|
|
|
|
284,523
|
|
|
|
1,577,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
1,090,424
|
|
|
|
462,315
|
|
|
|
(284,523
|
)
|
|
|
1,268,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
50,226
|
|
|
|
(111
|
)
|
|
|
-
|
|
|
|
50,115
|
|
Interest Expense
|
|
|
(330,306
|
)
|
|
|
(110,113
|
)
|
|
|
222,948
|
|
|
|
(217,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(280,080
|
)
|
|
|
(110,224
|
)
|
|
|
222,948
|
|
|
|
(167,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
810,344
|
|
|
|
352,091
|
|
|
|
(61,575
|
)
|
|
|
1,100,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
(expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
810,344
|
|
|
$
|
352,091
|
|
|
$
|
(61,575
|
)
|
|
$
|
1,100,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
11,883,612
|
|
|
$
|
9,613,958
|
|
|
$
|
155,302
|
|
|
$
|
21,652,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,218,381
|
|
|
|
640,083
|
|
|
|
10,808,862
|
|
|
|
12,667,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated
from sales above
|
|
|
286,892
|
|
|
|
(63,221
|
)
|
|
|
118,875
|
|
|
|
342,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
121,600
|
|
|
|
81,129
|
|
|
|
3,199
|
|
|
|
205,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
(76,401
|
)
|
|
|
(8,648
|
)
|
|
|
3,600
|
|
|
|
(81,449
|
)
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
NOTE
13 – SEGMENT ANALYSIS (continued)
|
|
Marine Technology Business (Products)
|
|
|
Marine Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
9,189,731
|
|
|
$
|
6,490,820
|
|
|
$
|
-
|
|
|
$
|
15,680,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
2,753,297
|
|
|
|
3,226,449
|
|
|
|
-
|
|
|
|
5,979,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,436,434
|
|
|
|
3,264,371
|
|
|
|
-
|
|
|
|
9,700,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
699,106
|
|
|
|
-
|
|
|
|
-
|
|
|
|
699,106
|
|
Selling, General & Administrative
|
|
|
2,165,601
|
|
|
|
1,979,436
|
|
|
|
596,931
|
|
|
|
4,741,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
2,864,707
|
|
|
|
1,979,436
|
|
|
|
596,931
|
|
|
|
5,441,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
3,571,727
|
|
|
|
1,284,935
|
|
|
|
(596,931
|
)
|
|
|
4,259,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
204,653
|
|
|
|
261
|
|
|
|
-
|
|
|
|
204,914
|
|
Interest (Expense) Income
|
|
|
(538,088
|
)
|
|
|
(214,674
|
)
|
|
|
256,332
|
|
|
|
(496,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(333,435
|
)
|
|
|
(214,413
|
)
|
|
|
256,332
|
|
|
|
(291,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
3,238,292
|
|
|
|
1,070,522
|
|
|
|
(340,599
|
)
|
|
|
3,968,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
3,513
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,241,805
|
|
|
$
|
1,070,522
|
|
|
$
|
(340,599
|
)
|
|
$
|
3,971,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated from sales above
|
|
|
1,680,852
|
|
|
|
265,985
|
|
|
|
607,375
|
|
|
|
2,554,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
377,311
|
|
|
|
244,223
|
|
|
|
9,528
|
|
|
|
631,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
2,541,716
|
|
|
|
94,874
|
|
|
|
12,470
|
|
|
|
2,649,060
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
NOTE
13 – SEGMENT ANALYSIS (continued)
|
|
Marine
Technology Business (Products)
|
|
|
Marine
Engineering Business (Services)
|
|
|
Overhead
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
$
|
7,816,669
|
|
|
$
|
6,983,805
|
|
|
$
|
-
|
|
|
$
|
14,800,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
2,690,603
|
|
|
|
3,520,070
|
|
|
|
-
|
|
|
|
6,210,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
5,126,066
|
|
|
|
3,463,735
|
|
|
|
-
|
|
|
|
8,589,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
708,146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
708,146
|
|
Selling, General
& Administrative
|
|
|
1,905,381
|
|
|
|
2,180,426
|
|
|
|
362,202
|
|
|
|
4,448,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
2,613,527
|
|
|
|
2,180,426
|
|
|
|
362,202
|
|
|
|
5,156,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
|
|
2,512,539
|
|
|
|
1,283,309
|
|
|
|
(362,202
|
)
|
|
|
3,433,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
149,990
|
|
|
|
5,787
|
|
|
|
-
|
|
|
|
155,777
|
|
Interest Expense
|
|
|
(615,383
|
)
|
|
|
(223,931
|
)
|
|
|
222,805
|
|
|
|
(616,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(465,393
|
)
|
|
|
(218,144
|
)
|
|
|
222,805
|
|
|
|
(460,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
2,047,146
|
|
|
|
1,065,165
|
|
|
|
(139,397
|
)
|
|
|
2,972,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
(expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
2,047,146
|
|
|
$
|
1,065,165
|
|
|
$
|
(139,397
|
)
|
|
$
|
2,972,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Intercompany Sales - eliminated
from sales above
|
|
|
643,294
|
|
|
|
178,132
|
|
|
|
362,875
|
|
|
|
1,184,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
247,235
|
|
|
|
255,848
|
|
|
|
9,631
|
|
|
|
512,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Long-lived Assets
|
|
|
642,906
|
|
|
|
13,150
|
|
|
|
12,468
|
|
|
|
668,524
|
|
CODA
OCTOPUS GROUP, INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
July
31, 2017 and 2016
NOTE
13 – SEGMENT ANALYSIS (continued)
Information
concerning principal geographic areas is presented below according to the area where the activity has taken place for the three
and nine months ended July 31, 2017 and 2016 respectively:
|
|
USA
|
|
|
Europe
|
|
|
Australia
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Revenues by Geographic Locations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2017
|
|
$
|
1,550,141
|
|
|
$
|
2,942,365
|
|
|
$
|
551,085
|
|
|
$
|
5,043,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2016
|
|
$
|
1,983,771
|
|
|
$
|
1,970,478
|
|
|
$
|
324,411
|
|
|
$
|
4,278,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 31, 2017
|
|
$
|
6,825,815
|
|
|
$
|
7,574,299
|
|
|
$
|
1,280,437
|
|
|
$
|
15,680,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 31, 2016
|
|
$
|
6,939,673
|
|
|
$
|
6,733,926
|
|
|
$
|
1,126,875
|
|
|
$
|
14,800,474
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 and the audited
financial statements included in our registration statement on Form 10/A filed with the Securities and Exchange Commission
on March 29, 2017. 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
Throughout
these discussions, the following terminologies listed in the table immediately below are used and have the meanings ascribed to
them in the said table.
“
Current Quarter
”
|
This refers to the three month period ended July 31, 2017
|
“
Previous Quarter
”
|
This refers to the three month period ended July 31, 2016
|
“2017 Nine Months Period”
|
This refers to the nine month period ended July 31, 2017
|
“2016 Nine Months Period”
|
This refers to the nine month period ended July 31, 2016
|
Coda
Octopus Group, Inc. (“Coda,” “the Company,” or “we”) designs and manufactures patented real
time 3D sonar solutions and other leading products (comprising both hardware and software) 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). Hereafter we will refer to these segments as either Products Segment or Services Segment
(as the context requires).
Our
products are used primarily in the underwater construction market, offshore oil and gas and wind energy industry, complex dredging
operations, port security, mining, countermine measures, defense (specifically, object identification and reacquisition
missions) and marine sciences sectors. Our customers include service providers to major oil and gas companies, law enforcement
agencies, ports, mining companies, defense companies, research bodies 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 provide
engineering services through the full life cycle of the parts we supply (conception, design, production and obsolescence
management)
Historically, the Marine Technology Business
generated approximately 70% of our revenues. In the last two 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. In the Current Quarter, however,
our Marine Technology Business generated 68% of our revenues, whereas the Marine Engineering Business generated 32%. The reduced
revenue share of our Services Segment is largely due to delays in securing committed purchase orders from our defense customers
resulting from the uncertainty around the newly elected US Administration’s budgetary policy and spending priorities. Nevertheless,
we believe that this is a temporary situation and the Marine Engineering Business will continue to grow at a faster pace than
the Marine Technology Business as this latter segment continues to be affected by the contraction in the oil and gas (O&G)
sector’s capital and operational spending. 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 to this sector have declined and gross profit
margins of items we sell into this sector have weakened. The outlook for the O&G sector continues to look poor and the widely
held view in the market is that this is likely to continue as long as the current surplus and volatility in the price of oil continues.
This situation is further compounded by the depreciation of British Pound against the US Dollar which has impacted on the US Dollar
revenues generated by the Products Segment.
We continue to believe that our unique and patented real time 3D solutions for subsea and defense application
are a significant advancement on the current technology available in the subsea sonar market. Because of its real time capability
providing volumetric data of moving (as opposed to static) underwater targets or objects in low or zero visibility conditions,
this technology reduces 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, we
believe that our real time 3D solution is becoming the preferred solution for subsea asset placements (such as Accropodes™,
mattress placements, block placements and the like) because it is the only technology that can visualize in real time moving objects
in the water column (such as blocks).
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. Furthermore, as discussed in our section on Research and Development, we are focusing
on the advancement of our real time 3D technology to introduce more competitively priced products and products tailored to particular
markets. In January 2017, we launched our Echoscope
®
XD, a multiple projector system that provides a wider field
of view that is more suitable for bathymetry survey or imaging of a wider area. This new product can also be retrofitted to existing
systems. This paves the way for the further expansion of the markets for our real time 3D sonar. We are also close to launching
the first of a series of new products based on our fourth generation (4G) technology. This system is a shallow water system targeted
at the subsea construction market and is much smaller in size and lighter than the current iteration of our real time 3D sonars.
In addition, its power requirements are less. We believe that these features will allow us to expand into markets where size,
weight and power requirements of our equipment play a significant role.
In recent years we have made progress in getting
our core real time patented 3D technology, the Echoscope
®
, adopted by a significant number of ports in the USA (the
CodaOctopus® Underwater Inspection System – (“UIS”) – which integrates our Echoscope, motion sensing
product and hydrographic pole) where it is used for port and harbor security.
We have also made progress in expanding the
markets (and applications) into which we sell our patented real time 3D Sonars. Recently, we have sold a number of systems to
subsea mining companies for use in selecting the areas for mining and to precisely locate, sample and harvest the
minerals from the seabed with maximum yield and minimum disturbance to the environment. All such operations are in zero visibility
water conditions.
Increasingly, our customers involved in
offshore energy and renewables are adopting the technology as the primary tool for scour management, subsea cable
installation and associated cable protection tasks. During fiscal 2016, there were four significant European wind
energy projects all of which adopted our technology. We continue to make progress in this sector in 2017. We are enhancing
our products further with the aim of automating these operations.
During the last 12 months we have also begun to focus on the defense market for our real time 3D sonar technology.
Recently, we have had a number of successful trials with significant defense and navy prospects both in the US and the UK. During
these evaluations, our technology has been identified as important technology for a number of defense applications as it allows
real time observation for many difficult defense tasks such as real time hull scanning of ships, search and rescue, diving applications,
obstacle avoidance, threat detections, mine and countermine measures.
In
addition, in recent years we have started to rent our real time 3D solutions with associated 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. In the Current Quarter, sales of our rental solutions
and associated services have fallen compared to the Previous Quarter.
The
following brief overview highlights some of the major issues that currently impact the Company’s business.
|
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, which previously had been an important
market for our products;
|
|
|
|
|
b.
|
the allocation of
funds to defense procurement by governments in the US and the UK;
|
|
|
|
|
c.
|
uncertainty on the
impact of the United Kingdom decision to terminate its membership in the European Union. See below for recent steps we have
started to take to mitigate some of the impact should there be a “hard Brexit” (i.e. an exit arrangement that
allows the UK no or limited access to the European Union markets). In the event that the United Kingdom does not secure access
to the European Union Single Market, this is likely to directly impact our cost basis as currently we do not pay export duty
on products that we sell to customers in the Single Market. We are in the process of designing a strategy to mitigate some
of the likely impact;
|
|
|
|
|
d.
|
a significant percentage
of the Company revenues are generated by the Company’s subsidiaries in the United Kingdom. The depreciation of British
Pound against major currencies including the US Dollar impacts our foreign subsidiaries in the United Kingdom which generates
approximately 58% of our revenues in the Current Quarter and which are transacted in British Pounds. Furthermore, a large
part of our assets are held in British Pounds while the majority of our liabilities (which comprise our senior secured debentures)
are maintained in US Dollar. The continued uncertainty described in paragraph (c) above is likely to cause the continued decline
in the value of the British Pound against the US Dollar for the foreseeable future. See Note 3 of the Consolidated
Unaudited Financial Statements regarding our Foreign Currency Translation Policy;
|
|
|
|
|
e.
|
global-political
uncertainties affecting the markets into which we sell our goods and services;
|
|
|
|
|
f.
|
global trends which
makes certain geographical regions more competitive in providing engineering solutions because of their labor rates, such
as India and China, are likely to affect our Services Segment;
|
|
|
|
|
g.
|
Revenues from our
Services Segment have been adversely affected in the Current Quarter due to uncertainty regarding the new US Administration’s
funding priorities. As such, significant purchase orders that we had anticipated have not yet been placed. Although we believe
that the medium to long-term prospects for government based revenues remain strong. The delay in receiving the anticipated
purchase orders is likely to adversely affect this Company’s financial results for the current fiscal year;
|
|
|
|
|
h.
|
On April 28, 2017,
the Company entered into a Secured Loan Agreement with HSBC Bank NA for a loan in the principal amount of $8,000,000 at a
fixed annual interest rate of 4.56%. The obligation is secured by all of the Company’s assets and business undertakings
in the USA and is guaranteed jointly and severally by each of the Company’s foreign subsidiaries; and
|
|
|
|
|
i.
|
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 located
in the United States, United Kingdom, Australia and Norway. A large proportion of our revenues (approximately 68%) and costs
(in the Current Quarter) are incurred outside of the USA with a significant part of that in the UK. In addition, a significant
part of our assets (both current and fixed) are held in British Pounds by our foreign subsidiaries. The decision of the UK to
exit the European Union (“Brexit”) has resulted in significant currency exchange rate fluctuations and volatility
in global stock markets including a sharp fall of the British Pound against the US Dollar and other major currencies. This fall
affects our reported revenues since we report in US Dollars. Additionally, a significant part of our supply chain for our UK Products
business is sourced from outside of the UK. The depreciation of the British Pound against major currencies including the US Dollar
results in an increased cost in our raw materials and these increases are not easily passed on to our customers.
Since
the Brexit vote, we have suffered adverse currency movements affecting our UK Businesses. It has been reported in the Financial
Times that in July 2016 British Pound closed at a 31year low against the US Dollar at around US Dollar 1.32 for the British Pound.
Since then, the British Pound has continued to depreciate against the US Dollar to around $1.20 to $1.25 for £1 with the
average for 2017 Nine Months Period being $1.26 and $1.32 at the Balance Sheet date for the Current Quarter. For the 2017 Nine
Months Period our reported revenues have been reduced by $1,000,000 due to adverse movement of the British Pound to the US Dollar.
See further below under Section titled “Inflation and Foreign Currency” for full analysis of Exchange Rate Movements
and impact for the 3 and 9 months respectively.
Given
the lack of comparable precedent, the implications of Brexit and how they might affect the Company in the medium to long term
are unclear. However, in the event that the negotiations with Britain’s European counterparts result in a “hard Brexit”,
thereby disrupting trade and the free movement of goods, services and people, this could adversely affect our Business.
The
UK Government triggered Article 50 on March 29, 2017. The UK political establishment appears to be pursuing a “hard Brexit”.
In anticipation of mitigating some of the impact of this on the Company, on or around February 28, 2017 we established Coda Octopus
Products A/S in Denmark (a member of the European Union). This is established as a wholly owned subsidiary of Coda Octopus Products
Limited. Our CEO is the Managing Director of Coda Octopus Products A/S in Denmark.
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
full discussion of our significant accounting policies, including further discussion of the accounting policies described below,
can be found in Note 1, “Summary of Significant Accounting Policies” of our Annual Consolidated Financial Statements
included in Form 10/A.
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 is 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 costs (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.
Results
of Operations for the three months ended July 31, 2017 (“Current Quarter”) compared to the three months ended July
31, 2016 (“Previous Quarter”)
Revenue
:
Total revenues for the Current Quarter and the Previous Quarter were $5,043,590 and $4,278,660, respectively, representing an
increase of 17.9%. The increase in Revenues in the Current Quarter is a reflection of the increase in sales by our Product Segment.
Although this segment continues to be impacted by the downturn in O&G sector, we have managed to continue to make progress
in selling into new markets and new geographical regions.
Gross
Margins:
Margins were weaker in the Current Quarter at 60.7% (gross profit of $3,060,829) compared to 66.5% (gross profit
$2,845,987) in the Previous Quarter. This decrease is a reflection of the mix of sales generated in the Current Quarter. In addition,
a significant part of sales by the Products Segment were through agents, which command a commission ranging between 15 and 20%
and also a reduction of the level of rental activities. This has impacted our Gross Margins in the Current Quarter and at the
same time, our rental revenues, which have better gross margins, are down compared to the Previous Quarter. Further information
on the performance of each Segment can be found in Note 13 to the Condensed Consolidated Unaudited Financial Statements.
Research
and Development (R&D)
. R&D expenditures in the Current Quarter were $200,118 representing a 31.7% decrease compared
to the Previous Quarter, when these expenditures were $292,855. Notwithstanding this decrease, on a full year basis we expect
this number to increase to reflect ongoing R&D projects relating to our program to advance technologically 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) for prototyping new real time 3D products and motion sensing products. Our goal will be to bring more competitively
priced and technologically advanced products to the market in fiscal year 2018. We expect the first prototype within our 4G of
real time 3D sonars to be available for customer trials around October 2017. Trials can take up to three months and therefore
we do not expect to launch this variant until the end of our first quarter in 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 increased to $1,717,264 from
$1,284,916 in the Previous Quarter, an increase of 33.6%. This is in line with new costs associated with our SEC reporting,
NASDAQ listing, increased professional fees relating to these activities and increase in the costs of our Directors and Officers
insurance.
Key
Areas of SG&A Expenditure across the Group for the Current Quarter compared to the Previous Quarter are:
Expenditure
|
|
July
31, 2017
|
|
|
July
31, 2016
|
|
|
Percentage
Change
|
Wages and Salaries
|
|
$
|
1,001,346
|
|
|
$
|
985,172
|
|
|
Increase
of 1.6%
|
Legal and Professional Fees (including accounting,
audit and investment banking services)
|
|
$
|
227,506
|
|
|
$
|
100,934
|
|
|
Increase of 125.4%
|
Rent for our various locations
|
|
$
|
38,869
|
|
|
$
|
89,003
|
|
|
Decrease of 56.3%
|
Marketing
|
|
$
|
35,971
|
|
|
$
|
12,164
|
|
|
Increase of 195.7%
|
Operating
Income
. We had an operating income of $1,143,447 in the Current Quarter against an operating income of $1,268,216
in the Previous Quarter, resulting in a decrease of 9.8% over the Previous Quarter. This decrease is largely due to the
increase in our SG&A expenditures combined with the reduction in revenues generated by our Services Segment in the Current
Quarter due to delays in receiving purchase orders from its defense customers due to uncertainty in the new US Government Administration
on budgetary and spending priorities.
Interest
Expense
. Interest expense decreased by 48.5% in the Current Quarter to $112,089 from $217,471 in the Previous Quarter. This
is due to lower interest payments attributable to our current Senior Loan with HSBC Bank NA. Please refer to Note 9 – Loans
and Notes Payable to the Unaudited Condensed Consolidated Financial Statements for further details pertaining to this HSBC
Loan.
Other
Income.
In the Current Quarter, we had Other Income of $89,931 as compared to $50,115 in the Previous Quarter resulting
in an increase by 79.4%. This category is subject to fluctuations as it usually reflects Value Added Tax rebates from purchases
made outside of the European Union by our UK operations and changes according to the level of purchases we make outside of the
European Union in the period.
Net
Income.
In the Current Quarter, we had Net Income of $1,124,802 as compared to $1,100,860 in the Previous Quarter representing
a small increase of 2.2% over the Previous Quarter. This is largely attributable to reduction in interest expenses payable and
a gain realized from sale of fixed asset in the Current Quarter.
Comprehensive
Income.
In the Current Quarter, our Comprehensive Income was $1,138,109 compared to a loss on $6,495 in the Previous Quarter.
This is due to a gain on foreign currency transactions of $13,307 as compared to a loss on foreign currency transactions of (1,107,355)
in the Previous Quarter.
Segment
Reporting three months ended July 31, 2017 compared to three months ended July 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.
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 in our Form 10/A. See Note 13 of our Condensed Consolidated Unaudited
Financial Statements which provides more information on each of the Segments for the Current Quarter compared to the Previous
Quarter.
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 68% and 57% of
our total revenues for the three months ended July 31, 2017 and July 31, 2016, respectively.
Our
Marine Engineering Business largely sells its services into prime and second tier defense contractors and generated approximately
32% and 43% of our total revenues for the three months ended July 31, 2017 and July 31, 2016, respectively. The Marine Engineering
Business has not met its revenue plan year to date due to delays experienced by the Services Segment in securing committed purchase
orders from our defense customers resulting from the uncertainty around the newly elected US Administration and its budgetary
policy and spending priorities. This has impacted its revenues in the Current Quarter.
Results
of Operations for the nine months ended July 31, 2017 (“2017 Nine Months Period”) compared to the nine months ended
July 31, 2016 (“2016 Nine Months Period”)
Revenue
:
Total revenues for the 2017 Nine Month Period and the 2016 Nine Month Period were $15,680,551 and $14,800,474 respectively, representing
an increase of 5.9%. Although overall revenues have increased, we are still behind in our revenue plan for this fiscal year due
to delays in securing anticipated purchase orders by our Services Segment. This is caused by uncertainty over the budgetary and
spending priorities of the new US Administration, resulting in defense contractors not committing to orders until there is more
clarity and we expect this to continue in our fourth quarter.
Gross
Margins:
Margins were stronger in the 2017 Nine Month Period at 61.9% (gross profit of $9,700,805) compared to 58.0% (gross
profit $8,589,801) in the 2016 Nine Month Period. The increase in our Gross Margins is a reflection of the mix of sales generated
in the 2017 Nine Months Period with a high proportion of sales in our Marine Technology Business that traditionally commands a
higher gross margin than our Marine Engineering Business. In the 2016 Nine Month Period, 47% of our revenues were generated by
the Services Segment and 53% by the Products Segment.
Research
and Development (R&D).
R&D expenditures in the 2017 Nine Month Period were $699,106 representing a 1.3% decrease over
the 2016 Nine Month Period, where these expenditures were $708,146. This level of expenditures for our R&D efforts is in line
with our budgetary plans. On a full year basis, we anticipate that this area of expenditures will increase over the previous 2016
full year period 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 for prototyping new real time 3D products and motion sensing products. Our goal will be to bring more competitively priced
and technologically advanced products to the market. It is anticipated that our first iteration of our 4G sonars will be available
for customers evaluation in the subsea construction market before the end of the current fiscal year and should these be successful
we would expect to launch of our first iteration of our 4G technology is anticipated to be in first quarter 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 2017 Nine Months Period increased to $4,741,968
from $4,448,009 in the 2016 Nine Months Period, an increase of 6.6%. The increase in this category of expenditures
is in line with our budgetary expectations and reflect the additional costs associated with the Company returning to SEC reporting
and listing of its shares of common stock at the Nasdaq Capital Market and increased costs of Directors and Officers insurance.
Key
Areas of SG&A Expenditure across the Group for the 2017 Nine Months Period compared to the 2016 Nine Months Period are:
Expenditure
|
|
July 31, 2017
|
|
|
July 31, 2016
|
|
|
Percentage
Change
|
Wages and Salaries
|
|
$
|
2,977,685
|
|
|
$
|
3,221,840
|
|
|
Decrease of 7.6%
|
Legal and Professional Fees (including accounting, audit and investment banking services)
|
|
$
|
720,665
|
|
|
$
|
587,692
|
|
|
Increase of 22.6%
|
Rent for our various locations
|
|
$
|
80,937
|
|
|
$
|
51,615
|
|
|
Increase of 56.8%
|
Marketing
|
|
$
|
160,812
|
|
|
$
|
100,855
|
|
|
Increase of 59.4%
|
In
the 2017 Nine Months Period our SG&A expenditures have increased, which is partially due to increased spending on Legal and
Professional Fees associated with having returned 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 registration statement is now effective
and the Company is subject to the 1934 Act.
Operating
Income
. We had an operating income of $4,259,731 in the 2017 Nine Months Period against an operating income of $3,433,646
in the 2016 Nine Months Period, making this an increase of 24.1%. This increase is largely due to an increase in revenues
combined with a reduction in our direct costs of sales (resulting from the mix of sales in the 2017 Nine Months Period), resulting
in an increase in our gross profit margins. We also had slightly lower expenditures for wages and salaries category but overall
increased SG&A due to the reasons disclosed immediately above). Moreover, our R&D expenditures will continue to increase
in the last three months of the current and the next financial year to reflect the investments we are making in research and development
of our next generation of real time 3D solutions (4G real time 3D solutions) and motion sensing products.
Interest Expense
.
Interest expense decreased by 19.5% in the 2017 Nine Months Period to $496,430 from $616,509 in the 2016 Nine Months Period. This
reduction is due to (i) redemption of the amounts described in category A below; and (ii) reduction in the interest rate
payable under the new HSBC NA secured loan which the Company effected on or around April 28, 2017. This loan attracts a
lower interest rate of 4.5566% as compared to 8.5% on previous Senior Secured Debentures; (iii) reduction of the principal amount
of the said HSBC NA loan, which is a reducing balance loan (Company repays both principal and interest on a monthly basis).
This
category of expenditures included:
No.
|
|
Description
|
|
Status
|
A.
|
|
Senior
Secured Debentures –
Original
Amount $12,000,000 issued on or around February 21, 2008
|
|
This
has now been repaid in full. See below for further details.
|
B.
|
|
HSBC
(UK) Mortgage on Building (Office and Manufacturing Facility located in Portland, UK). Original Mortgage amount was $530,701
|
|
This
has now been repaid in full and the mortgage over the building was released.
|
C.
|
|
Loan
from our CEO of $1,000,000
|
|
This
is still outstanding.
|
On
and around April 28, 2017, we paid off the outstanding principal and accrued interest under the Secured Debentures described
in paragraph A of the table immediately above. This was achieved by
|
-
|
obtaining
a loan in HSBC Bank USA in the principal amount of $8,000,000 which is secured by the Company’s assets and with significantly
lower interest than the Secured Debentures;
|
|
|
|
|
-
|
issuing
Series C preferred stock valued at $1,000,000 to the holder of the Secured Debentures; and
|
|
|
|
|
-
|
$133,261
in cash.
|
This
category of expenditures is likely to decrease going forward as the annual interest on the new Secured Loan is 4.5566% as compared
to 8.5% which we were paying on category A above and at the same time our overall level of borrowing has dropped. See Note 9 of
the Condensed Consolidated Unaudited Financial Statements for full information on new HSBC Bank USA Secured Loan of $8,000,000
which the Company borrowed on or around April 28, 2017 and section titled “Liquidity and Capital Resources” below.
Other
Income.
In the 2017 Nine Month Period, we had Other Income of $204,914 as compared to $155,777 in the 2016 Nine Month
Period resulting in an increase by 31.5%. This category is subject to fluctuations as it usually reflects Value Added Tax
rebates from purchases made outside of the European Union by our UK operations and changes according to the level of purchases
we make outside of the European Union in the period.
Net
Income
. In the 2017 Nine Month Period, we had Net Income of $3,971,728 as compared to $2,972,914 in the 2016 Nine Months Period
representing an increase of 33.6% over the 2016 Nine Months Period. This is due to an increase in revenues by 5.9% combined with
stronger gross profit margins (up from 58% to 61.9%) and a reduction in interest expenditures by 19.5%.
Comprehensive
Income
. In the 2017 Nine Month Period, our Comprehensive Income was $4,752,922 compared to $1,093,358 in the 2016 Nine Month
Period representing an increase of 334.7%. This includes a gain for the 2017 Nine Months Period in foreign currency translation
adjustment of $781,194 and a loss for the same item in the 2016 Nine Month Period of $1,879,556.
Segment
Reporting nine months ended July 31, 2017 compared to nine months ended July 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 59% and 53% of
our total revenues for the nine months ended July 31, 2017 and July 31, 2016, respectively.
Our
Marine Engineering Business largely sells its services into prime and second tier defense contractors and generated approximately
41% and 47% of our total revenues for the nine months ended July 31, 2017 and July 31, 2016, respectively. Although the revenues
of the Marine Engineering Business have fallen in the 2017 Nine Months Period due to delays experienced by the Services
Segment in securing committed purchase orders from our defense customers resulting from the uncertainty around the newly elected
US Administration and its budgetary policy and spending priorities, we continue to believe this is a temporary situation and overall
the Marine Engineering Business is set to grow in the next fiscal year.
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
in our Form 10/A.
See
Note 13 to the Condensed Consolidated Unaudited Financial Statements which provides break-out of the Segments for 2017
Nine Months Period compared to the 2016 Nine Months Period.
Liquidity
and Capital Resources
At
July 31, 2017, the Company had an accumulated deficit of $36,350,872, working capital of $11,221,763 and stockholders’ equity
of $14,894,365. For the 2017 Nine Months Period, the Company generated cash flow from operations of $4,207,660.
On
April 28, 2017, the Company and its wholly-owned US based subsidiaries, Coda Octopus Products, Inc. and Coda Octopus Colmek, Inc.
(together, the “Subsidiaries”), entered into a loan agreement with HSBC Bank NA (the “Lender”) for a loan
in the principal amount of $8,000,000 (the “Loan”). The annual interest rate is fixed at 4.56%. Commencing on May
28, 2017 and continuing on the 28th day of each month thereafter, the Company is required to make monthly principal and interest
payments of $149,350 until April 28, 2022. In addition, within 30 days after the delivery to the Lender of the Company’s
annual audited financial statements, the Company is required to make an annual principal payment of $700,000 during the term of
the Loan. Such annual payments will reduce the balance of the principal outstanding. As a result, it is expected that the Loan
will be repaid within a period of approximately 45 months. The Loan may be prepaid in whole or in part at any time subject to
a break funding charge as detailed in the promissory note evidencing the Loan. This Loan is also guaranteed jointly and severally
by each of the overseas subsidiaries of Coda Octopus Group, Inc.
The
obligations in connection with the repayment of the Loan are secured by all assets of Coda Octopus Group, Inc., and its US Subsidiaries.
Our foreign subsidiaries are joint and several guarantors of the obligations.
The
proceeds from the Loan were used to repay in its entirety the outstanding principal balance of $8,000,000 under secured debentures
(the “Debentures”) that were issued by the Company in February 2007 and that were most recently held by CCM Holdings,
LLC. (“CCM”). Accrued and unpaid interest under the Debentures of approximately $1,133,261 was satisfied through the
issuance to CCM of 1,000 shares of Series C Convertible Preferred Stock, par value $0.001, with a stated value of $1,000 each
(the “Preferred Stock”). The Preferred Stock is convertible at the option of either the holder or the Company at
a conversion price of $5.00 for each Series C Preferred Stock held.
The
Company paid the balance in cash.
Inflation
and Foreign Currency
The
Company maintains its books in local currency: US Dollars, British Pound, Australian Dollars and Norwegian and Danish Kroner for
its United States, United Kingdom, Australian, Norwegian and Danish operations, respectively.
The
Company’s operations are conducted in the United States, and through its wholly-owned subsidiaries, in the United Kingdom,
Australia and Norway. As a result, fluctuations in currency exchange rates do 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. The Company cannot predict the extent to which currency fluctuations may affect the Company’s
business and financial position, and there is a risk that such fluctuations will have an adverse impact on the Company’s
sales, profits and financial position. Also, because differing portions of our revenues and costs are denominated in foreign currency,
movements can impact our margins by, for example, decreasing our foreign revenues when the dollar strengthens without correspondingly
decreasing our expenses. The Company does not currently hedge its currency exposure.
In
the reporting period, the translation of the Company’s UK operations’ British Pound denominated balance sheets
into US dollars has been affected by the weakening of the average value of the British pound against the US dollars in the relevant
time periods from $1.42 during the 2016 Nine Months Period to $1.27 in the 2017 Nine Months Period. These are the values that
have been used in the calculations below. In the reporting period both the Australian Dollars and Norwegian Kroner strengthened
against the US Dollar slightly.
The impact of these currency fluctuations
on the three months ended July 31, 2017 is shown below. In this context “Constant Rates” is defined as the weighted
average exchange rate prevailing in the Previous Quarter.
|
|
GBP
|
|
|
AUD
|
|
|
NOK
|
|
|
Total
|
|
|
|
Actual
Results
|
|
|
Constant
rates
|
|
|
Actual
Results
|
|
|
Constant
rates
|
|
|
Actual
Results
|
|
|
Constant
rates
|
|
|
Effect
|
|
Revenues
|
|
|
3,032,177
|
|
|
|
3,182,701
|
|
|
|
551,063
|
|
|
|
531,543
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(131,005
|
)
|
Costs
|
|
|
(1,638,058
|
)
|
|
|
(1,719,375
|
)
|
|
|
(259,378
|
)
|
|
|
(250,191
|
)
|
|
|
(30,265
|
)
|
|
|
(29,655
|
)
|
|
|
71,516
|
|
Net Income (Losses)
|
|
|
1,394,119
|
|
|
|
1,463,326
|
|
|
|
291,684
|
|
|
|
281,351
|
|
|
|
(30,265
|
)
|
|
|
(29,655
|
)
|
|
|
(59,487
|
)
|
Assets
|
|
|
11,758,202
|
|
|
|
11,801,128
|
|
|
|
405,442
|
|
|
|
385,507
|
|
|
|
94,556
|
|
|
|
88,427
|
|
|
|
(16,862
|
)
|
Liabilities
|
|
|
(633,113
|
)
|
|
|
(635,424
|
)
|
|
|
(24,324
|
)
|
|
|
(23,128
|
)
|
|
|
(4,378
|
)
|
|
|
(4,095
|
)
|
|
|
832
|
|
Net Assets
|
|
|
11,125,089
|
|
|
|
11,165,704
|
|
|
|
381,118
|
|
|
|
362,372
|
|
|
|
90,178
|
|
|
|
84,333
|
|
|
|
(16,030
|
)
|
This
table shows that the effect of constant exchange rates, versus the actual exchange rate fluctuations, decreased profits for the
Current Quarter by $59,487 and decreased net assets by $16,030. In addition, the Company booked transactional exchange rate gains
of $13,638 during the Current Quarter. All of these amounts are material to our overall financial results.
The impact of these currency fluctuations
on the nine months ended July 31, 2017 is shown below. In this context “Constant Rates” is defined as the weighted
average exchange rate prevailing in the 2016 Nine Months Period.
|
|
GBP
|
|
|
AUD
|
|
|
NOK
|
|
|
Total
|
|
|
|
Actual
Results
|
|
|
Constant
rates
|
|
|
Actual
Results
|
|
|
Constant
rates
|
|
|
Actual
Results
|
|
|
Constant
rates
|
|
|
Effect
|
|
Revenues
|
|
|
7,777,912
|
|
|
|
8,702,173
|
|
|
|
1,277,896
|
|
|
|
1,245,603
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(891,968
|
)
|
Costs
|
|
|
(5,399,052
|
)
|
|
|
(6,040,629
|
)
|
|
|
(856,892
|
)
|
|
|
(835,238
|
)
|
|
|
(94,708
|
)
|
|
|
(93,777
|
)
|
|
|
618,992
|
|
Net Income (Losses)
|
|
|
2,378,860
|
|
|
|
2,661,544
|
|
|
|
421,004
|
|
|
|
410,365
|
|
|
|
(94,708
|
)
|
|
|
(93,777
|
)
|
|
|
(272,976
|
)
|
Assets
|
|
|
11,758,202
|
|
|
|
11,801,128
|
|
|
|
405,442
|
|
|
|
385,507
|
|
|
|
94,556
|
|
|
|
88,427
|
|
|
|
(16,862
|
)
|
Liabilities
|
|
|
(633,113
|
)
|
|
|
(635,424
|
)
|
|
|
(24,324
|
)
|
|
|
(23,128
|
)
|
|
|
(4,378
|
)
|
|
|
(4,095
|
)
|
|
|
832
|
|
Net Assets
|
|
|
11,125,089
|
|
|
|
11,165,704
|
|
|
|
381,118
|
|
|
|
362,372
|
|
|
|
90,178
|
|
|
|
84,332
|
|
|
|
(16,030
|
)
|
This
table shows that the effect of constant exchange rates, versus the actual exchange rate fluctuations, decreased profits for the
2017 Nine Months Period by $272,976 and decreased net assets by $16,030. In addition, the Company booked transactional
exchange rate loss of $90,965 during the 2017 Nine Months Period. All of these amounts are material to our overall financial results.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.