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 annual report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 14, 2022 . This discussion should not be construed to imply that the results discussed herein will necessarily be indicative of actual operating results in the future. Such discussion represents only our management's best present assessment.
General Overview
Throughout these discussions, the following terminologies listed immediately below are used and have the meanings ascribed to them in the said table.
"Current Quarter " Three-month period endedApril 30, 2022
"
We operate two distinct business operations. These are:
? the Marine Technology Business (also referred to in this Form 10-Q as "Products Business", "Products Operations" or "Products Segment"); and ? the Marine Engineering Business (also referred to in this Form 10-Q as
"Engineering Business", "Engineering Operations", or "Services Business" or
"Services Segment"). Our Marine Technology Business is an established technology solution provider to the subsea and underwater imaging, surveying and diving market. It has been operating in this sector for over 25 years and it owns key proprietary technology including real time volumetric 3D Imaging Sonar technology and diving technology, that are used both in the underwater defense and commercial markets. All design, development and manufacturing of our technology and solutions are performed within the Company. Our imaging sonar technology products and solutions marketed under the name of Echoscope® and Echoscope PIPE®are used primarily in the underwater construction market, offshore wind energy industry (offshore renewables), offshore oil and gas, forward looking obstacle avoidance, complex underwater mapping, salvage operations, dredging, bridge inspection, underwater hazard detection, port security, mining, fisheries, commercial and defense diving, and marine sciences sectors. Our diving technology which is new to the market is distributed under the name "CodaOctopus® DAVD" (Diver Augmented Vision Display) addresses the global defense and commercial diving markets. We believe that it has the potential to radically change how diving operations are performed globally because it delivers a real time information platform for diving, allows diving operations to be performed in zero visibility water conditions and provides real time mapping of the dive area. 27
Although we generate most of our revenues from our real time 3D sonar which includes both hardware and proprietary software, we have a number of other products in the subsea market such as our inertial navigation systems (F180 Series® and F280 Series®) and our geophysical hardware and software solutions, which include machine learning based automatic detection systems. Our customers include offshore service providers to major oil and gas companies, renewable energy companies, underwater construction companies, law enforcement agencies, ports, mining companies, defense bodies, research institutes and universities and diving companies. Our Services Business acts primarily as a sub-contractor to prime defense contractors and engineer sub-assemblies which are utilized in broader defense programs. The Services Business has operations in theUSA andUK . Its central business model is the design and manufacture of sub-assemblies for utilization into larger defense mission critical integrated systems ("MCIS"). An example of such MCIS is the US Close-In-Weapons Support (CIWS) Program for the Phalanx radar-guided cannon used on combat ships. These proprietary sub-assemblies, once approved within the MCIS program, afford the Services Business the status of preferred supplier. Such status permits it to supply these sub-assemblies and upgrades in the event of obsolescence or advancement of technology for the life of the MCIS program. Clients include prime defense contractors such as Raytheon,Northrop Grumman , Thales Underwater andBAE Systems .
Key Pillars for our Growth Plans
Our volumetric real time imaging sonar technology and our DAVD are our most promising products for the Group's near-term growth.
Our real time 3D/4D/5D/6D Imaging sonars are the only underwater imaging sonars capable of providing not only complex seabed mapping but inspecting and monitoring in real time 3D/4D/5D and 6D moving objects underwater irrespective of water conditions including in zero visibility water conditions (a perennial problem in underwater operations). Competing technology can perform mapping (but not complex mapping) without the ability to perform real time 3D inspection and monitoring of moving objects underwater. Furthermore, we believe our Echoscope PIPE® is the only technology that can generate multiple real time 3D/4D/5D and 6D acoustic images of moving objects underwater using different acoustic parameters such as frequency, field of view, pulse length and acoustic filters.
In the industry in which we operate, we are widely considered the leading solution providers for underwater real time 3D visualization.
We also believe that the DAVD system is poised to radically change the way diving operations are performed globally by advancing the methods of communication, ability to consume and use digital information and real time imaging sonar data, thereby improving safety and reducing the costs of these operations. The DAVD HUD (Head Up Display) concept of utilizing a pair of transparent glasses in the HUD underwater, is protected by patent. The DAVD HUD is manufactured and distributed under license from theUnited States Department of the Navy at Naval Surface Warfare Center Panama City Division. The other component parts of the DAVD system are proprietary to the Company and include software (4G USE®), Diver Processing Pack, Top Side Controller and real time 3D Sonar. The successful adoption of the DAVD is dependent on the Company's ability to have on-site demonstrations with existing and prospective customers. The DAVD system does not lend itself to adoption without such demonstration and training. Both the Marine Technology Business and Marine Engineering Business have established synergies in terms of customers and specialized engineering skill sets (hardware, firmware and software) encompassing capturing, computing, processing and displaying data in harsh environments. Both businesses jointly bid for projects for which their common joint skills provide competitive advantage and make them eligible for such projects.
Factors Affecting our Business in the
Our Form 10-K for the fiscal year ended
28
Cumulative Supply
The biggest challenge for the Company in theCurrent Quarter is the ongoing shortage of components in the market. We are experiencing a very high percentage of routine items required for the manufacture of our products and solutions or performing custom upgrades for customers that are unavailable for purchase in the market with crippling lead times being quoted from anywhere between six months to a year. In addition, suppliers are now charging on an hourly basis for time spent on seeking alternative parts. Since the beginning of the Coronavirus outbreak inMarch 2020 , the Company has been ramping up its investment in inventory items that were typically on long lead time. We believe that in the current year we have built sufficient inventory for these high value long lead items. However, our systems are complex, and it is the low value inventory items that have traditionally been readily available that have unexpectedly become unavailable. To complete a system or perform customer upgrades, we need all parts and not just a high percentage of parts and it is these previously readily available items that have now become extremely challenging.
Our suppliers of certain subassemblies are also receiving decommits (i.e., cancellation) on orders that have been under contract with their suppliers for a long time. Therefore, even if there is a supply contract in place, firm or expected delivery dates are increasingly no longer met by suppliers.
We are also experiencing significant price increases for all our raw materials and components. Price increases sometimes exceed 100%. The significant price increases also means that unless these increased prices are fully absorbed by customers, margins and net income may be adversely affected. The general shortage of components in the market impacts our Services Business even more acutely given the prototyping nature of its business which does not enable pre-emptive forward buying. The very nature of prototyping means that any requisite components are unknown until the prototype requirements are finalized and order is placed by the customer. Therefore, these components cannot be pre-emptively purchased until contract award or letter of intent received. Additionally, our customers are also experiencing supply chain problems. This impacts on their ability to progress to the point of placing orders for the sub-assemblies that we typically design and manufacture for them. Consequently, this delays orders and impacts the level of order take by the Business.
Pandemic
Our operations continue to be impacted by the ongoing Coronavirus outbreak with its various mutations ("Pandemic"), which in turn continues to impact the demand for our goods and services. We rely on the ability to sell our solutions offered by the Marine Technology Business globally.Asia is a very significant market for our technology solutions includingJapan ,China andSouth Korea . During theCurrent Quarter , all of these countries had various degrees of entry restrictions which continue to prevent in-person visits with existing and prospective customers to demonstrate our new offerings which underpin our growth strategy. Our products and solutions, including the top end software which controls the sonar and DAVD are complex and, as a pre-requisite for adoption, do require in-person demonstration and training for customers. It is therefore not feasible to do these virtually. Furthermore, in theCurrent Quarter our business experienced critical shortage of staff due to a high infection rate. This has resulted in increased project costs for various ongoing internal and external projects and significantly reduced productivity which will have a negative impact on our overall performance during the current financial year.
Inflation
Due to the global supply chain issues and after-shock of the Pandemic, inflation measured as the Consumer Price Index is significant in the countries in which we operate. In the twelve months toApril 2022 , these were: -Denmark 6.7%, -UK 9.0% and -USA 8.3%. Inflation affects our business in a number of areas including increasing the costs of our operations and therefore our overall financial results. See section of this report "Inflation and Foreign Currency". Currency Fluctuations The Company has operations in theUK ,USA ,Denmark ,Australia andIndia . In theCurrent Quarter the USD has strengthened against major currencies including the British Pound, Euro andDanish Kroner (the functional currencies of the Company's foreign subsidiaries). A significant part of our consolidated results is transacted in Pounds and translated into USD, our reporting currency. In theCurrent Quarter , for the purposes of reporting revenues and expenses the value of the Pound fell 5.8% when compared to thePrevious Quarter and for assets and liabilities the Pound fell 9.1% when compared to thePrevious Quarter . The impact of currency fluctuations, including the impact of the Pound falling, is discussed more fully below in the section "Inflation and Foreign Currency". See also Note 4 (Foreign Currency Translation) and section of this report "Inflation and Foreign Currency".
Skills/Resource Shortages and Pressure on Salaries and Wages
We are experiencing skills shortage in areas that are critical to our growth strategy including experienced sales and marketing personnel and software developers.
Due to the inflationary conditions in the countries in which we operate (US, theUK andDenmark ), there are significant pressures on wages making it difficult to attract staff and also risking retention of skills.
Impact on Revenues and Earnings
We are uncertain as to the extent that these factors reported immediately above including the global supply chain issues will have on our future financial results. In theCurrent Quarter , we continue to be negatively impacted by the reduction in customer orders and the resulting drop in our revenues and earnings. The supply chain issues further exacerbate this problem as our customers are unable to sub-contract to us, due to problems with availability of components and raw materials under the main part of the programs. Furthermore, with the significant increase in the costs of components and raw materials, this may affect our earnings, as we may not be able to sustainably pass on these dramatic increases onto our customers which may result in reduce demand for our products or services or the erosion of our gross profit margins.
Impact on Liquidity, Balance Sheet and Assets
Failure to curb the Pandemic in the near future, address the supply chain issues and inflation may adversely impact on our availability of our free cash flow, working capital, earnings and business prospects. As ofApril 30, 2022 , we had cash and cash equivalents of approximately$20,658,119 . Based on our outstanding obligations and our cash balances, we believe we have sufficient working capital to effectively continue our business operations for the foreseeable future.
Critical Accounting Policies
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements that have been prepared under accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of financial statements in conformity with 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 Accounting Policies" of our Consolidated Financial Statements for the year endedOctober 31, 2021 . 29 Revenue Recognition Our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater solutions for imaging, mapping, defense and survey applications and from the engineering services that we provide. Our contracts do not include the possibility for additional contingent consideration so that our determination of the contract price does not involve having to consider potential variable additional consideration. Our product sales do not include a right of return by the customer. Regarding our Products Segment, all of our products are sold on a stand-alone basis and those market prices are evidence of the value of the products. To the extent that we also provide services (e.g., installation, training, etc.), those services are either included as part of the product or are subject to written contracts based on the stand-alone value of those services. Revenue from the sale of services is recognized when those services have been provided to the customer and evidence of the provision of those services exist. For further discussion of our revenue recognition accounting policies, refer to Note 2 - "Revenue Recognition" in these consolidated financial statements and in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 .
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 on a contract-by-contract basis in accordance with our revenue recognition policy. 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 also 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. 30 Income Taxes The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 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.
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 US 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 15 years. The Company amortizes its limited lived intangible assets using the straight-line method over their estimated period of benefit. Annually, or sooner if there is indication of a loss in value, we evaluate the recoverability of intangible assets and consider 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, goodwill is reduced by the excess of the carrying amount of the reporting unit over that reporting unit's fair value.Goodwill can never be reduced below zero. 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 during the periods presented.
Summary of Consolidated Results of Operations
Our consolidated financial results in theCurrent Quarter were down compared to thePrevious Quarter . This is attributed to reduced order bookings in both the Products and Services businesses during theCurrent Quarter . The Products Business experienced delays in several anticipated rental projects which were included in our pipeline of opportunities in both the first quarter and the second quarter of the financial year. This was further exacerbated by Oceanology 2022 (one of the main industry trade events) being held inMarch 2022 . Typically, customers postpone capital expenditure investment decisions until after this trade event. Furthermore, many key customers fromAsia were not in attendance of Oceanology 2022 due to the Pandemic-related restrictions in these countries. This has resulted in reduced order by the Marine Technology Product in the first two quarters of this financial year. Although we have experienced reduced demand, we believe this relates to the current environment and not a broader issue with our offerings. The Services Business order take continues to be slower than anticipated and is compounded by their customers projects being affected by the ongoing supply chain shortages and inflationary prices and therefore impacting the timing of the placement of sub-contracts for sub-assemblies that would typically be awarded to the Services Business. Furthermore, during theCurrent Quarter we continued to be materially impacted by the Pandemic-related constraints placed upon the business environment which limited the extent of the business development activities the Products Business could undertake inAsia . OurUK operations were also significantly impacted by a high level of infection of the coronavirus amongst staff which impacted productively and hampered our progress. Segment Summary Products Business
In theCurrent Quarter the Products Business generated$3,491,009 or 70% of our consolidated revenues compared to$4,184,409 or 77.9% in thePrevious Quarter , representing a fall of 16.6%. Revenues generated fromEurope fell by 86.7% and were$221,334 compared to$1,665,443 in thePrevious Quarter . We believe that this is due to the Pandemic which surged inEurope in the first half of our financial year affecting demand inEurope for our products. Gross Profit Margin increased slightly by 1% and was 76.6% in theCurrent Quarter compared to 75.6% in thePrevious Quarter . In theCurrent Quarter more units of revenues in the Products Business emanated from sales through agents, resulting in an increase in commissions on sales which were 165.2% higher at$266,300 in theCurrent Quarter compared to$100,400 , thus negatively affecting margins. In the Current Quarter Total Operating Expenses fell in the Products Business by 11.6%, compared to thePrevious Quarter and Net Income Before Taxes fell by 20.8% and was$1,494,832 compared to$2,009,600 in thePrevious Quarter .
Services Business
In theCurrent Quarter the Services Business generated$1,493,829 or 30% of our consolidated revenues compared to$1,188,667 or 22.1% in thePrevious Quarter representing an increase of 25.7%. Gross Profit Margin was 23.9% representing a fall of 25.6%. The fall in Gross Profit Margin in the Services Business is largely due to the mix of engineering projects executed in theCurrent Quarter . Revenues generated by the Services Business includes equipment sales in the amount of$534,134 which carry a lower than typical Gross Profit Margin profile for the Services Business. This project afforded the Company an opportunity to serve a new market sector with a prestigious customer which we believe will open other opportunities with this customer in the new sector. Total Operating Expenses decreased by 12.0%, largely due to a decrease in R&D expenditures in the amount of$206,271 , which resulted from R&D costs incurred being subsequently applied to a contracted engineering project and moved from Operating expenses to Direct Costs. In theCurrent Quarter the Services Business realized a loss before income taxes of$222,916 compared to an income of$361,472 in thePrevious Quarter . Although the Services Business realized a loss in theCurrent Quarter , we do anticipate that on an annualized basis the Services Business operations will generate a net income, as we are expecting the third and fourth quarters to be more solid for this operating segment. 31
Results of Operations for the
Revenue: Total consolidated revenues for theCurrent Quarter and thePrevious Quarter were$4,984,838 and$5,373,076 respectively, representing a fall of 7.8%. The Products Business revenues fell from$4,184,409 in thePrevious Quarter to$3,491,009 in theCurrent Quarter , representing a fall of 16.6%. This is largely due to slower than anticipated closure of orders in the first two quarters of this financial year, where we are seeing customer projects being postponed, thus impacting order take. In theCurrent Quarter , the Services Business revenues increased by 25.7% and was$1,493,829 compared to$1,188,667 in thePrevious Quarter . Although the Services Business is quoting more projects in this financial year, the pace of progress for closing these opportunities has slowed. We believe this is largely due to supply chain issues under the prime contract causing delay in the sub-contracting process. Gross Profit Margins: Margin percentage was weaker in theCurrent Quarter at 60.8% (gross profit of$3,031,706 compared to 69.8% (gross profit of$3,749,604 ) in thePrevious Quarter .
Gross Profit Margins in the reporting period may vary according to a number of factors. These include:
? The percentage of consolidated sales attributed to the Products Business.
The Gross Profit Margin yielded by the Products Business is generally
higher than that of the Services Business.
? The percentage of consolidated sales attributed to the Services Business.
The Services Business yields a lower gross profit margin on generated
sales which are largely based on time and materials contracts. ? The mix of sales generated by the Products Business: ? Outright sales versus rentals. ? Hardware related sales versus Software related sales.
? Extent of
? Extent of paid customer engineering work relating to customizing our technology for their purpose.
? Level of commissions on sales (both the Services and Products businesses work
with a global network of sales agents). Most sales by the Products Business
from
agents/distributors Network.
? Level of assets in rental pool and cost of sales associated with these Assets
(and which are subject to depreciation).
Services Business
In the Current Quarter Gross Profit Margins for the Services Business were 23.9% compared to 49.5% in thePrevious Quarter . This significant fall is due to the fact that 36.4% of the total revenues generated in theCurrent Quarter by this segment relates to a particular work package which has a much lower than typical Gross Profit Margin, due to the type of project it involves. This project afforded the Company an opportunity to serve a new market sector with a prestigious customer which we believe will open other opportunities for the Company with this customer and in this sector. This has impacted the Gross Profit Margin of the Services Business in theCurrent Quarter and overall consolidated Gross Profit Margin.
Products Business
In the Current Quarter Gross Profit Margins for the Products operations were
76.6% compared to 75.6% in the
Since there are more variable factors affecting Gross Profit Margins in the Products Business, a table showing a summary of break-out of sales generated by the Products Business in theCurrent Quarter compared to thePrevious Quarter is set out below: Current Quarter Previous Quarter Percentage Products Products Change Equipment Sales$ 2,058,137 $ 3,090,462 Decrease 33.4 % Equipment Rentals 715,308 598,190 Increase 19.6 % Software Sales 134,422 221,053 Decrease 39.2 % Services 583,142 274,704 Increase 112.3 % Total Net Sales$ 3,491,009 $ 4,184,409 Decrease 16.6 %
In the
Further information on the performance of each Segment including revenues by product and geography in theCurrent Quarter can be found in Notes 14 and 15 to the Unaudited Consolidated Financial Statements.
Research and Development (R&D): Total consolidated Research and Development
expenditures in the
? Services Segment. During theCurrent Quarter the Services Business R&D expenditures were ($99,868 ) in theCurrent Quarter compared to$106,403 in thePrevious Quarter . This amount concerns an initial investment made by the Company in R&D that can now be attributed to subsequently awarded customer contract. The fall in R&D expenditures in this business unit is a reflection of reduction in expenditures relating to the Thermite® product line development which has been on hold due to many trials which we had commenced prior to the Pandemic being stalled. Until we can get the outcome of these trials, and therefore the customer requirements for the product, we are postponing expenditures in this area. One such trial which had hitherto been stalled has re-started and we have received the order for a small quantity of prototypes. This is an important opportunity for the success of the Thermite® range since it is for aUS Navy shipboard application and if we are successful would lead to downstream follow-on production order for multiple units. This would also be a new program and customer for the Services Segment. ? Products Segment R&D expenditures in the Products Business increased from$538,878 in thePrevious Quarter to$617,246 in theCurrent Quarter , representing an increase of 14.54%. The real increase in R&D Expenditures is relatively modest given that in theCurrent Quarter this amount includes an exceptional item of expenditures of$66,000 which represents a sub-contractor's costs for development of a new generation of an ASIC (Application-Specific Integrated Circuit) device for our sonar technology, which will replace the previous generation of this device which we utilize. Segment April 30, 2022 April 30, 2021 Percentage Change Services Segment R&D Expenditures$ (99,868 ) $ 106,403 Decrease 193.9 % Products Segment R&D Expenditures$ 617,246 $ 538,878
Increase 14.54 % 32
Selling, General and Administrative Expenses (SG&A): SG&A expenses for the
The increase in SG&A in theCurrent Quarter is due to several factors. These include increase in wages and salaries and increase in Legal and Professional Fees. In addition, in thePrevious Quarter we recorded contributions of$48,288 under theUK Government's Pandemic Relief Program, the Coronavirus Job Retention Scheme (CJRS) which reduced payroll expenditures in thePrevious Quarter and therefore SG&A. In theCurrent Quarter , we recorded no such contributions. In addition, in theCurrent Quarter , we recorded an increase of 170.48% relating to stock compensation expenditures (a non-cash charge) and which was$365,568 compared to$135,157 in thePrevious Quarter . We also incurred costs related to the establishment ofCoda Octopus Products (India) Private Ltd which did not exist in thePrevious Quarter . This entity has been established to mitigate the acute engineering and software skills shortage that we are experiencing in both theUK andUSA .
Key Areas of SG&A Expenditure across the Group for the
Expenditure April 30, 2022 April 30, 2021 Percentage Change Wages and Salaries$ 940,460 $ 791,759 Increase of 18.78 % Legal and Professional Fees (including accounting and audit)$ 390,218 $ 258,736 Increase of 50.82 % Rent for our various locations $ 14,742 $ 8,158
Increase of 80.71 % Marketing$ 108,569 $ 32,116 Increase of 238.05 %
The increase in "Wages and Salaries" is a reflection of the increased costs associated with the market conditions for employment. With inflationary pressures currently at unprecedented levels in the countries in which we operate includingUSA andUK , we expect this area is likely to continue to increase to remain competitive in attracting and retaining staff.
The increase in the
In general, the category of "Rent" is not material for the Business as we own most of our premises and facilities. The current category of rent largely reflects the premises we are using inCopenhagen which has been established to mitigate as far as possible the impact of theUnited Kingdom withdrawing from theEuropean Union . The Marketing Expenditures in both theCurrent Quarter andPrevious Quarter are atypical of our projected Marketing Expenditures. Typically, our Marketing Expenditures reflect a range of marketing events such as participation of trade shows in different parts of the world, particularly inEurope ,North America ,Asia and theMiddle East . Since the outset of the Pandemic in 2020, our marketing activities have been severely constrained due to the various government restrictions on travel and gatherings. This has depressed this area of expenditure. However, we are beginning to participate in more marketing events, and this has resulted in an increase of Marketing expenditures in theCurrent Quarter . We expect this area to materially increase over the fiscal year and be more in line with our pre-Pandemic Marketing expenditures. Operating Income: In theCurrent Quarter we realized an operating profit of$481,212 compared to$1,315,789 in thePrevious Quarter , representing a fall in Operating Income of 63.4%. The reduction in Operating Income is a result of a fall in our consolidated revenues in theCurrent Quarter by 7.2% compared to thePrevious Quarter along with weaker Gross Profit Margins and an increase in Total Operating Expenses of 4.8% compared to thePrevious Quarter . Interest Expense: Interest expense fell by 51.0% in theCurrent Quarter to$2,502 from$5,108 in thePrevious Quarter . We do not expect this category to be material since we do not have any significant loans. This category reflects interest and charges on banking facilities we have in place, such as business credit cards. Other Income: In theCurrent Quarter we had$11,995 as "Other Income" compared to$623,238 in thePrevious Quarter . In thePrevious Quarter , as part of the US Government Pandemic Relief Program, the Company recognized$558,901 as "Other Income", which was received under the second round of the Payroll Protection Program for payroll assistance ("PPP"). In theCurrent Quarter , no PPP assistance was recorded. Except for amounts received for PPP, "Other Income" category is typically not material. Net Income before income taxes: In theCurrent Quarter , we realized Net Income before income taxes of$493,208 as compared to$1,939,027 in thePrevious Quarter , representing a fall of 74.6%. The fall in Net Income before taxes is due to a fall in our consolidated revenues in theCurrent Quarter of 7.2% with Gross Profit Margins being weaker, in conjunction with an increase in Total Operating Expenses by 4.8% over thePrevious Quarter . In addition, in the Previous Quarter Net Income before taxes increased by the inclusion of$558,901 in "Other Income" which represented assistance received under the PPP. Without this PPP contribution in thePrevious Quarter , the fall in Net Income before income taxes in theCurrent Quarter would be 64.3%. 33 Net Income: In theCurrent Quarter the Company realized a net income of$611,303 as compared to$2,207,933 in thePrevious Quarter , representing a fall of 72.3%. The fall in Net Income in theCurrent Quarter is a result of a fall in our consolidated revenues in conjunction with an increase in Total Operating Expenses. In addition, in the Previous Quarter Net Income increased by the inclusion of$558,901 in "Other Income" which represented assistance received under PPP. Without this PPP contribution in thePrevious Quarter , the fall in Net Income in theCurrent Quarter would be 62.9%. In theCurrent Quarter the Company's effective tax rate decreased as a result of the Services Business having a taxable loss in theCurrent Quarter . In theCurrent Quarter the effective tax rate was (23.9)% compared to (13.9)% in thePrevious Quarter . Comprehensive Income (loss). In the Current Quarter Comprehensive loss was ($1,655,448 ) compared to a comprehensive income of$2,506,645 for thePrevious Quarter . This category is affected by fluctuations in foreign currency exchange transactions. In thePrevious Quarter we realized a gain on foreign currency translation adjustments relating to certain transactions of$298,712 compared to a loss on these transactions of$2,266,751 in theCurrent Quarter . In theCurrent Quarter the USD has strengthened against major currencies including the British Pound, Euro andDanish Kroner (the functional currencies of our foreign operations). A significant part of the Company's operations is based in theUK , and therefore a significant part of our financial transactions is performed in Pounds which are translated into USD for reporting purposes. In theCurrent Quarter , the Pound has fallen significantly against the USD. This is a key factor in the loss relating to foreign currency translations transactions in theCurrent Quarter . See Table 1 under section "Inflation & Foreign Currency" which shows the impact of the currency adjustments on our Profit & Loss Account activities and Balance Sheet
Results of Operations for the Current Six Month Period compared to the Previous Six Month Period
Revenue: Total consolidated revenues for the Current Six Month Period and the Previous Six Month Period were$10,823,046 and$10,423,535 respectively, representing an increase of 3.8%. In the Current Six Month Period, the Products Business revenues fell by 7.8%. The Products Business revenue in the Current Six Month Period was$7,314,757 compared to$7,932,688 . The Services Business revenues increased in the Current Six Month Period and was$3,508,289 compared to$2,490,847 , representing an increase of 40.8%. In the Current Six Month Period both the Products and Services Businesses have experienced a slow pace of converting opportunities to firm orders and we have during the period booked less orders than anticipated in our business plan. In theCurrent Quarter our overall quotation percentage rate was higher than thePrevious Quarter . However, we are experiencing a much slower rate of closure including projects moving out in time. We believe this is reflective of the challenging environment particularly the supply chain issues that persists globally and also the ongoing constraints caused by the Pandemic, particularly inAsia which is an important market for our solutions.
Gross Profit Margins: Margin percentage was lower in the Current Six Month
Period at 66.4% (gross profit of
Gross Profit Margins in the reporting period vary according to several factors, including:
? The percentage of consolidated sales attributed to the Products Business. The
Gross Profit Margin yielded by the Products Business is generally higher than
that of the Services Business.
? The percentage of consolidated sales attributed to the Services Business. The
Services Business yields a lower gross profit margin on generated sales which
are largely based on time and materials contracts. ? The mix of sales generated by the Products Business: ? Outright sales versus rentals. ? Hardware related sales versus Software related sales.
? Extent of
? Extent of paid customer engineering work relating to customizing our technology for their purpose.
? Level of commissions on sales (both the Services and Products businesses work
with a global network sales agents). Most sales from
as those are typically sales via our agents/distributors Network.
? Level of assets in rental pool and cost of the sales associated these Assets
(and which are subject to depreciation).
Services Business
Gross Profit Margins for the Services Business were lower at 36.1% in the Current Six Month Period compared to 42.1% in the Previous Six Month Period. In the Current Six Month Period 27.9% of the Services Business revenues ($979,998 ) is attributable to an engineering project which carries a lower than typical Gross Profit Margin. This project afforded the Company an opportunity to serve a new market sector with a prestigious customer which we believe will open other opportunities with this customer and in this sector. This mix has impacted on the overall Gross Profit Margins of the Services Business.
Products Business
In the Current Six Month Period Gross Profit Margins for the Products Business were 81.0% compared to 75.8% in the Previous Six Month Period. Even though we paid increased agents commission on sales generated in the Current Six Month Period ($401,004 compared to$357,736 , 12.1% higher) Gross Profit Margins were stronger in the Products Business due to increased units of equipment rentals (44.3% over the Previous Six Month Period) and service (125.8% increase over the Previous Six Month Period) both categories attracting a higher Gross Profit Margin than hardware product sales. Since there are more variable factors affecting Gross Profit Margins in the Products Business, a table showing a summary of break-out of sales generated by the Products Business in the Current Six Month Period compared to the Previous Six Month Period is set out below: Six Month Six Month Percentage Period 2022 Period 2021 Change Equipment Sales$ 4,016,982 $ 5,883,949 Decrease 31.7 % Equipment Rentals 1,345,776 932,553 Increase 44.3 % Software Sales 439,218 446,275 Decrease 1.6 % Services 1,512,781 669,911 Increase 125.8 % Total Net Sales$ 7,314,757 $ 7,932,688 Decrease 7.8 % In the Current Six Month Period the Products Business incurred Commission costs of$401,400 compared to$357,736 , representing a 12.1% increase, resulting in Gross Profit Margins being lower.
Further information on the performance of each Segment including revenues by product and geography can be found in Notes 14 and 15 to the Unaudited Consolidated Financial Statements.
34 Research and Development (R&D): R&D expenditures in the Current Six Month Period were$1,190,268 compared to the$1,228,420 in the Previous Six Month Period, representing a decrease of 3.1%. ? Services Segment.
During the Current Six Month Period the Services Business R&D expenditures decreased by 82.4%. The fall in R&D expenditures in this business unit is a reflection of reduction in expenditures relating to the development of the Thermite® product line. Since the start of the Pandemic Thermite® trials have stalled. Until we can get the outcome of these trials, and therefore the customer requirements for the product, we are postponing expenditures in this area. One such trial which had hitherto been stalled has re-started and we have received the order for a small quantity of prototypes. This is an important opportunity as it is intended for aUS Navy shipboard application. If we are successful, we would expect it to result in downstream follow-on production order for multiple units. This would also be a new program and customer for
the Services Segment. ? Products Segment During the Current Six Month Period R&D expenditures in the Products Segment increased by 16.9% from$980,622 in the Previous Six Month Period to$1,146,621 . R&D expenditures are incurred by this business in connection with investments it makes in developing its products and solutions. In the Current Six Month Period, Products Business R&D expenditures include an exceptional item of expenditure of$66,000 which represents accruals for sub-contractor's costs for development of a new generation of an ASIC (Application-Specific Integrated Circuit) device for our sonar technology. Segment April 30, 2022 April 30, 2021 Percentage Change
Services Segment R&D Expenditures $ 43,647$ 247,798 Decrease of 82.4 % Products Segment R&D Expenditures$ 1,146,621 $ 980,622
Increase of 16.9 % 35
Selling, General and Administrative Expenses (SG&A): SG&A expenses for the
Current Six Month Period increased to
The increase in SG&A in the Current Six Month Period is due to several factors. These include increase in wages and salaries and increase in Legal and Professional Fees. In addition, in the Previous Six Month Period we recorded contributions of$131,788 under theUK Government's Pandemic Relief Program, the Coronavirus Job Retention Scheme (CJRS) which reduced payroll expenditures in the Previous Six Month Period and therefore SG&A. In the Current Six Month Period, we recorded no such contributions. In the Current Six-Month Period, we recorded a significant increase of 123.1% relating to stock compensation expenditures (a non-cash charge) and which were$690,743 compared to$309,604 in the Previous Six Month Period. We also incurred costs related to the establishment ofCoda Octopus Products (India) Private Ltd , which did not exist in the Previous Six Month Period.
Key Areas of SG&A Expenditure across the Group for the
Expenditure April 30, 2022 April 30, 2021 Percentage Change Wages and Salaries$ 1,843,622 $ 1,630,065 Increase 13.10 % Legal and Professional Fees (including accounting and audit)$ 749,235 $ 594,085 Increase 26.12 % Rent for our various locations $ 30,487 $ 18,283
Increase 66.75 % Marketing$ 122,335 $ 43,446 Increase 181.58 % The increase in the "Wages and Salaries" category of expenditure in the Current Six Month Period, is a reflection of tightness in the labor market resulting in competitive conditions causing increase in the costs of labor in the countries in which we operate including in US,UK ,Denmark andIndia . The increase is a reflection of increases to salaries for existing staff and new hires. The increase in the "Legal and Professional" category of expenditures in the Current Six Month Period is a reflection of increase in the costs of our audit services fees. In general, the category of "Rent" is not material for the Business as we own most of premises and facilities. The current category of rent largely reflects the premises we use inCopenhagen . The Marketing Expenditures in both the Previous Six Month Period and Current Six Month Period are atypical of our Marketing Expenditures. Our marketing comprises of a raft of activities which include trade shows in different parts of the world, particularly inEurope ,North America ,Asia and theMiddle East . In the Previous Six Month Period our marketing activities have been severely constrained due to the Pandemic which prevented activities such as travel to customer or attending trade shows. We are now participating in more marketing related events. However, we are still significantly constrained and not back to pre-Pandemic levels of marketing activities due to the ongoing Pandemic, which restricts marketing activities in key countries such as those inAsia where there are still significant restrictions on foreigners entering these countries. The nature of our offerings, particularly our technology solutions require us to be in close proximity with our customers including being able to physically demonstrate the performance of our solutions. Therefore, virtual meetings cannot substitute for the key requirements to be physically able to demonstrate our capabilities on water in the customer's place of operation. As these barriers are removed including entry restrictions, we anticipate that this area of expenditures will materially increase and be more in line with our pre-Pandemic expenditures. Operating Income: Our income from our operating activities in the Current Six Month Period was$1,846,266 as compared to$2,225,881 in the Previous Six Month Period which represents a fall of 17.1%. This fall is a reflection of weaker Gross Profit Margins combined with an increase in Total Operating Expenses by 10.5%, as a result of a significant increase in our SG&A Expenditures in the Current Six Month Period. Interest Expense: Interest expense in the Current Six Month Period was$2,902 compared to$11,297 in the Previous Six Month Period, representing a reduction of 74.3%. We do not expect Interest Expense to be material for our business since we currently do not have any significant loans. This category typically reflects charges on our banking facilities such as Business credit cards. Other Income: In the Current Six Month Period, we had Other Income of$91,589 as compared to$709,074 in the Previous Six Month Period. In the Previous Six Month Period Other Income included$648,872 reflecting Pandemic-related contributions under the PPP. In the Current Six Month Period, there are no such contributions. Without such contributions, this category is generally not material. Net Income before income taxes: In the Current Six Month Period, we had a net income before income taxes of$1,937,856 as compared to$2,934,955 in the Previous Six Month Period, representing a fall of 34.0%. This is due to the fall in our consolidated revenues in theCurrent Quarter impacting our year-to-date consolidated revenues along with weaker gross profit margins in conjunction with an increase in Total Operating Expenses by 10.5%. In addition, in the Previous Six Month Period Net Income before income taxes increased by the inclusion of$648,872 in "Other Income" which represented assistance received under the PPP. Without this PPP contribution in the Previous Six Month Period, the fall in Net Income before income taxes in the Current Six Month Period would be 15.2%.
36 Net Income: In the Current Six Month Period net income fell by 45.2 % to$1,828,552 from$3,336,777 in the Previous Six Month Period. This is due to the fall in our consolidated revenues along with weaker gross profit margins in conjunction with an increase in Total Operating Expenses. In addition, in the Previous Six Month Period Net Income increased by the inclusion of$648,872 in "Other Income" which represented assistance received under the PPP. Without this PPP contribution in the Previous Six Month Period, the fall in Net Income in the Current Six Month Period would be 31.9%. In the Current Six Month Period the Company's effective tax rate increased and was 5.5% compared to (13.9)% in the Previous Six Month Period. The increase in the effective tax rate in the Current Six Month Period results from the exhaustion of the Company's net operating losses inthe United States . Furthermore, the effective tax rate in the Current Six Month Period is a lower rate because one of our subsidiaries inthe United States incurred a loss in theCurrent Quarter . Comprehensive Income (loss). In the Current Six Month Period Comprehensive loss was$197,050 compared to Comprehensive gain of$4,561,102 for the Previous Six Month Period. This category is affected by fluctuations in foreign currency exchange transactions. In the Previous Six Month Period we had a gain of$1,224,325 on foreign currency translation adjustment transactions compared to a loss on these transactions of$2,025,601 in the Current Six Month Period. In the Current Six Month Period, the USD has strengthened against most major currencies including the British Pound, Euro andDanish Kroner , the functional currencies of our foreign subsidiaries. A significant part of the Company's operations is based in theUK , and therefore a significant part of our financial transactions is performed in Pounds which are translated into USD for reporting purposes. In the Current Six Month Period, the Pound has fallen significantly against the USD. This is a key factor in the loss relating to foreign currency translations transactions in the Current Six Month Period. See Table 2 under section "Inflation & Foreign Currency" which shows the impact of the currency adjustments on our Profit & Loss Account activities and Balance Sheet.
Liquidity and Capital Resources
AtApril 30, 2022 , the Company had an accumulated deficit of$16,649,306 , working capital of$31,336,268 and stockholders' equity of$41,542,766 . For the Six Months EndedApril 30, 2022 , the Company's operating activities provided cash of$4,707,661 . Financing Activities Secured Promissory Note
OnApril 28, 2017 , the Company and its wholly-owned US based subsidiaries,Coda Octopus Products, Inc. andCoda Octopus Colmek, Inc. (together, the "Subsidiaries"), entered into a loan agreement withHSBC Bank NA (the "Lender") for a loan in the principal amount of$8,000,000 (the "Loan"). The Loan was satisfied in full onDecember 28, 2021 .
Revolving Credit Line
The Company entered into a$4,000,000 revolving line of credit withHSBC Bank NA onNovember 27, 2019 (renewed up toNovember 2022 ), with interest at the prime rate. The outstanding balance on the line of credit was$0 as ofApril 30 ,
2022. 37
Inflation and Foreign Currency
The Company maintains its books in functional currency. In this connection these are:
? US Dollars for US Operations; ? British Pound for United Kingdom Operations; ?Danish Kroner for our Danish Operations; ? Australian Dollars for our Australian Operations ? Indian Rupees for our Indian Operations Fluctuations in currency exchange rates can affect the Company's sales, profitability, balance sheet valuation and financial position when the foreign currencies of its international operations are translated into US. 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.
The impact of currency fluctuations on the three months and six months ended
For the purpose of Table 1 "Constant Rates" is defined as the prevailing
exchange rate for balance sheet transactions in the
Table 1: Three Months ended
British Pounds Australian Dollar Danish Kroner Indian Rupee US Dollar Actual Constant Actual Constant Actual Constant Actual Constant Actual Constant Total Results Rates Results Rates Results Rates Results Rates Results Rates Effect Revenues 3,280,837 3,412,590 - - 700,819 751,162 -
- 3,981,656 4,163,752 (182,096 ) Costs and Other (Income) Expense 2,529,514 2,631,095
319 333 38,881 41,674 (25,077 )
(25,861) 2,543,637 2,647,241 (103,604 ) Net profit (losses)
751,323 781,495 (319 ) (333 ) 661,938 709,488 25,077 25,861 1,438,019 1,516,511 (78,492 ) Assets 21,722,299 23,651,516 32,203 34,323 2,687,985 2,947,397 18,822 18,429 24,461,309 26,651,665 (2,190,356 ) Liabilities (1,675,791 ) (1,824,623 ) (2,415 ) (2,574 ) (58,317 ) (63,945 ) (67,054 ) (65,652 ) (1,803,577 ) (1,956,794 ) 153,217 Net assets 20,046,508 21,826,893 29,788 31,749 2,629,668 2,883,452 (48,232 ) (47,223 ) 22,657,732 24,694,871 (2,037,139 )
This table shows that the effect of constant exchange rates, versus the actual
exchange rate fluctuations, decreased our net income on activities in the
Table 2: Six Months ended
The impact of currency fluctuations on the six months endedApril 30, 2022 , is shown below. In this context "Constant Rates" is defined as the prevailing exchange rate for balance sheet transactions in the Previous Six Month Period and weighted average exchange rate prevailing in the Previous Six Month Period for related revenues and expenses. British Pounds Australian Dollar Danish Kroner Indian Rupee
US Dollar Actual Constant Actual Constant Actual Constant Actual Constant Actual Constant Total Results Rates Results Rates Results Rates Results Rates Results Rates Effect Revenues 5,816,119 6,049,685 - - 1,089,562 1,167,830 - - 6,905,681 7,217,515 (311,834 ) Costs & Other (Income) Expense 4,791,775 4,984,205 24,573 25,677 109,026 116,858 (25,077 ) (25,861) 4,900,297 5,100,879 (200,582 ) Net profit (losses) 1,024,344 1,065,480 (24,573 ) (25,677 ) 980,536 1,050,972 25,077 25,861 2,005,384 2,116,636 (111,252 ) Assets 21,722,299 23,651,516 32,203 34,323 2,687,985 2,947,397 18,822 18,429 24,461,309 26,651,665 (2,190,356 ) Liabilities (1,675,791 ) (1,824,623 ) (2,415 ) (2,574 ) (58,317 ) (63,945 ) (67,054 ) (65,652 ) (1,803,577 ) (1,956,794 ) 153,217 Net assets 20,046,508 21,826,893 29,788 31,749 2,629,668 2,883,452 (48,232 ) (47,223 ) 22,657,732 24,694,871 (2,037,139 )
This table shows that the effect of constant exchange rates, versus the actual
exchange rate fluctuations, decreased our net income on activities in the
Current Six Months Period by
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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