CODA OCTOPUS GROUP, INC. Forward-Looking Statements
The information herein contains forward-looking statements. All statements other than statements of historical fact made herein are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations. The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. General Overview
We operate two distinct business operations. These are:
? the Marine Technology Business (also referred to in this Form 10-K as
"Products Business", "Products Operations" or "Products Segment"); and
? the Marine Engineering Business (also referred to in this Form 10-K as"Engineering Business", "Engineering Operations", or "Services Segment").
Our Marine Technology Business is a technology solution provider to the subsea
and underwater market. It has a long-established pedigree in this market, and it
innovates, designs, develops and manufactures proprietary solutions for this
market (both for commercial and defense applications) including our range of
flagship volumetric real time sonar solutions and our diving technology.
These solutions and products are used primarily in the underwater construction
market, offshore oil and gas, offshore wind energy industry, and in the complex
dredging, port security, mining and marine sciences sectors. Our customers
include service providers to major offshore renewable companies, oil and gas
("O&G") companies, law enforcement agencies, ports, mining companies, underwater
vehicle manufacturers, Prime Defense Contractors as OEM integrators, defense
bodies, fisheries and research institutes.
Our Marine Engineering Business is a supplier of engineering services and
embedded solutions (such as mission computers) to prime defense contractors such
as Raytheon, Northrop Grumman , Thales Underwater, Atlas Electronik UK and
Babcock International Group. Generally, the items supplied into the defense
market are sub-systems in broader mission critical integrated systems and thus
requires a high level of reliability, consistency in standards and robustness.
We have long-standing relationships with prime defense contractors, and we use
these credentials to secure more business. We support some significant defense
programs by supplying and maintaining proprietary parts (or parts for which we
are preferred suppliers) through obsolescence management programs. These
services provide recurring stream of revenues for our Services segment.
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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.
Factors Affecting our Business
Our business is affected by a number of factors including those set out below:
A.United Kingdom's withdrawal from theEuropean Union ("Brexit") TheUK was a member of theEuropean Union member states for close to 50 years. This membership enabled the freedom of movement of goods, persons, capital and services between member states. Following a referendum in 2016 the country voted to leave the EU. TheUK withdrew from its membership of the EU onDecember 31, 2020 . This withdrawal removed all rights which theUK previously enjoyed as
a member.
As part of the withdrawal, the
The change in the
? Our shipments into the
results in increased costs and time for the processing of shipments. This
operates as a deterrent for EU customers to work with us. We endeavor to
mitigate this by shipping to our subsidiary in
customer. This means increased costs which we are unable to recover and
significant delays which may risks the project.
? Our technology requires training to support its effective implementation.
Typically for sales and rentals we would mobilize our engineers to train and
assist these customers in set up of the equipment. Under the new trade
agreement, we will need to obtain the necessary work permits from the EU
member state to which we intend to send our engineer. This will be timeconsuming and costly and the rules for granting such permit will vary from
member state to member state. Furthermore, we have no precedent to know if
these permits will be granted.
? EU Member State customers are reluctant to engage
hassle factor associated with importing into the EU. This risks reduction in
our opportunities emanating from the EU countries.
? We are not able to recruit from EU Member states without getting work permits.
As a result, we are subject to skills shortages and significant increase in
the costs of salaries as many technology companies are competing for the same
skills. The
shortage of skills in key areas such as engineering and software development.
The Company established Coda Octopus Products A/S, in
21 B. Currency Risks: The Company's operations are split betweenthe United States ,United Kingdom ,Denmark ,India andAustralia . A large proportion of our consolidated revenues (53.9% in the 2022 FY) are generated outside ofthe United States by our foreign subsidiaries in theUnited Kingdom ("UK") andDenmark . In addition, a significant part of our assets and liabilities (both current and fixed) is held in British Pounds andDanish Kroner by these foreign subsidiaries. Foreign Currency Translations as they pertain to our assets and liabilities are translated at the prevailing exchange rate at the balance sheet date and related revenue and expenses are translated at weighted average exchange rates in effect during the period (see paragraph n (Foreign Currency Translation) of Note 2 - Summary of Accounting Policies of our audited Consolidated Financial Statements as ofOctober 31, 2022 ). Significant currency fluctuations (particularly the British Pound and/or the Danish Kroner, Euros, versus the US Dollar) may affect our financial results and the value of our assets. We are therefore subject to currency fluctuation risks. In the Current 2022 FY, due to the sharp depreciation of the Pound,Danish Kroner and Euros against the USD, our revenues were impacted by$1,192,833 when applying the same exchange rate in the 2021 FY. C. Inflation
Inflation measured as the Consumer Price Index is significant in the countries
in which we operate. In the twelve months to
-Denmark 10.1% - source: Statistics Denmark, -UK 11.1% - source:Office of National Statistics (ONS); and -USA 7.7% - source:U.S. Bureau of Labor Statistics .
In the 2022 FY the impact of Inflation has not been material since we were holding significant inventory and also had our salaries and professional fees in place at the beginning of the 2022 FY. However, we believe global inflation will pose a significant risk to our business in the 2023 FY. Inflation affects our business in several areas and therefore our overall financial results. For further discussions on Inflation see the relevant section of Item 7 MD&A which concerns "Inflation and Foreign Currency". D. Political Landscape/Exporting toChina We sell our products globally and increasingly toAsia . The recent change in both the US andUK Governments' attitude (and to a lesser extent theEuropean Union member states) towards trade withChina , directly affects the sale of our products to customers based inChina . Our real time 3D sonars which are depth rated above 300 meters along with our inertial navigation and attitude measurement sensors (F280® series) are subject to export control for certain countries, includingChina and therefore requires an export license. We also are not allowed to promote our DAVD technology inChina . OnDecember 22, 2020 theUS Government Department of Commerce (Bureau of Industry and Security , Commerce) amended the Export Administration Regulations (EAR) to add seventy-seven (77) Chinese entities "determined ….to be acting contrary to the national security or foreign policy interests ofthe United States ". The amended EAR in general states that there is a "presumption of denial" of grant of export licenses to these entities and their affiliates. In a new pronouncement datedNovember 4, 2021 , theUS Government has expanded the list significantly which is an indication that theUS Government policy and disposition towardsChina is hardening and companies in the technology space will increasingly find it difficult to sell toChina due to government restrictions. TheUK Government is generally in lock step with theUS Government's position and has refused to grant export licenses for several of the Company's applications for end users inChina for the first time in 25 years of our dealing with theUK Export Control Organization . The curtailment of access to this market due to refusal to issue export licenses is likely to significantly impact our revenues fromAsia .
Furthermore, even though our sonars which are depth rated at 250m or less do not
require export licenses for
In 2022 FY we realized much less in sales to
The removal ofChina as a trading partner is likely to have significant negative impact on our revenues and growth strategy.China has one of the largest planned investment programs for offshore renewables, the market for which most of our technology is used for inChina . After significant business development inChina , we had started to see persistent and credible growth for our products in this market. Unless there is a change in this policy, we are likely to see a decline in growth and sales into the Chinese Market. 22 E. Supply Chain and Supply Chain Disruption
We rely on the availability of raw materials including electronic assemblies and semiconductor to manufacture our products and solutions and offer our engineering services.
Due to the exceptionally high demand in the semi-conductor market with limited supplies available, we are experiencing extreme lead times for components which are necessary for the manufacture and service of our products and providing engineering design services by our Engineering Business. We are also seeing significant price increases for these and other routine components. Both the extended lead time, in some instances 99 weeks lead time is being quoted by suppliers, and the price increase may affect our ability to meet customer requirements and make the prices of our products or engineering service uncompetitive. The Products Business may reasonably endeavor to reduce the impact of the extended lead times we are experiencing by priming well in advance our supply chain as far as possible. However, the impact on the Engineering Business is more severe and could grind their operations to a halt since this part of our business does not know what components are required until their customers place an order for bespoke engineering work packages. We therefore have a high risk that our Engineering Business' may be severely impacted by the shortages that we are currently experiencing. The increased inventory evidences our mitigation strategy to increase inventory where we can and, in this regard, a significant part of our cash resources in the 2023 FY is geared towards supporting our supply chain requirements. Our technology is based on electronics that are designed and manufactured to our specification exclusively for us. These electronic components are costly. Advancement in technology may make these specialized components or circuits obsolete. Reengineering these key components could result in significant capital expenditure and also may cripple the production of our products since quick replacements cannot be found and would require new engineering work. Furthermore, there is no broader market for these components. F. Significant Increase in the Price of Raw Materials
In addition to the disruption in the Supply Chain, we are also experiencing very significant increase in price of raw materials which we are unlikely to be able to pass on to our customers. These increases may make the cost of making our products prohibitive and uncompetitive and could affect our margins and also the viability of our business.
G. Shortage of Key Skills/Resourcing Levels and significant increase in cost of
operations due to inflation
We are experiencing extreme shortage of personnel with key skills which are critical to our business, such as electronic engineers, software development skills, technical support engineers, field support engineers and sales and business development skills. This situation is further compounded by significant increases in wages and salaries. In addition, with theUK withdrawing from EU membership, this exacerbates an already critical situation for businesses. In theUK where we have a significant part of our activities including Manufacturing and Research & Development, there is acute shortage of skills and many industries demanding pay increases in excess of current inflation rate of 11.1%. TheUK is seeing extensive strike actions across the country, and this will put further pressure on businesses to meet and exceed inflation-proof salary increases. This is likely to increase the cost of operations, in particular, our SG&A expenditures in the 2023 FY. As a small business, we are hindered in our ability to compete for certain specialized electronic engineering skills as our remuneration package is not as competitive as those offered by bigger companies which are competing for the same skills.
We are looking to address the skills shortage by establishing a subsidiary inIndia , where software development skills and support engineers' skills are more readily available (as we do not believe the local situation will improve in the near future- given the different Tech companies that are competing for the same skills). We can, however, give no assurance that this will serve as adequate mitigation for this issue. H. Government Spending for Defense: We are dependent on the timely allocation of funds to defense procurement by governments inthe United States and theUnited Kingdom . A large part of our revenues in the Services Segment derives from government funding in the defense sector. In general, where there is a change of government, spending priorities may change from those priorities of the previous Administration. This may adversely impact on our revenues. Furthermore, the US Federal Defense Budget is dependent on theNew Administration being able to secure approval inCongress for the defense budget. The slim majority on which the current Administration operates is likely to hinder future spending on new defense projects. 23
I. Technological Advancement:
A significant part of our growth strategy is predicated on our flagship real time volumetric imaging sonar technology and our Diver Augmented Vision Display (DAVD) solution. The technology space is inherently uncertain due to the fast pace of innovations and therefore we can give no assurance that we can maintain our leading position in these areas or that innovations in other areas may not surpass our solutions that we currently supply to the subsea market. An example of new technology entering the subsea market is LIDAR technology. However, unlike our sonar technology, LIDAR technology cannot be employed in zero visibility conditions and cannot generate a volume pulse or image moving objects required for real time inspection and monitoring underwater.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted inthe United States of America ("US GAAP"). The preparation of financial statements in conformity with US GAAP requires our management to make estimates and assumptions that affect the reported values of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported levels of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Below is a discussion of accounting policies that we consider critical to an understanding of our financial condition and operating results and that may require complex judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, "Summary of Accounting Policies" of our Consolidated Financial Statements. Revenue Recognition All of our revenues are earned under formal contracts with our customers and are derived from both sales and rental of underwater technologies and equipment for imaging, mapping, defense and survey applications, diving technology 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 paragraph h of Note 2 "Revenue Recognition" in our Consolidated Financial Statements.
24 Stock based Compensation We recognize the expense related to the fair value of stock based compensation awards within the consolidated statements of income and comprehensive income. The fair value of stock based compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the periods in which the related
services are rendered. Income Taxes The Company accounts for income taxes in accordance with Accounting Standards Codification 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 lives for income tax purposes versus straight line depreciation used for book purposes and from the utilization of net operating loss carry-forwards.
Deferred tax assets and liabilities are the amounts by which the Company's future income taxes are expected to be impacted by these differences as they reverse. Deferred tax assets are based on differences that are expected to decrease future income taxes as they reverse. Correspondingly, deferred tax liabilities are based on differences that are expected to increase future income taxes as they reverse. Note 8 to the Consolidated Financial Statements discusses the amounts of deferred tax assets and liabilities, and also presents the impact of significant differences between financial reporting income and taxable income. 25
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
Goodwill and intangible assets consist principally of the excess of cost over the fair value of net assets acquired (i.e., 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 intangible assets using the straight-line method over their estimated period of benefit. We annually evaluate the recoverability of goodwill and intangible assets and carefully consider events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. Step 1 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 discounted cash flows, exceeds the carrying amount, goodwill is not considered impaired. The Company has adopted Accounting Standards Codification 2017 - 04, Simplifying the Test for Goodwill Impairment, which permits the Company to impair the difference between the carrying amount in excess of the fair value of the reporting unit as the reduction in goodwill.
At the end of each year, we evaluate goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the reporting unit compared to the fair value of the reporting unit. To date, the Company has not had any goodwill impairments.
Fiscal Year 2022 Consolidated Results of Operations
In this Form 10-K, the following meanings are ascribed to the terminologies set out immediately below:
FY Means Fiscal Year
2022 FY Means the Fiscal Year ended
In the Current FY revenues increased by 4.2% over the Previous FY, Gross Profit Margins fell by 0.9%, total operating expenses fell by 6.8% and operating income increased by 30.4%. Net income before taxes fell by 2.3% and after taxes by 13.1%. The main factor is that in the Previous FY we recorded in "Other Income" exceptional items totaling$1,350,440 (comprising Paycheck Protection Program ("PPP") and Employment Retention Credits ("ERC")) contributions whereas in the 2022 FY we recorded$88,917 comprising ERC. Without these exceptional items in both the Current FY and Previous FY, net income before taxes would have been$5,043,418 and$3,902,804 , respectively, thus representing a 29.2% increase in net income before taxes in the 2022 FY. Our revenues in the Current FY have been materially affected by the sharp depreciation of the Pound,Danish Kroner and Euro against the USD our reporting currency. A significant part of our consolidated revenues is translated from Pounds and Danish Kroners to USD. The overall impact of this currency fluctuation is$1,192,833 , when using the exchange rate of the Previous FY. In the Current FY the Products Business generated revenues of$14,724,688 compared to$15,804,222 during the Previous FY. The part of the Products Business revenues generated by the Company's foreign subsidiaries in theUK andDenmark , has been impacted by the significant fall in the Pound and the Danish Kroner against the USD, our reporting currency. This means that when comparing the same exchange rate of the Previous FY, the Products Business revenues in the Current FY after translating from Pound to USD fell by$913,899 . Therefore, without the significant depreciation of the Pound and the Danish Kroner against the USD in the Current FY, the Products Business revenue would have been$15,638,587 and in line with the Previous FY. In the Current FY the Engineering Business generated revenues of$7,501,115 compared to$5,527,305 , an increase of 35.7%. However, theUK part of our Engineering Business was also impacted by the significant depreciation of the Pound against the USD and, as a direct result, revenues were adversely impacted by$278,934 . We are increasingly reducing the impact of currency fluctuations on our foreign subsidiaries revenues by transacting our sales in USD. In the Current FY, 46.1% of our revenue was transacted in USD compared to 26.4% in the Previous FY.
Comparison of fiscal year ended
The information provided below pertains to the Company's consolidated financial
results. For information on the performance of each Segment including the
disaggregation of revenues and geographical split, see Note 13 ("Segment
Analysis") of our audited Consolidated Financial Statements as of October 31,
2022 , and 2021.
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Revenue:
Year Ended October 31, 2022 Year Ended October 31, 2021 Percentage Change
$ 22,225,803 $ 21,331,527 Increase of 4.2%
We realized an increase in revenues of 4.2% in the 2022 FY compared to the 2021 FY. However, as discussed above, the sharp depreciation of the Pound against the USD in the Current FY has impacted our revenues generated by our foreign subsidiaries by$1,192,833 and thus our overall consolidated revenue in the
2022 FY. Products Business Revenues 2022 FY$ 14,724,688 Products Business Revenues 2021 FY$ 15,804,222 Services Business Revenues 2022 FY$ 7,501,115 Services Business Revenues 2021 FY$ 5,527,305 The Products Business revenues declined by 6.8% in the Current FY. This is largely due to the sharp depreciation of the Pound, Euro andDanish Kroner against the USD. A significant part of our revenues is derived from our foreign subsidiaries in theUK andDenmark and therefore for the purpose of reporting, the functional currencies of these subsidiaries are translated into USD. Applying the same exchange rate as the Previous FY, revenue of the Products Business was negatively impacted by$913,899 . Without this sharp depreciation, the Products Business revenue would have been largely in line with the 2021 FY. The Engineering Business revenues increased by 35.7%. However, similarly, the foreign subsidiary part of Engineering Business based in theUK was also impacted by the sharp decline of the Pound against the USD. Assuming the same exchange rate as the Previous FY (which our Business Plan is geared to), revenue of the Engineering Business was negatively impacted by$278,934 . Gross Margin:
Year Ended
68.3% 69.2%
(Gross profit of
Gross Profit Margins reported in our financial results may vary according to several 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 Engineering Business.
? The percentage of consolidated sales attributed to the Engineering Business.
The Engineering 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 Offshore Engineering Support Services provided in the period.
? Extent of paid customer engineering work relating to customizing our
technology for these customers' requirements.
? Level of commissions on sales (both the Engineering and Products businesses
work with a global network of sales agents). Most sales by the Products
Business from
agents/distributors network. See Notes 13 (Segment Analysis) and 14
(Disaggregation of Revenue) to our audited Consolidated Financial Statements
as of
the disaggregation of our revenues by type and geography.
? Level of assets in the rental pool and cost of sales associated with these
rental assets (and which are subject to depreciation - see Note 2 paragraph d
to our audited Consolidated Financial Statements as of
In the 2022 FY Gross Profit Margins for the Marine Technology Business were 80.0% compared to 79.9% in the 2021 FY. For the Engineering Business, these were 45.4% in the 2022 FY compared to 38.6% in the 2021 FY.
Since there are more variable factors affecting Gross Profit Margins in the Marine Technology Business, a table showing a summary break-out of sales generated by the Marine Technology Business in the 2022 FY compared to the 2021 FY is set out below:
2022 FY 2021 FY
Products Products Percentage Change
Equipment Sales $ 8,771,050 $ 10,914,124 (19.6 )%
Equipment Rentals 1,844,775 2,324,773 (20.6 )%
Software Sales 1,014,867 669,968 51.5 %
Services 3,093,996 1,895,357 63.2 %
Total Net Sales $ 14,724,688 $ 15,804,222 (6.8 )%
In the 2022 FY the Products Business paid $596,426 in commission compared to
$605,620 in the 2021 FY as there were less sales via our Agents/Distribution
network.
In the Current FY the Products Business generated revenues of $14,724,688
compared to $15,804,222 . The part of the Products Business revenues generated by
the Company's foreign subsidiaries in the UK and Denmark , has been impacted by
the significant fall in the Pound and the Danish Kroner against the USD, our
reporting currency. Therefore, assuming the same exchange rate of the Previous
FY, the Products Business revenues in the Current FY after translating from
Pound to USD fell by $913,899 . Without the significant depreciation of the Pound
and Kroner against the USD in the Current FY, the Products Business revenue
would have been $15,638,587 and largely in line with the Previous FY.
For more detailed information on the composition and disaggregation of our
revenues, please refer to Note 14 ("Disaggregation of Revenue") of our audited
Consolidated Financial Statements of
27
Research and Development (R&D):
Year Ended October 31, 2022 Year Ended October 31, 2021 Percentage Change $ 2,237,920 $ 2,982,676 Decrease of 25.0% Research and Development costs are, in general, an inherent ongoing cost for the Marine Technology Business operations since it will need to either maintain the products it has in the market or continue to advance these products and its core technology to keep them competitive (both in price and performance) and to expand the product offerings which we have in the market. Accordingly, we continue to invest in research and development to further our business goals including maintaining our lead in the real time volumetric imaging sonar sector (Marine Technology Business) and our new-to-market diving technology (DAVD). In the 2022 FY this category of expenditure decreased by 25.0%. The decrease is largely due to reduced spending in this area in the Engineering Business, where expenditures fell by 93.6% and was$30,420 in the 2022 FY compared to$473,569 in FY2021. This reflects our strategy to reduce expenditures on the Thermite® Octal development until we can gage both market and customer requirements through the demonstrations of the capability of the Thermite®. In 2022 FY the Products Business research and development expenditures fell by 12.0%. This is largely a reflection that we have completed the capital-intensive development phase associated with onward development of the hardware phase our real time 3D/4D/5D/6D sonar technology and our F280 Series®. Our developments are now focused on feature enhancements and the like and are largely firmware and software enhancements.
Changes in this category by Segment are set out immediately below:
% increase /
Description Amount (decrease)
Decrease
Marine Technology Business (Products Segment) 2022FY
12.0%
Marine Technology Business (Products Segment) 2021FY
Decrease
Engineering Business (Services Segment) 2022 FY
93.6%
Engineering Business (Services Segment) 2021 FY
Selling, General and Administrative Expenses (SG&A):
Year Ended October 31, 2022 Year Ended October 31, 2021 Percentage Change $ 7,948,704 $ 7,949,525 Decrease of 0.0%
SG&A in the 2022 FY was largely in line with 2021 FY expenditures.
Notable factors in our SG&A 2022 FY are:
Within the category of SG&A we have transactions which are cash charges and non-cash charges. The non-cash charges comprise Depreciation, Amortization and Stock-based compensation charges. In 2022 FY and 2021 FY, respectively non-cash items as a percentage of SGA expenses were 20.5% and 20.6%, respectively.
Stock Based Compensation Expenses (Non-Cash Item). In the 2022 FY we expensed
In the 2021 FY, the Company had$135,000 as contribution under theUK Government Coronavirus Job Retention Scheme (CJRS), thus reducing SG&A in 2021 FY. There were no contributions under the CJRS in the 2022 FY.
Further discussions on SG&A are set out immediately below.
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Key Areas of SG&A Expenditure across the Group for the year ended
October 31, October 31, Percentage
Expenditure 2022 2021 Change
Increase of
Wages and Salaries $ 3,752,524 $ 3,361,494 11.6%
Legal and Professional Fees (including
accounting, audit and investment banking
Increase of
services) $ 1,419,013 $ 1,284,591 10.5%
Increase ofRent for our various locations$ 64,637 $
51,443 25.6%
Increase of
Marketing $ 197,258 $ 48,214 309.1%
Although in FY2022 expenditures relating to Wages and Salaries increased by 11.6%, it should be noted that in the 2021 FY we had had contributions under theUK Coronavirus Job Retention Scheme (CJRS) of$135,000 which reduced this category of expenditures. In the 2022 FY there were no such contributions. In addition, market conditions for wages and salaries have changed significantly. We are seeing a persistently sharp rise in the costs of labor in the market and therefore anticipate that this area of expenditures will continue to increase in the 2023 Financial Year.
In 2022 FY regarding Legal and Professional Fees we recorded$125,000 as a refund from ourUK auditors. This means that in real terms, without this refund, Legal and Professional fees have increased by 20.2% which is a reflection of additional financial resources that we have taken on and an increase in our overall audit fees.
In the 2022 FY expenditures relating to the category of "Rent" increased by
25.6% compared to FY 2021. Rent is not a material expenditure in the Group as
most of our premises are owned by the Company, except for premises used in
In 2022 FY expenditures relating to the category of "Marketing" increased by 309.1%. In 2021 FY this area of expenditure was depressed due to continued restrictions caused by the Coronavirus Pandemic. In 2022 FY we have been able to participate in more industry-related trade events and anticipate that this category of expenditures will continue to increase in the 2023 Financial Year as we focus our business strategy on business development and sales and marketing. 29 Operating Income: Year Ended October 31, 2022 Year Ended October 31, 2021 Percentage Change $ 5,004,064 $ 3,837,517 Increase of 30.4%
In the 2022 FY Operating Income increased by 30.4%. The increase in Operating Income is largely due to the increase in Revenue by 4.2% over the 2021 FY coupled with a fall in Total Operating Expenses by 6.8%.
Other Income: Year Ended October 31, 2022 Year Ended October 31, 2021 Percentage Change $ 137,975 $ 1,435,382 Decrease of 90.4 %
In the 2021 FY Other Income included$648,872 representing amounts received under the PPP and$701,568 in ERC which theUS Administration made available as part of the Pandemic response package for US companies. In the 2022 FY we did not receive any contributions under the PPP but recorded$88,917 for ERC. Outside of these exceptional amounts, this category of income is not material for the Company. Interest Expense: Year Ended October 31, 2022 Year Ended October 31, 2021 Percentage Change $ 9,704 $ 19,655 Decrease of 50.6% This is not a material category of expenses for the Company since inDecember 2021 we have repaid all indebtedness under our Senior Secured Debenture withHSBC NA . We therefore do not anticipate Interest Expense to be a material item of expenses in our financial statements. 30
Net Income before Income taxes for the year ended
Year Ended October 31, 2022 Year Ended October 31, 2021 Percentage Change $ 5,132,335 $ 5,253,244 Decrease of 2.3%
In the 2022 FY, Net Income before taxes fell by 2.3% despite an increase in revenues (by 4.2% over the previous 2021 FY), a reduction in Total Operating Expenses by 6.8% and a reduction in the category of Interest Expenses. A factor in this is that in the 2021 FY, Net income before taxes was positively impacted by exceptional items of "Other Income" comprising (PPP and ERC) totaling$1,350,440 . In the 2022 FY Net income before taxes was marginally impacted by exceptional items of "Other Income" comprising ERC and totaling$88,917 . Without these exceptional items in "Other Income" in both the 2022 FY and 2021 FY, Net Income before taxes would have been$5,043,418 and$3,902,804 , respectively, and representing a 29.2% increase in Net Income before taxes in the 2022 FY.
Net Income after Income taxes for the year ended
Year Ended October 31, 2022 Year Ended October 31, 2021 Percentage Change $ 4,301,221 $ 4,947,765 Decrease of 13.1%
In the 2022 FY, Net Income after Income taxes fell by 13.1%. This is due to a number of factors. In the 2021 FY, Net income before taxes was positively impacted by exceptional items of "Other Income" comprising (PPP and ERC) totaling$1,350,440 . In the 2022 FY Net income before taxes was marginally impacted by exceptional items of "Other Income" comprising ERC and totaling$88,917 . Without these exceptional items in "Other Income" in both the 2022 FY and 2021 FY, Net Income before taxes would have been$5,043,418 and$3,902,804 , representing a 29.2% increase in Net Income before taxes in the 2022FY. Additionally, in the 2022 FY we recorded tax expense of$831,114 compared to$305,479 in the 2021 FY, representing an increase in the 2022 FY of 172.1%.
Comprehensive Income for the year ended
Year Ended October 31, 2022 Year Ended October 31, 2021 Percentage Change $ 1,231,156 $ 5,601,984 Decrease of 78.0%
In the 2022 FY, Comprehensive Income was$1,231,156 compared to$5,601,984 for the 2021 FY reflecting the adverse effects of currency fluctuations. Comprehensive Income is affected by fluctuations in translating foreign currency transactions of our foreign subsidiaries into USD relating to both our profit and loss expenses and valuation of our assets and liabilities comprised within our balance sheet. A significant part of the Company's reported financial results emanates from its foreign subsidiaries including in theUK andDenmark , resulting in translation from these foreign subsidiaries functional currencies to USD. In the Current FY the USD strengthened significantly against most major currencies including the Pound, Euro andDanish Kroner . The Company therefore realized significant adjustments relating to foreign currency transactions in the Current Year. In the 2021 FY we realized a gain on foreign currency translation adjustments relating to these transactions of$654,219 compared to a loss on these transactions in the 2022 FY of$3,070,065 . In the 2022 FY the USD has strengthened against major currencies including the British Pound, Euro,Danish Kroner and Indian Rupees (the functional currencies of our foreign operations). A substantial part of these losses are paper losses associated with re-valuation of our foreign subsidiaries balance sheet. A significant part of the Company's operations is based in theUK , and therefore a significant part of our financial transactions is performed in Pounds which are translated into USD for reporting purposes. In the 2022 FY, the Pound has fallen significantly against the USD (approximately by 8%). This is a key factor in the loss relating to foreign currency translations transactions in the 2022 FY. See Table 1 under the section which concerns "Inflation & Foreign Currency" which shows the impact of the currency adjustments. 31 Segment Analysis We are operating in two reportable segments, which are managed separately based upon fundamental differences in their operations. Segment operating income is total segment revenue reduced by operating expenses identifiable with the business segment. Overhead includes general corporate administrative costs. The Company evaluates performance and allocates resources based upon operating income. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies. There are inter-segment sales in the table below which have been eliminated from our financial statements. However, for the purpose of segment reporting, these inter-segment sales are included in the table below only. The following tables summarize certain balance sheet and statement of operations information by reportable segment for the financial years endingOctober 31, 2022 , and 2021, respectively. Marine Marine Technology Engineering Business Business (Products) (Services) Overhead Total Year EndedOctober 31, 2022 Net Revenues$ 14,724,688 $ 7,501,115
$ -
Cost of Revenues 2,941,569 4,093,546
- 7,035,115
Gross Profit 11,783,119 3,407,569 - 15,190,688
Research & Development 2,207,500 30,420 - 2,237,920 Selling, General & Administrative 2,563,554 2,654,565
2,730,585 7,948,704
Total Operating Expenses 4,771,054 2,684,985
2,730,585 10,186,624
Income (Loss) from Operations 7,012,065 722,584
(2,730,585 ) 5,004,064
Other Income (Expense) Other Income 55,715 79,204 3,056 137,975 Interest Expense (9,233 ) (71 ) (400 ) (9,704 )
Total Other Income (Expense) 46,482 79,133
2,656 128,271
Income (Loss) before Income Taxes 7,058,547 801,717
(2,727,929 ) 5,132,335
Income Tax (Expense) Benefit Current Tax (Expense) Benefit (868,162 ) 39,422 (176,400 ) (1,005,140 ) Deferred Tax Benefit (Expense) 31,907 (41,657 )
183,776 174,026
Total Income Tax (Expense) Benefit (836,255 ) (2,235 ) 7,376 (831,114 ) Net Income (Loss)$ 6,222,292 $ 799,482 $ (2,720,553 ) $ 4,301,221
Supplemental Disclosures
Total Assets$ 33,348,805 $ 12,662,109
Total Liabilities$ 2,432,750 $ 526,195
Revenues from Intercompany Sales- eliminated from sales above$ 2,406,717 $ 396,015
Depreciation and Amortization
Purchases of Long-lived Assets$ 1,123,475 $ 36,862 $ 90,887 $ 1,251,224 32 Marine Marine Technology Engineering Business Business (Products) (Services) Overhead Total Year EndedOctober 31, 2021 Net Revenues$ 15,804,222 $ 5,527,305
$ -
Cost of Revenues 3,169,835 3,391,974
- 6,561,809
Gross Profit 12,634,387 2,135,331 - 14,769,718
Research & Development 2,509,107 473,569 - 2,982,676 Selling, General & Administrative 3,231,733 2,304,300
2,413,492 7,949,525
Total Operating Expenses 5,740,840 2,777,869
2,413,492 10,932,201
Income (Loss) from Operations 6,893,547 (642,538 )
(2,413,492 ) 3,837,517
Other Income (Expense) Other Income 354,373 1,079,374 1,635 1,435,382 Interest Expense (1,738 ) (365 ) (17,552 ) (19,655 )
Total Other Income (Expense) 352,635 1,079,009
(15,917 ) 1,415,727
Income (Loss) before Income Taxes 7,246,182 436,471
(2,429,409 ) 5,253,244
Income Tax (Expense) Benefit Current Tax Benefit (Expense) 35,032 (51,624 ) - (16,592 ) Deferred Tax (Expense) Benefit (418,338 ) 409,205
(279,754 ) (288,887 )
Total Income Tax (Expense) Benefit (383,306 ) 357,581 (279,754 ) (305,479 ) Net Income (Loss)$ 6,862,876 $ 794,052 $ (2,709,163 ) $ 4,947,765
Supplemental Disclosures
Total Assets$ 30,631,442 $ 14,117,747
Total Liabilities$ 3,166,999 $ 849,306
Revenues from Intercompany Sales- eliminated from sales above$ 2,075,387 $ 355,608
Depreciation and Amortization
Purchases of Long-lived Assets
Coda Octopus Martech and Coda Octopus Colmek ("Services Segment" or "Marine
Engineering Business") are providing engineering services as sub-contractors
mainly to prime defense contractors and Coda Octopus Products operations are
comprised primarily of product sales, technology solutions sales, rental of
equipment and/or software and associated services ("Products Segment" or "Marine
Technology Business").
The Company's reportable business segments sell their goods and services in four geographic locations:
?Americas ?Europe ?Australia /Asia ?Middle East /Africa 33
Liquidity and Capital Resources
As ofOctober 31, 2022 , the Company had an accumulated deficit of$14,176,636 , working capital of$33,542,200 and stockholders' equity of$43,382,809 . For the year then ended, the Company generated cash flow from operations of$6,726,967 . We believe that our current level of cash and cash generation will be sufficient to meet our short and medium-term liquidity needs. As ofOctober 31, 2022 , we had cash on hand of$22,927,371 and both billed and unbilled receivables of approximately$3,472,715 . Our current cash balance represents approximately 35 months of Selling, General and Administrative Expenses. The Company continues to critically evaluate the level of expenses that we incur and reduce those expenses as appropriate. We also have access to a revolving line of credit of$4 million fromHSBC NA . This line of credit is available to the Company for short-term working capital purpose. All amounts under the Revolving Line of Credit are payable at the end of each financial year. The facility was renewed for another year untilNovember 2023 . To date, the Company has not had reason to borrow any funds for its operations under this credit line. Our main liquidity issues are forward buying components and inventory for our products which encompass specialized electronics for which there is no after-market except for the products to which they are designed for, funding our research and development program ("R&D") which requires significant expenditures in attracting engineering skills and incurring non-recoverable costs for researching, developing and prototyping products and managing our currency exposure and business development and marketing costs required for the success of our business. Operating Activities
Net cash generated from operating activities for the year endedOctober 31, 2022 , was$6,726,967 . We recorded net income for the period of$4,301,221 . Other items in uses and sources of funds from operations included non-cash charges related to depreciation and amortization, deferred tax asset and stock-based compensation, which collectively totaled$1,676,563 . Changes in operating assets increased net cash from operating activities by$1,205,916 and changes in current liabilities decreased net cash from operating activities by$456,733 . 34 Investing Activities
Net cash used in investing activities for the year ended
Financing Activities
Net cash used in financing activities for the year ended
Secured Promissory Note OnApril 28, 2017 , the Company together with its wholly owned US subsidiaries,Coda Octopus Products, Inc. andCoda Octopus Colmek, Inc. , entered into a loan agreement withHSBC Bank NA for a loan in the principal amount of$8,000,000 . The annual interest rate was fixed at 4.56%. The loan was secured by all assets of the Company and itsU.S. subsidiaries and of three of the Company's overseas subsidiaries. The entire remaining balance of$63,559 was repaid by the end
of the 2021 calendar year. Foreign Currency
The Company maintains its books in local currency: US Dollars for its US
operations, British Pounds for its
For the 2022 FY, 46% of the Company's revenue were conducted insidethe United States and 54% outsidethe United States through its wholly owned subsidiaries in theUnited Kingdom andDenmark . As a result, currency fluctuations may significantly affect the Company's sales, profitability, balance sheet valuations and financial position when the foreign currencies of its international operations are translated intoU.S. dollars for financial reporting purposes. In addition, we are also subject to currency fluctuation risks with respect to certain foreign currency denominated receivables and payables. Although the Company cannot predict the extent to which currency fluctuations may affect the Company's business and financial position, there is a risk that such fluctuations will have an adverse impact on the Company's sales, profits, balance sheet valuations and financial position. Because differing portions of our revenues and costs are denominated in foreign currency, movements in those currencies could impact our margins by, for example, decreasing our foreign revenues when the dollar strengthens and not correspondingly decreasing our expenses. The Company does not currently hedge its currency exposure. In the future, we may engage in hedging transactions to mitigate foreign exchange risk. However, as a strategy the Company is endeavoring to transact its sales by its foreign subsidiaries in USD. In the Current FY 46% of our revenue was in USD compared to 27% in the Previous FY. 35
The translation of the Company's denominated balance sheets and results of operations into US dollars (USD) are affected by changes in the average value of USD against the currencies of our foreign subsidiaries operating in GBP, DKK and AUD (our limited operations in INR are not considered material for this purpose) included in our consolidated results.
British Operations British Pound Average exchange A decrease in the 2022 FY and 2021 FY against USD
rate was $ 1.2552 value of the GBP
to the GBP against against the USD by
$1.3758 USD 8.8%
Australian Australian Dollar Average exchange A decrease in the
Operations 2022 FY ("AUD") against USD rate was $0.7001 value of the AUD
and 2021 FY against $0.7531 against the USD by
USD 7.0%
Danish Operations
rate was $0.1433 value of the DKK
against $0.1603 against the USD by
USD to the DKK 10 .6%
These are the values we have used in the calculations below which show the impact of these currency fluctuations on our operations in the 2022 FY:
British Pounds Australian Dollar Danish Kroner USD
Actual Constant Actual Constant Actual Constant Actual Constant Total
Results Rates Results Rates Results Rates Results Rates Effect
Revenues 10,039,273 11,004,589 - - 1,917,373 2,144,890 11,956,646 13,149,479 (1,192,833 )
Costs 8,666,591 9,499,918 24,037 25,857 241,451 270,102 9,000,932 9,868,067 (867,135 ) Net profit (losses) 1,372,682 1,504,671 (24,037 )
(25,857 ) 1,675,922 1,874,788 2,955,714 3,281,412 (325,698 ) Assets 20,236,412 24,059,112 26,825 31,570 3,040,207 3,559,146 23,305,960 27,652,607 (4,346,647 ) Liabilities (1,140,131 ) (1,355,504 ) - - (72,230 ) (84,559 ) (1,211,331 ) (1,438,925 ) 227,594 Net assets 19,096,281 22,703,608 26,825 31,570 2,967,977 3,474,587 22,094,629 26,213,682 (4,119,053 ) This table shows that the effect of constant exchange rates, versus the actual exchange rate fluctuations, decreased net income for the year by$325,698 and decreased net assets by$4,119,053 . These amounts are material to our overall financial results.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Inflation
Inflation affects our Business in several ways including:
Ø Cost of Operations (including wages and salaries) Ø Bill of Material Costs of our Products The effect of inflation on the Company's 2022 FY results has been benign due to a number of factors. Wages and Salaries for our Current FY were in place prior to the upturn in inflation and also our Products Business had significant inventory which had been sourced prior to the upturn in inflation.
We therefore expect that inflation will be more impactful in the 2023 financial year.
While in the past few years we have seen fairly benign rates of inflation in labor and materials in the countries in which we operate and those countries from which we source raw materials and components from and those that we sell to, since the middle of 2022 FY we have been seeing worrying signs of inflation in almost all countries. In the US,UK andDenmark , countries in which we have operations, inflation has moved to 7.7%, 11.1%, and 10.1% as ofOctober 31, 2022 , respectively.
Specifically, we are seeing inflation affecting staff costs, both in significantly increased demands from potential new recruits and existing staff members whose living wages have been eroded by inflation.
We also see inflation in our sourcing of components, both run of the mill such as metalwork and also more particularly specialist components, including electronics. We are hit in two ways, the first being the "normal" increase in prices due to the basic effects of inflation, and the second being an extra premium (combined with longer lead tines) being sought for scarcity. Some of this scarcity being brought about by the effects of COVID in far eastern suppliers. Longer lead times, some of which have now extended to a year or more also bring an additional inflation risk to the Company as we are unable to place purchase orders on our suppliers until we have a customer contract, and our suppliers are unwilling or unable to provide a fixed cost to us as they in turn are unable to get fixed prices for their components. The levels of our margins are therefore at risk and preservation of our margins is dependent upon our ability to pass on these increases to our customers which is improbable, particularly since our customer base is global (in the Far East inflation profiles are very different). We are also at risk of high staff turnover if we cannot offer inflation-proof wages in a market that is ultra-competitive due to demand outstripping supply.
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