# Coda Octopus Group, Inc.: Form 10-Q for the period ended Jan 31, 2022

- Company: [Coda Octopus Group, Inc.](/companies/coda.md) (CIK 1334325)
- Form: 10-Q
- Filed: 2022-03-16
- Accepted by EDGAR: Mar 16, 2022, 06:05 ET
- Period: 2022-01-31
- Accession: 0001493152-22-006927
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334325/000149315222006927/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334325/000149315222006927/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-01-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-11-01 to 2022-01-31 | $5.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-11-01 to 2022-01-31 | $1.7m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2021-11-01 to 2022-01-31 | $4.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2021-11-01 to 2022-01-31 | $672.9k | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2021-11-01 to 2022-01-31 | $2.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2021-11-01 to 2022-01-31 | $1.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2021-11-01 to 2022-01-31 | $227.4k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-11-01 to 2022-01-31 | $1.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-11-01 to 2022-01-31 | $0.11 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-11-01 to 2022-01-31 | $0.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-11-01 to 2022-01-31 | 11,396,861 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2021-11-01 to 2022-01-31 | $3.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2021-11-01 to 2022-01-31 | $987.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-01-31 | $20.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-01-31 | $34.8m | us-gaap:AssetsCurrent |
| Total assets | at 2022-01-31 | $45.4m | us-gaap:Assets |
| Current liabilities | at 2022-01-31 | $2.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-01-31 | $2.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-01-31 | $42.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,625 characters.

### 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 the Securities and Exchange Commission on February 14, 2022. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

### General Overview

Throughout these discussions, the following terminologies listed immediately below are used and have the meanings ascribed to them in the said table.

“*Current Quarter”*: Three-month period ended January 31, 2022

“*Previous Quarter”*: Three-month period ended January 31, 2021

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 Segment”).

Our Marine Technology Business is a technology solution provider to the subsea and underwater market. It owns key proprietary technology including real time volumetric imaging sonar technology and diving technology, both of which are applicable to 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), and offshore oil and gas, 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 marketed under the name “CodaOctopus® DAVD” (Diver Augmented Vision Display) addresses the global defense and commercial diving markets and has the potential to radically change how diving operations are performed globally because it delivers a real time information platform for diving and allows diving operations to be performed in zero visibility water conditions and provides real time map of the dive area.

We generate most of our revenues from our real time 3D sonar which includes both hardware and proprietary software. Our customers include service providers to major oil and gas companies, renewable energy companies, law enforcement agencies, ports, mining companies, defense bodies, research institutes and universities.

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 the USA and UK. 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 for these items. 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 and BAE systems.

### Key Pillars for our Growth Plans

Our volumetric real time imaging sonar technology and our Diver Augmented Vision Display (“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 /6D moving underwater objects 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 inspection and monitoring of moving objects underwater. We believe our Echoscope PIPE® is the only technology that can generate multiple real time 3D/4D/5D and 6D acoustic images using different acoustic parameters such as frequency, field of view, pulse length and acoustic filters.

We are widely considered the leading solution providers for real time 3D visualization underwater.

We also believe that the DAVD system is poised to radically change the way commercial and 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 is protected by patent and is manufactured and distributed under License from United States Department of the Navy at Naval Surface Warfare Center Panama City Division to the Company.

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

Following is a short description of some of the most critical and pressing factors that affect our business. For a more detailed discussion of these and additional factors, refer to our Form 10-K for the fiscal year ended October 31, 2021, that is hereby incorporated by reference.

### General Impact

Our operations continue to be impacted by the Coronavirus outbreak (“Pandemic”). 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 including Japan, China, South Korea. All these countries without exception have severe restrictions which continue to affect our ability to have in-person visits with customers to demonstrate our new offerings which underpin our growth strategy including Echoscope PIPE® and CodaOctopus® DAVD (Diver Augmented Vision Display System) and our new enterprise software solution 4G USE®. Our products and solutions, including the top end software which controls the sonar and DAVD are complex and do require in-person demonstration and training for customers to benefit optimally from their adoption.

In addition, we are significantly impacted by the increasing unavailability of critical components for our products and also parts for bespoke engineering by our Engineering Segment. This is further compounded by significant price increases which, on the Marine Technology Business side, we are unlikely to be able to pass on to our customers. This is therefore likely to impact our realizable margins.

We are also experiencing skills shortage in areas that are critical to our growth strategy including in experienced sales and marketing personnel. In addition, the competition is very fierce for skills and we are seeing significant increase in costs associated with wages and salaries and demands from potential candidates to work from home as a precondition to joining our team. This is further exacerbated by the United Kingdom leaving the European Union, which complicates hiring qualified candidates from EU member states.

The Services Business continues to experience difficulties in closing orders due to a combination of factors including delays in Defense Prime Contractors securing their orders. This means that sub-contracting is slow.

### Impact on Revenues and Earnings

Until the business environment normalizes, we are uncertain as to the extent of the impact the Pandemic will have on our future financial results. In the Current Quarter both the Marine Technology Business and our Engineering Business have been impacted by the constraints caused by the Pandemic which in turn is impeding our ability to do meaningful business development and opportunities pipeline building all of which affect our financial performance as a business.

### Impact on Liquidity, Balance Sheet and Assets

Failure to curb the coronavirus Pandemic in the near future, coupled with the projected downturn in the global economic outlook, may adversely impact on our availability of free cash flow, working capital and business prospects. As of January 31, 2022, we had cash and cash equivalents of approximately $20,711,288 and in the Current Quarter we generated approximately $3,461,499 of cash from operations. 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 in the 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 ended October 31, 2021.

#### 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.

With regard to 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 ended October 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.

#### Income Taxes

The Company accounts for income taxes in accordance with Accounting Standards Codification 740, Income Taxes (ASC 740). Under ASC 740, deferred income tax assets and liabilities are recorded for the income tax effects of differences between the bases of assets and liabilities for financial reporting purposes and their bases for income tax reporting. The Company’s differences arise principally from the use of various accelerated and modified accelerated cost recovery system for income tax purposes versus straight line depreciation used for book purposes and from the utilization of net operating loss carry-forwards.

Deferred tax assets and liabilities are the amounts by which the Company’s future income taxes are expected to be impacted by these differences as they reverse. Deferred tax assets are based on differences that are expected to decrease future income taxes as they reverse. Correspondingly, deferred tax liabilities are based on differences that are expected to increase future income taxes as they reverse.

For income tax purposes, the Company uses the percentage of completion method of recognizing revenues on long-term contracts which is consistent with the Company’s financial reporting under U.S. generally accepted accounting principles.

#### Intangible Assets

Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (or goodwill), customer relationships, non-compete agreements and licenses. Goodwill was allocated to our reporting units based on the original purchase price allocation. Goodwill is not amortized and is evaluated for impairment annually or more often if circumstances indicate impairment may exist. Customer relationships, non-compete agreements, patents and licenses are being amortized on a straight-line basis over periods of 2 to 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 take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.

The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, 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, if any. 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.

### Consolidated Results of Operations

### Summary

In the Current Quarter our financial results have been adversely impacted by a number of factors. These are:

- The ongoing Pandemic continues to affect our business development activities as in-person meeting and demonstrations with our customers are required due to the nature of our offerings.
- Weaker than expected backlog of orders in the Services Segment.
- Sustained increases in component prices.
- Significant lead times for routine components for our products.

### Segment Summary

In the Current Quarter the Products Business generated 65.5% of our consolidated revenues compared to 74% in the Previous Quarter. In the Current Quarter the Products Business realized an increase in net income before taxes of 17.5%. This was $1,972,634 in the Current Quarter compared to $1,678,218 in the Previous Quarter. Revenues generated in the Current Quarter increased by 2% and was $3,823,748 compared to $3,748,279. Gross Profit Margin increased and was 85% in the Current Quarter compared to 76.1% in the Previous Quarter. Total Operating Expenses increased by 9.1%. In the Current Quarter the Products Business completed significant milestone deliverables for our DAVD GEN 3.0 funded Program including expanding the capability to the Full Face Mask (FFM). Previously the DAVD was compatible with the Kirby Morgan Helmets. We also completed the introduction of the capability to support multiple divers and automating a number of key functions for the DAVD system.

In the Current Quarter the Services Business generated 34.5% of our consolidated revenues compared to 26% in the Previous Quarter. In the Current Quarter the Services Business’s recorded net income before taxes of $179,733 compared to loss before income taxes of $253,169 in the Previous Quarter. Revenues generated in the Current Quarter increased by 54.7% and was $2,014,460 compared to $1,302,180 in the Previous Quarter. Gross Profit Margin was 45.1% in the Current Quarter compared to 35.4% in Previous Quarter. Total Operating Expenses increased by 12.1% in the Current Quarter.

### Results of Operations for the Current Quarter compared to the Previous Quarter

***Revenue***: Total consolidated revenues for the Current Quarter and the Previous Quarter were $5,838,208 and $5,050,459 respectively, representing an increase of 15.6%. Revenue in both the Products and Services Businesses increased over the Previous Quarter. Revenue in the Products Business increased by 2% and Services Business by 54.7%.

***Gross Profit Margins:*** Margin percentage was stronger in the Current Quarter at 71.3% (gross profit of $4,159,934) compared to 65.6% (gross profit of $3,314,922) in the Previous Quarter.

Gross Profit Margins reported in our financial results may vary according to several factors. These include:

- The percentage of consolidated sales attributed to the Marine Technology Business. The Gross Profit Margin yielded by the Marine Technology 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 within the Marine Technology Business during the reporting period:
- Outright Sale versus Rentals;
- Hardware Sale versus Software;
- Mix of Services rendered in the period – Offshore Engineering Services versus Paid Customer Research and Development Projects;
- The mix of engineering projects performed (Design prototyping versus manufacturing), may also affect Gross Profit Margins;
- Level of commissions on products which may vary according to volume. Both the Services and Marine Technology Businesses work with sales/distribution agents.
- Level of Rental Assets in the Marine Technology Business’ Rental Pool and therefore subject to depreciation.

In the Current Quarter Gross Profit Margins for the Products operations were 85.0% compared to 76.1% in the Previous Quarter. For the Services operation these were 45.1% in the Current Quarter compared to 35.4% % in the Previous Quarter.

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 Quarter compared to the Previous Quarter is set out below:

|  | Current Quarter Products | Previous Quarter Products | Percentage Change |
| --- | ---: | ---: | ---: |
| Equipment Sales | $1,958,845 | $2,793,487 | (29.88)% |
| Equipment Rentals | 630,468 | 334,363 | 88.56% |
| Software Sales | 304,796 | 225,222 | 35.33% |
| Services | 929,639 | 395,207 | 135.23% |
| Total Net Sales | $3,823,748 | $3,748,279 | 2.01% |

In the Current Quarter the Products Business incurred Commission costs of $138,372 compared to $281,105, representing a 50.8% fall, resulting in Gross Profit Margins being higher.

Further information on the performance in the Current Quarter compared to the Previous Quarter of each Segment including revenues by product and geography can be found in Note 14 and Note 15 to the Unaudited Consolidated Financial Statements.

We believe that the decrease in the Equipment Sales category in the Current Quarter is due to the impending industry trade show, Oceanology 2022, which is scheduled to take place on March 15 -17, 2022. We typically see postponement of capital investment decisions until after the event.

***Research and Development (R&D)***: R&D expenditures in the Current Quarter were $672,890 compared to $583,139 in the Previous Quarter, representing an increase of 15.4%.

| Segment | January 31, 2022 | January 31, 2021 | Percentage Change |
| --- | ---: | ---: | --- |
| Services Segment R&D Expenditures | $143,515 | $141,395 | Increase of 1.50% |
| Products Segment R&D Expenditures | $529,375 | $441,744 | Increase of 19.84% |

25

***Selling, General and Administrative Expenses (SG&A):*** SG&A expenses for the Current Quarter increased by 16.4% to $2,111,112 from $1,813,366 in the Previous Quarter. In the Previous Quarter SG&A was reduced by $83,500 representing payroll assistance received under the UK Coronavirus Job Retention Scheme (CJRS) for UK staff who were furloughed during the Current Quarter. SG&A also includes non-cash item relating to charges for stock-based compensation which in the Current Quarter was $325,175 compared to $174,447, representing an 86.4% increase. The main variances in SG&A therefore relates to these two items discussed here.

#### Key Areas of SG&A Expenditure across the Group for the Current Quarter compared to the Previous Quarter are:

| Expenditure | January 31, 2022 | January 31, 2021 | Percentage Change |
| --- | ---: | ---: | --- |
| Wages and Salaries | $903,162 | $838,306 | Increase of 7.74% |
| Legal and Professional Fees (including accounting and audit) | $359,018 | $336,109 | Increase of 6.82% |
| Rent for our various locations | $15,745 | $9,765 | Increase of 61.24% |
| Marketing | $13,766 | $11,330 | Increase of 21.5% |

The increase in the “Wages and Salaries” category of expenditure reflects $83,500 in contributions under the CJRS which resulted in the reduction in SGA during the Previous Quarter . Nevertheless, we expect this area of expenditure to increase as we are investing in business development and sales resources and we also expect an increase in labor costs due to general skills shortage and also inflationary pressures in both the US and UK.

The increase in “Legal and Professional” reflects additional costs associated with increasing our accounting functions.

The increase in Marketing is anticipated within our plans and reflects an increase in marketing activities. This is an area of expenditures which we anticipate will increase materially in this fiscal year and subsequent years. As we shift our focus from R&D to business development and marketing, including undertaking efforts to build our brands, we anticipate a significant increase in this area of expenditure.

***Operating Income***: In the Current Quarter Operating Income increased by 49.8% and was $1,375,932 as compared to $918,417 in the Previous Quarter. The increase in Operating Income is due to the increase in consolidated revenues realized in the Current Quarter.

***Interest Expense***: Interest expense in the Current Quarter was $11,278 compared to $14,514 in the Previous Quarter, representing a fall of 22.3%. In the Current Quarter we paid the last interest payable on the HSBC NA debentures. All indebtedness under the debentures have been satisfied in full and therefore there will be no further interest payments in the foreseeable future. Please refer to Note 11 – Note Payable to the Unaudited Consolidated Financial Statements for further details pertaining to this HSBC Loan for more information on this.

***Other Income***: In the Current Quarter, we had Other Income of $79,994 compared to $92,025, representing a fall of 13.1% from the Previous Quarter. In the Previous Quarter we had contributions under the Paycheck Protection Program of $89,971 compared to $0 in the Current Quarter. Similarly in the Previous Quarter we had $0 for Employee Retention Credit, compared to $68,917 in the Current Quarter.

***Income before income taxes***: In the Current Quarter, we had income before income taxes of $1,444,648 as compared to $995,928 in the Previous Quarter, representing an increase of 45.1%. Income before income tax increased largely due to the increase in the Current Quarter of our consolidated revenues.

***Net Income:*** In the Current Quarter we had Net Income of $1,217,248 compared to $1,128,844 in the Previous Quarter, representing an increase of 7.8%. In the Previous Quarter we recorded Current Tax Benefit of $24,725 and in the Current Quarter we recorded Current Tax Expense of $285,609 and similarly we recorded Deferred Tax Benefit in the Current Quarter of $58,209 compared to $108,191 in the Previous Quarter. The Company has now utilized its net operating loss carry forwards and therefore it is expected that the US companies will become tax paying entities.

***Comprehensive Income.*** In the Current Quarter Comprehensive Income was $1,458,398 compared to $2,054,456 for the Previous Quarter. This category is affected by fluctuations in foreign currency exchange transactions. In the Current Quarter we had a foreign currency translation adjustment of $241,150 compared to $925,613 in the Previous Quarter. With the removal of the uncertainty of the future relationship between the United Kingdom and the European Union (“EU”) following its withdrawal from the EU and the entering into a trade agreement, we anticipate that the British Pound will be less volatile against the US$ and other major currencies.

### Liquidity and Capital Resources

At January 31, 2022, the Company had an accumulated deficit of $17,260,609, working capital of $32,360,629, cash of $20,711,228 and stockholders’ equity of $42,832,646. For the Current Quarter, the Company’s operating activities provided cash of $3,461,499.

The Company entered into a $4,000,000 revolving line of credit with HSBC NA on November 27, 2019, at prime. The outstanding balance on the line of credit was $0 as of January 31, 2022. This revolving credit line will expire on November 26, 2022, unless renewed by the bank.

#### Financing Activities

Secured Promissory Note

On April 28, 2017, the Company and its US based subsidiaries entered into a loan agreement with HSBC Bank NA (the “Lender”) for a loan in the principal amount of $8,000,000 (the “Loan”). The annual interest rate was fixed at 4.56%. The obligations in connection with the repayment of the Loan were secured by all assets of Coda Octopus Group, Inc., and its US subsidiaries. Our foreign subsidiaries were joint and several guarantors of the obligations. This loan was paid in full in December 2021 and all obligations under the HSBC Loan have now been satisfied.

### 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; and
- Australian Dollars for our Australian Operations.

Note 4 (Foreign Currency Translation) of our Unaudited Consolidated Financial Statements discusses fully the applicable rates used for our Balance Sheet and Income Statement.

Fluctuations in currency exchange rates can affect the Company’s sales, profitability and financial position when the foreign currencies of its international operations are translated into U.S. dollars for financial reporting. In addition, we are also subject to currency fluctuation risk with respect to certain foreign currency denominated receivables and payables. The Company cannot predict the extent to which currency fluctuations may affect the Company’s business and financial position, and there is a risk that such fluctuations will have an adverse impact on the Company’s sales, profits and financial position. Also, because differing portions of our revenues and costs are denominated in foreign currency, movements can impact our margins by, for example, decreasing our foreign revenues when the dollar strengthens without correspondingly decreasing our expenses. The Company does not currently hedge its currency exposure.

Since the United Kingdom’s decision to withdraw from the European Union in 2016, the British Pound has been extremely volatile and because a significant part of our operations is based in the United Kingdom we suffered, since then, significant adverse exchange rate movements. However, since the final withdrawal from the EU by the United Kingdom in December 2020, the British Pound has been regaining its strength and we anticipate that the volatility that we experienced during the lead up to UK leaving the European Union will abate.

The impact of currency fluctuations on the three months ended January 31, 2022, is shown below. In this context “Constant Rates” is defined as the weighted average exchange rate prevailing in the Previous Quarter.

|  | British Pounds Actual Results | Constant Rates | Australian Dollar Actual Results | Constant Rates | Danish Kroner Actual Results | Constant Rates | US Dollar Actual Results | Constant Rates | Total Effect |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | 2,535,282 | 2,601,843 | - | - | 388,743 | 410,428 | 2,924,025 | 3,012,271 | (88,246) |
| Costs | 2,262,261 | 2,321,654 | 24,254 | 25,575 | 70,145 | 74,058 | 2,356,660 | 2,421,286 | (64,626) |
| Net profit (losses) | 273,021 | 280,189 | (24,254) | (25,575) | 318,598 | 336,370 | 567,365 | 590,984 | (23,619) |
| Assets | 22,672,721 | 23,102,691 | 32,500 | 34,633 | 2,142,098 | 2,209,870 | 24,847,319 | 25,347,194 | (499,875) |
| Liabilities | (1,119,560) | (1,140,792) | (2,610) | (2,781) | (19,688) | (20,311) | (1,141,858) | (1,163,884) | 22,026 |
| Net assets | 21,553,161 | 21,961,900 | 29,890 | 31,852 | 2,122,410 | 2,189,559 | 23,705,461 | 24,183,311 | (477,850) |

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 Quarter by $23,619 and decreased net assets by $477,850. In addition, the Company booked transactional exchange rate gain of $241,150 during the Current Quarter.

### Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

## Controls and procedures

As filed, 1,715 characters.

a) Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of January 31, 2022. Based upon that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in Internal Controls.

There was no change in our internal controls over financial reporting that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting during the quarter covered by this Report.

Filed Mar 16, 2022.
Source: SEC EDGAR, the filing index for accession 0001493152-22-006927. Last ingested by Listed: Oct 24, 2026, 15:11 ET. No prices; not investment advice.