Coda Octopus Group, Inc. — Q2 2024 Form 10-Q
Reporting period: Three and six months ended April 30, 2024. Financial statements are unaudited. Coda operates a Marine Technology Products business and a Marine Engineering Services business, serving commercial subsea and defense markets.
Financial performance
| Metric | Three months ended April 30, 2024 | Year-over-year change | Six months ended April 30, 2024 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $5.32 million | Up 0.4% | $9.78 million | Down 10.2% |
| Gross profit / margin | $3.74 million / 70.2% | $3.62 million / 68.3% | $6.83 million / 69.8% | $7.38 million / 67.7% |
| Operating income | $1.35 million | Up 57.9% | $1.91 million | Down 13.4% |
| Income before taxes | $1.64 million | Up 59.6% | $2.42 million | Up 1.4% |
| Net income | $1.42 million; $0.13 per diluted share | Up 40.3% | $2.05 million; $0.18 per diluted share | Down 15.0% |
- Quarterly Products revenue was $3.52 million, down 1.6%; its gross margin improved to 80.2% from 75.3%. Services revenue was $1.80 million, up 4.7%; its gross margin declined to 50.7% from 53.9%.
- For the six-month period, Products revenue fell 4.6% to $7.07 million and Services revenue fell 22.2% to $2.72 million. Products’ gross margin rose to 76.4%; Services’ fell to 52.6%.
- Quarterly operating expenses fell 13.7% to $2.39 million, with lower SG&A and stock-based compensation contributing. Six-month SG&A fell 7.5% to $3.89 million, while R&D increased 6.0% to $1.03 million.
Cash, liquidity and balance sheet
- At April 30, cash and cash equivalents were $23.71 million, versus $24.45 million at October 31, 2023. Working capital was $41.01 million; current assets were $43.83 million and current liabilities $2.82 million.
- Six-month operating activities used $1.25 million of cash, compared with $0.26 million used in the prior-year period. Investing activities provided $0.41 million, including $0.77 million of proceeds from a property and equipment sale; financing activities used $0.02 million.
- Total liabilities were $2.93 million, with no outstanding balance on the $4.0 million revolving credit line. The facility expires November 26, 2024, unless renewed. Stockholders’ equity was $51.07 million.
- Inventory increased to $12.65 million from $11.69 million; accounts receivable rose to $4.40 million from $2.64 million, and unbilled receivables to $1.58 million from $0.89 million.
Changes, outlook and risks
- Management attributed weaker first-half revenue mainly to delayed U.S. defense-program funding under continuing resolutions. U.S. sales for the six months were $2.23 million, versus $4.71 million a year earlier. Management said affected orders were postponed rather than lost, but timing remains uncertain.
- The DAVD untethered system is under customer field evaluation. The company says it has received $1.0 million in program funding and supplied eight systems; a further expected $950,000 is delayed pending appropriations.
- Management believes available cash and obligations support operations for the foreseeable future. It provided no quantified revenue or earnings guidance. It anticipates higher wages and marketing costs as it hires and expands business development; it also expects interest income to remain material if interest rates stay at current levels or rise.
- Risks cited include long and unpredictable defense procurement cycles, interest rates affecting subsea project demand, geopolitical tensions and potential component supply disruption, foreign-exchange volatility, and shortages of skilled employees. Two customers generated 28.7% of quarterly revenue; those customers represented 32.5% of receivables at period-end.
- Quarterly net income benefited from higher interest income ($293,468 versus $170,596) and reduced operating expenses. Six-month net income declined despite higher pretax income, reflecting lower revenue and higher tax expense. Foreign-currency translation produced a $437,683 quarterly loss in other comprehensive income; the six-month translation gain was $591,897, down from $2.15 million a year earlier.
- No material legal proceedings, off-balance-sheet arrangements, or changes in internal control over financial reporting were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether delayed U.S. defense appropriations convert into orders and when the expected $950,000 DAVD program funding is received.
- Whether cash conversion improves, particularly given operating cash use and increases in receivables, unbilled receivables and inventory.
- How customer concentration and the timing of defense contracts affect quarterly revenue and receivables.
- Whether higher hiring, marketing and R&D spending is matched by sales growth, and whether interest income remains a meaningful earnings contributor.
- The revolver’s renewal status before its November 26, 2024 expiration, and the effects of currency movements on reported results.